Nature Intelligence Belongs in Existing Markets, Not New Ones

I made it about five weeks of being in new Dad mode before I had enough sleep and enough bandwidth for my brain to get the writing bug again. This piece was triggered by a brief look through LinkedIn the other day and I’m very curious how it resonates (or not!) with this audience. And just to remember the deeper meaning of it all, at the end I’ll include a photo of our daughter, Ronen Anne Wilburn, born on May 12th. I’m sure I’ll have some reflections on the new Dad journey and how it relates to everything I’ve written about and care deeply about soon…

But for now, let’s get nature finance nerdy.

In the last few years, the nature tech and nature finance startups that I’ve seeing emerging has increased rapidly. From the initial wave starting in the late 2010s that focused on measuring, financing and selling carbon stocks and sequestration in nature, there’s been an explosion of startups now developing tools to measure the full breadth of nature’s state and functions. From biodiversity and ecosystem integrity to ecosystem services like water regulation and provision.

But what I’ve found fascinating is the number of those groups that instead of just creating an intelligence layer, are also trying to create new products, new demand for those products.

Everyone seems to be creating their own credit, or their own unit, that they aim to productize and sell to interested buyers. Trying to create new markets for nature.

Now I totally understand the inclination and I myself was largely a part of that zeitgeist for many years.

In a world that is largely geared around markets as the main driver of what we value and therefore what gets resources, and whose markets currently don’t value nature, it makes sense to look at how to create new products and markets that could generate new streams of capital to protect and restore nature.

Even when I’ve had conversations with major financial institutions around nature, often they are more interested in the creation of new products that can be a new revenue stream for the bank rather than understanding the risk exposure of their current portfolio to deteriorating ecosystems.

And especially if you are a startup that is pitching a big financial upside to investors, there’s a lot more money to be made if you can be the backbone of a new market than just selling SaaS intelligence services to other entities.

But I think we should all ask ourselves the question: instead of spending our energies trying to build new markets for nature, should we be focused on getting existing markets to value nature?

It is incredibly hard to create a new asset class, let alone create the demand for that asset class where demand doesn’t exist today.

But where there are existing asset classes and existing demand for products that depend on nature for their value, getting those markets to adjust their valuation to factor in the risks associated with nature dependencies, I posit, will be a much faster route to get financial resources to flow to protect and restore those areas upon which dependencies exist.

Yes I believe nature has intrinsic value, but most of humanity currently does not share that belief. The value of nature to most of humanity is expressed through risk mitigation and service delivery to other markets - agriculture, industry, insurance, real estate, etc.

Now the challenge that I believe has driven much of the steer towards creating new markets for nature is that those credits, those individual units, have the promise of getting individual actors to purchase outcomes from individual projects. The promise is being able to bypass the freerider problem that requires government engagement getting everyone who has a dependency to take collective action to protect or restore the ecosystem they depend on.

But I think this is largely a false promise. Because at the end of the day, even if there is an individual unit that a company can buy that comes out of a specific project, beside the PR boost that I might get that normally falls in the CSR category of spending, is there a clear business case for me to buy that credit today?

The issue with an individual credit is it is very likely too small to represent a change in the risk quantification that affects my credit rating, my cost of capital, my valuation. Only a landscape scale shift in ecological function does that.

Well, maybe for things like nutrient availability in soils or pollination there are smaller scale units that can be measured and affect corporate value, but those are largely on-farm and won’t drive capital to off-farm ecosystem protection and restoration.

For ecosystem services that affect risk at scale, like water provision, it takes landscape scale to influence changes in risk, changes in risks to markets that have the potential to trigger changes in how those markets value nature.

Nature as critical infrastructure providing a service. Not a unitized outcome representing a small area at a moment in time.

And an individual credit model does not incentivize collective action, it does not overcome the freerider problem that plagues environmental action at the scale that we need it. Only engagement by an entity that can get all of the dependents together to pay to reduce the risk they all experience, which provides value to their companies that operate in existing markets with existing demand, will get us over that hump. And in the vast majority of cases, that entity is the government.

Now to be clear, I think payments linked to verified outcomes can and should be used to compensate land stewards for ecosystems they are supporting that reduce the risk to existing markets. And even credits/units themselves can and are necessary for markets where government is driving demand, like habitat banks. But I do question the value of creditizing everything and taking steps towards commodification. Yes, financial instruments like secondary trading and derivatives can de-risk initial investments, but they often lead to the degradation of the true value of the initial units themselves and what I call financial leakage, when entities not involved in the creation of value receive inordinate financial gain to the risk they are taking. A bit more of a macro reflection on this below.

So today, I would encourage all of the startups building nature intelligence to look at where you can inject the intelligence you are creating into existing markets to shift how they value nature. No it might not have as high of a financial ceiling for you as creating a new market would, but I think you will be more successful in the near-term and the long-term. Maybe there will be an opportunity in the future for you to create a new market, but those markets will only emerge if we make the case to day to existing markets that they depend on nature and create clear business cases for them to start to spend to protect and restore it.

I see many people in the nature tech, policy and finance worlds creating models that take years if not decades to build for the existing paradigm but not looking at where we are likely to be in 5, 10, 15 years.

And no one can predict the future, especially not me, but I am curious about some of the signals that I am seeing. Signals that make me think that we might be approaching the tip of the financialization pendulum swing.

And I could be entirely wrong on this, so please take the following with a major grain of salt. Again, this is me trying to read the tea leaves, a subjective assessment, not a position that I hold tightly.

When you have an American conservative think tank writing an editorial, “The Finance Industry is a Grift”, I wonder whether we are at the beginning of a swing in the other direction.

My meta-take is that I don’t think that smarter means stronger.

There are signs that our financial system, with every step towards more sophisticated financial engineering, is becoming more fragile. Not to mention increased distortion of markets means more and more financial compensation being taken away from the actors that are truly generating value. A financial system whose representation of value continues to diverge more and more from the real economy and creation of value in the physical world.

And ultimately, the signal I am sensing amongst the noise is that we are likely going to have some sort of simplification in the next couple of decades. That might be from government starting to clamp down because the average citizen has had enough, or the system itself starting to fracture on its own accord.

And I think that simplification will bring markets back to their core functions and streamline the way that capital engages with markets and value creation itself.

If we want to get more resources to flow to nature, I think we need to think long and hard about not only where markets and finance are today, but where we are going in the next decade or so.

I would argue that building tools and nature intelligence that integrate directly into existing markets to make visible how existing production depends on nature and thereby influencing existing flows of capital to value lower risk, and giving government or non-governmental collective action efforts the tools and political mandate to get all actors to commit the capital to reduce their shared risk and increase their resilience and their attractiveness to future investment, is a much more impactful way to spend our time than trying to create new markets for nature, especially before existing markets recognize and internalize their dependence on nature.

And not only impactful, but business savvy. I predict the startups that focus on integrating this intelligence into existing markets will be far more successful than those that try to create new products or new markets without a clear demand signal.

Now I also believe that it is the role of philanthropy, civil society and government to design and, and solely government to create, new environmental markets like habitat banks. Where there are market failures, that is where NGO’s funded by philanthropy working with the government should step in to fix those market failures. But this should not be the role of startups and it’s unwise for startups to try to step into this role.

Today, I believe the best investments for VC’s looking to get into the nature space are into startups that are creating nature intelligence that is immediately actionable within existing markets. Helping banks, private equity, insurers and even governments understand the risk exposure of existing investments and insurance to nature risk and providing intelligence for how to reduce those risks.

And for anyone creating nature tech out there, my gut says you will be more successful creating intelligence to help corporates, insurers and investors understand their current exposure to nature risk and how to reduce that risk. And for those in the NGO world, less time trying to create new credits and new markets and more time leveraging that new intelligence working with government to reduce that risk at scales that can shift the risk profiles at scale of existing investments in the region that government is responsible for.

Make the risk visible, show how to lower the risk, support government to enable joint action that lowers the risk for all dependents, lower the cost of capital for everyone in that region, make that region and all of its economic activity more attractive to investors. More investment flows into the region.

Kick-start the nature positive economic feedback loop.

I wish it was that easy in reality, but hard does not mean impossible, and I believe this approach, at least in our current paradigm, is much more likely to yield the nature protection and restoration outcomes on the ground that we all want, rather than trying to create new markets from thin air.

I recognize this may be a bit of a hot-take. It’s just my current perspective in an ever evolving world. Would be quite curious if you agree or disagree.

Onwards, Eric