Unprecedented Focus on Biodiversity Spurring Nature Credit Markets
Celebrations, tens of thousands of church bells ringing across the land and a riot of color will mark King Charles III’s coronation in May 2023.
But long after the bunting has been cleared away and Brits’ memories of parties over the special bank holiday weekend have faded, a more enduring and even more colorful legacy of the king’s ascension to the throne will begin to take shape.
In honor of Charles’ five-decade long focus on the environment and biodiversity — he gave his first speech on the subjects in 1970 at the age of 21 — the U.K.’s historic building preservation charity English Heritage in March said it will create or enhance 100 meadows to decorate with wildflowers some of Britain’s most iconic buildings from the Neolithic Stonehenge to the Jewel Tower in Westminster.
The need for wildflower restoration in the U.K. is great. Ninety seven percent of the country’s meadows have disappeared since the 1930s, decimating the populations of pollinators such as bees and butterflies.
By some measures, biodiversity loss has been as acute in the U.K., western Europe and eastern regions of the U.S. as in the parts of Brazil and central Africa that have been stripped of their forests. The U.K. is one of the world’s most nature-depleted countries, according to the Biodiversity Intactness Index. But biodiversity loss in countries like the U.K. and across the world has been known about for decades.
Why has the subject become a sudden focus not just for kings and conservationists but for big corporations, financial institutions and policymakers?
The Dire Effects of Biodiversity Loss
Part of the reason is a growing appreciation that the global economy is increasingly at risk from degrading ecosystems. Studies attempting to put a figure on those current and future economic losses can smack of finger-in-the-air guesswork, with talk of tens of trillions of dollars and half of global economic output being at risk from biodiversity loss.
But the fundamental conclusions of scientific and economic studies point in the same direction: biodiversity loss is already having demonstrable effects on the stability of ecosystems and economies.
Moreover, the rate of biodiversity loss is accelerating, with one million of approximately 8.7 million known plant and animal species on the brink of extinction, according to the United Nations. Global wild animal loss is currently occurring at an annual rate of 2.5%, according to U.K.-based conservation charity the Zoological Society of London, while there was “an average 69% decline in the relative abundance of monitored wildlife populations around the world between 1970 and 2018,” according to the World Wildlife Fund’s Living Planet Index.
If that weren’t enough, in the wake of the pandemic and the human and economic pain it caused, there is a growing awareness in the financial community that the increasing loss of species’ habitats across the globe magnifies the risks of zoonotic diseases being transmitted to humans.
“The intensifying emergence of infectious pathogens has many underlying reasons, all driven by the growing anthropogenic impact on nature,” a 2020 article in the Biodiversity and Conservation periodical concluded.
Big Business Eyeing Biodiversity
Such considerations are spurring hundreds of big businesses to make promises to be “nature positive,” a pledge that could become as totemic and demanding as “getting to net zero.”
Originally a movement to arrest biodiversity decline by 2030 before spurring a complete recovery by 2050, the ‘nature positive’ phrase has now been adopted by businesses promising their operations will have an overall beneficial effect on the natural world.
Corporate interest in biodiversity has never been higher, as demonstrated by the large presence of big businesses and financial institutions at the COP15 UN biodiversity summit in Montreal in December 2022, where delegates agreed on a global framework for restoring biodiversity over the next 10 years.
There were more than 1,000 corporate delegates at COP15, up from 50 at COP14 four years earlier. Representatives from oil majors like ExxonMobil Corp. BP Plc, TotalEnergies SE and refiner Equinor attended and global mining company Rio Tinto brought 50 employees to the summit.
Banks, financial asset managers and insurance companies also were present at COP15, mindful that the Taskforce for Nature-Related Financial Disclosures will make its final recommendations in September this year.
The TNFD, a market-led initiative that has been spearheaded by financial market participants, will provide guidelines and metrics for financial institutions to disclose the impact of their lending operations on nature.
OPIS has attended meetings held under Chatham House rules, during which participants have suggested that shortly after TNFD publishes its final blueprint later this year, the British government is likely to require U.K.-based financial institutions to comply with it. Given that the German government is helping to fund TNFD’s work, it would not be surprising if Germany did likewise.
Under such a scenario, banks and asset managers in some of Europe’s largest financial hubs would in the future be asking counter-parties for information related to their current and potential operational impacts on nature.
At the same time, a raft of organizations like CDP, the U.S. non-profit environmental standards charity, are developing new biodiversity-related standards and surveys that will further focus business attention on nature. The White House last year said it will require federal contractors with combined contracts worth hundreds of billion dollars per year to disclose environmental data to CDP.
This obligation, the Federal Supplier Climate Risks and Resilience Rule, will force large federal contractors to disclose information on their biodiversity impacts because CDP is changing its environmental data disclosure requests. As a result, CDP will pose biodiversity-related questions for the first time to the 19,000 businesses and organizations with a combined stock market capitalization of $61 trillion that already make disclosures to it.
Similarly, the Global Sustainability Standards Board, which is responsible for global standards on sustainability reporting by organizations including businesses, is developing new biodiversity standards that will be published mid-2023.
Biodiversity Credit Markets to Mushroom
COP15 saw more than 190 nations agreeing to preserve and protect 30% of their land and marine territories, while committing $200 billion in public and private funding to projects supporting biodiversity. As part of that pledge, wealthier countries also agreed to support poorer nations with $20 billion per annum, rising to $30 billion by 2030, partly through a new biodiversity fund.
Surveying all of the above — the growing concern in wealthier countries about biodiversity loss at home as well as abroad; a new emphasis on corporate responsibility for the natural world; pledges by countries to provide more funding to conserve biodiversity across a huge part of the planet — it becomes clear that an ocean of money could soon flow into biodiversity-related projects. That is the context for the anticipated growth of a gallery of biodiversity credits and nature markets this decade.
The final text of the Global Biodiversity Framework negotiated at COP15 explicitly backed the formation of such nature markets in its Target 19, calling for a substantial increase in financial resources “to implement national biodiversity strategies and action plans…including by…stimulating innovative schemes such as payment for ecosystem services, green bonds, biodiversity offsets and credits.”
The reference to biodiversity credits was not in the original draft text of the framework. Its insertion in the final text reflected how several events and presentations in Montreal, often led by the World Economic Forum, focused on the potential for biodiversity credits to channel private sector funds into nature projects. Those events were often standing room only.
“What we are seeing right now, there is almost like a gold rush … in biodiversity credits but you don’t want that market to collapse even before it starts,” said Akansksha Khatri, the WEF’s head of nature and biodiversity, told OPIS in December.
Khatri was referring to voluntary biodiversity credits, purchased by buyers with no obligation to do so. By contrast, biodiversity offset credits have existed for decades in some countries such as Australia, the U.S., Canada and Colombia. Such credits have attempted to offset the damage done by housing, mining and infrastructure developments by funding biodiversity projects, with sometimes mixed results.
Still, Australia’s biodiversity offset markets are particularly well-developed, spanning both the national and state levels and including flora and fauna. Annual transactions in the New South Wales and Victorian biodiversity offset markets can reach into the hundreds of millions of U.S. dollars range, project developers say, although some species-related credits such as koala credits and Cumberland Plain Land Snail credits have been slow to get going.
The U.K. is following in the footsteps of Australia and will enforce the principle of ‘biodiversity net gain’ for new housing developments from November this year. The cost of hectare-based biodiversity units to offset damage done to biodiversity by such developments is likely to run into the tens of thousands of pounds, according to a 2019 impact assessment by the Department for Environment, Food and Rural Affairs.
“From a landowner’s perspective, there is the opportunity to sell biodiversity units to developers providing and managing biodiversity enhancements on their land,” real estate company Savills concluded about the new U.K. legislation.
Voluntary Biodiversity Credits
But it is voluntary biodiversity credit markets that are likely to grow exponentially this decade, as businesses try to make good on their nature-positive targets.
Unsurprisingly, countries with well-established biodiversity offsetting markets and project developers such as Australia and Colombia have been pioneering the first voluntary biodiversity units, many of which were issued just last year.
The projects typically involve conserving nature-rich forests and territories such as the Bosque de Niebla in Colombia. Credits for that project issued by developer Terrasos have been selling for $30-32 for 10 square meter units and include the costs of protecting the habitats for thirty years. Similarly, in Australia, voluntary biodiversity credits issued last year to conserve vulnerable habitats have been selling for between $2-6 for 1 sqm units.
Some of Australia’s largest domestic banks and insurance companies are taking a big interest in those projects, developers told OPIS at the start of this year, and earlier this month, two banks — Commonwealth Bank and Reserve Bank of Australia — announced they are creating a pilot project to model trading biodiversity credits on a digital platform that would enable instant settlements.
The announcement followed hot on the heels of the Australian government introducing a Nature Repair Market Bill to Parliament, which will allow landholders to issue tradable biodiversity certificates for undertaking projects that protect, manage and restore nature.
“Biodiversity certificates will be a form of tradable personal property which can be purchased, transferred, claimed, used and publicly tracked.
Fundamentally, they will enable biodiversity outcomes to be owned and traded separately from the underlying land,” said an analysis by law firm MinterEllison, which flagged the potential for the federal government to buy the certificates, which could be trading as soon as the second half of 2024.
“We think there is a role for government in actively backing the scheme in the early stages as a purchaser of biodiversity certificates,” the law firm said. “Provisions in the bill provide for the secretary to enter into biodiversity conservation contracts for the purchase of a biodiversity certificate on behalf of the Commonwealth, including through tender processes and reverse auctions.”
A Standardized Voluntary Biodiversity Credit for All Nature
The most ambitious voluntary biodiversity credit standard is being developed by U.K-based certification body Plan Vivo, which has partnered with the U.K.-based Wallacea Trust led by Tim Coles, a carbon credit and biodiversity project developer.
The Wallacea Trust methodology for biodiversity quantification attempts to define a unit that can be generated by all certified interventions by project developers to restore biodiversity or avoid its loss across all species and all nations.
The methodology defines a biodiversity credit “as a 1% uplift or avoided loss in biodiversity per hectare, as measured by the median percentage change in a basket of biodiversity metrics that together reflect the conservation objectives for the eco-region and habitats.”
“The proposers of schemes for production of credits would need to convince an independent panel of biodiversity experts contracted by Plan Vivo that the metrics being proposed would reflect the national and local biodiversity targets for those habitats. This approach would then allow metrics to be developed for any eco-region, habitat or location around the world,” according to the Wallacea methodology.
The University of Nottingham in the U.K. — which was recently handed £800,000 ($996,000) in funding from U.K. public bodies the Natural Environment Research Council and the Economic and Social Research Council to develop biodiversity credit methodologies — could play an important role in auditing projects’ biodiversity uplift claims, Coles told OPIS late last year.
“If a company says we have a 20% increase in biodiversity at our site, they can submit the data [to the scientists at the University of Nottingham] and have that independently audited by scientists. I think that’s going to be necessary for biodiversity credits because I don’t think certification bodies have the staff in-house to be able to do that,” said Coles. The University of Nottingham will be working with the Wallacea Trust in developing its methodological work. Coles said he believes the methodology offers biodiversity markets a standardized unit equivalent to the 1 metric ton unit of carbon that allows carbon markets to flourish.
He told OPIS that Wallacea Trust biodiversity projects have a guide price of $5 per unit. “We’ve got finance commitments for five million of these credits. The next closest that I know of is sixty. We’re way out in front in terms of market acceptance.”
Such a standardized unit could open the possibility of global secondary markets for biodiversity being established.
Before COP15, one U.K.-based fund manager suggested that the biodiversity credit market could eclipse the $2 billion voluntary carbon market in monetary value. Coles is similarly convinced, partly because of the nature-positive commitments being made by big corporations.
“It’s difficult to fall in love with a ton of carbon dioxide, so [a biodiversity credit has] got that sex appeal that carbon doesn’t have,” he said. “Companies are already spending money on biodiversity … We need a unit of accounting. Once you have the unit of accounting, that’s what leads to an explosion in these sorts of projects.”
“No company is nature-positive yet because until you work out the biodiversity foot-printing method, nobody can claim it … But companies … know it’s going to be happening. What they want to do is invest in projects that will definitely give them the uplift and they can quantify that uplift … When they’ve got their foot-printing sorted out … they can include it in their accounts,” he added.
It remains to be seen whether the uplift-based methodology and its attempt at universal applicability will gain broad acceptance, but Coles – who sits on the advisory working group for Verra, the world’s leading carbon credit registry, which is also developing a standard for nature credits — is convinced that other methodologies under development could be similar.
“We don’t know what [Verra is] going to do, but in the end there aren’t too many options, because they will want the same sorts of things that we are looking for,” Coles told OPIS. “I’ve said to the Verra guys: ‘If you think of something better, we will use it’. We’re not wedded to [the Wallacea Trust methodology], but I think in the end it’s got to form the basis of whatever comes out in the future.”
Plan Vivo has recently consulted on its standard and is likely to publish it in the summer months, OPIS sources familiar with the process say, while Verra is aiming for the end of the year.
How those global standards co-exist and compete with nation-based standards under development in countries like the U.K. and Australia will be one of the big stories to watch as biodiversity credits evolve. A plethora of standards and methodologies could hamper liquidity and make creating secondary markets harder to achieve.
Conclusion: A case for compulsive purchases?
Corporate interest in biodiversity credits appears high, and the funds, instruments and platforms that could make a market are emerging quickly. For example, commodities trader Mercuria last month announced the creation of Silvania, a $500 million nature-based investment platform. Asked if it intended to invest in the voluntary biodiversity credit market, a Mercuria spokesperson told OPIS: “We see that as an opportunity either as standalone biodiversity credits or as co-benefits with carbon.”
New financial innovations are coming thick and fast, with UN-backed ‘tiger bonds’ revealed this week by Responsible Investor magazine to be under discussion between several investment banks and governments. That proposal would see bonds being issued to protect tiger habitats, with measurable gains for biodiversity then potentially generating biodiversity credits.
Nature impact tokens are also under development, with Paul Jepson, head of innovation at U.K-based CreditNature, telling an Institute of Environmental Management and Assessment (IEMA) webinar on Thursday that the company will oversee its first token transactions this June, giving investors a certified stake in nature recovery projects.
Turning parts of the natural world into financial instruments that could be traded on secondary markets like any other commodity will doubtless be an anathema to many, especially trenchant critics of carbon offset projects.
But the level of increasingly dangerous global biodiversity loss, the hundreds of billions of dollars required every year to reverse it and stretched government finances all mean that private sector involvement will be needed. It is also appropriate, businesses making nature positive commitments accept, given that most forms of economic activity have some kind of impact on the natural world. But large questions loom over the nascent voluntary biodiversity markets, the Taskforce for Nature-Related Financial Disclosures and governments’ willingness to chivvy big businesses into taking action.
Even if some banks and financial institutions do agree or are compelled to make disclosures through TNFD on their nature-related impacts and dependencies, it does not necessarily guarantee sweeping system-wide change, especially if other lenders do not sign up. Some companies may buy voluntary biodiversity credits, but without compulsion, while others won’t.
Many large corporations will be attracted to voluntary biodiversity credits, suggested Dorothée Herr, a senior associate at NatureFinance, during the IEMA webinar. “We will see competing CEOs coming forward … the Salesforces and Netflixes of this world,” she said. But scaling up such markets might require “policy-induced demand,” she added.
Could “policy-induced demand” include mandates for big businesses? The idea that governments might not only buy voluntary biodiversity credits, as in the potential case of Australia starting from next year, but compel large businesses to spend money on nature-related projects may seem fanciful.
But countries do apply hypothecated levies on large businesses, such as in the U.K., where the Conservative government introduced the Apprenticeship Levy in 2017 that mandates large companies to set aside 0.5% of their payroll to finance apprenticeships.
Initiatives such as TNFD and the creation of biodiversity credit markets might ultimately end up spurring a wider debate about the obligations of governments, communities and businesses to the natural world.
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