Carbon Markets Nurture Biodiversity Solutions

Governments urged to provide clarity, incentives on biodiversity credits to allow the new market to scale. 

Just as mankind has played a huge role in global warming, human activity has majorly contributed to biodiversity loss and nature degradation, at great risk to ourselves and the future of the planet. 

The World Economic Forum (WEF) estimated that around half of global GDP (US$44 trillion) depends on the natural world, meaning that failing to protect it will likely have huge financial implications.  

As a key part of global decarbonisation efforts, compliance, sovereign and voluntary carbon markets have been established around the world. Now, companies, investors and governments are increasingly recognising the role biodiversity credits can play in mitigating negative biodiversity impacts, restoring what has been lost, and protecting what’s left.  

While compliance carbon markets, like the EU Emissions Trading System (ETS), serve as an effective way to force carbon-intensive industries to decarbonise by putting a price on their emissions, thus supporting investor efforts to drive down portfolio emissions, voluntary markets allow investors and corporates to invest directly in projects targeting positive climate (and increasingly biodiversity) related change.

Biodiversity credits are not to be confused with biodiversity offsets, although Dr Michael Burgass, Director at environmental consultancy firm Biodiversify, notes there “is a lot of loose language” mixing up the two.  

A biodiversity offset is a measurable conservation outcome designed to compensate for unavoidable negative impacts from certain projects, like the building of essential infrastructure. They are often legal requirements put upon companies to qualify for a permit, ultimately ensuring that a company achieves either no net loss or secures a net gain in biodiversity through the project.  

“In comparison, a credit is a measurable, traceable and tradeable unit of biodiversity; it’s an instrument to allow an individual or company to finance initiatives that will result in a measurable positive outcome for biodiversity – both flora and fauna,” Sabine Hoefnagel, Global Leader of Sustainability and Risk at sustainability consultancy firm ERM, tells ESG Investor. 

The ‘and’ is an “important feature” between biodiversity credits and offsets, says Maria Nazarova-Doyle, Head of Responsible Investments and Stewardship at UK-based pension fund Scottish Widows, a distinction which is also made in Target 19 of the Global Biodiversity Framework (GBF), which recognises biodiversity credits as a potential innovative vehicle to increase private investment. 

A 2020 report published by the International Institute for Environment and Development (IIED) said that, if so-called ‘biocredits’ are well designed, they will make private investments in biodiversity management more financially attractive and can also be used by governments to monitor corporate actions in line with biodiversity commitments.  

But what constitutes a high-quality biodiversity credit has yet to be agreed. Many wrinkles still need to be ironed out through emerging government policies and new innovations across carbon markets. 

Restore and conserve  

Although Simon Zadek, Chair of think tank NatureFinance, notes that the biodiversity credit market is still “at the early stage of the innovation curve”, biodiversity credit-focused projects are already sprouting. 

rePLANET Blue and rePLANET Wildlife are two sister companies working to restore and conserve landscapes through the generation of carbon and biodiversity credits sold on voluntary carbon markets (VCMs). rePLANET Wildlife is wholly concentrated on projects targeting biodiversity uplifts, whereas rePLANET Blue generates carbon credits, with additional biodiversity benefits also being monetised – essentially stacking or bundling different types of credits within one project.  

“Biodiversity and carbon credit stacking or bundling is a positive direction to go in, rather than keeping biodiversity credits separate from carbon credits,” says Biodiversify’s Burgass, noting that integrating strong biodiversity benefits could also bolster the overall quality of carbon credits. 

Nazarova-Doyle agrees, saying that, if biodiversity credits and offsets are to play “a positive role” in VCMs, “the use of stacked and explicitly bundled biodiversity and/or nature credits and offsets should be prioritised to promote greater multi-functional use of land and sea”. 

“In this way, we can enhance their potential for greater social and environmental co-benefits,” Nazarova-Doyle says.  

In 2019, nature-based carbon credits traded on VCMs were found to be three times more expensive than renewable energy-focused credits, thus demonstrating that market participants are willing to pay a premium for projects with co-benefits for climate and nature.  

The introduction of these carbon+ credits adds yet another layer of complexity to an already complicated market. 

Biodiversity-related impacts are also very location-specific, according to Guy Turner, CEO of specialist data, analysis and advisory firm Trove Research. 

“The atmosphere does not care where the CO2 emissions come from as long as they are removed or avoided to minimise warming,” he explains.  

“This is fundamentally different to biodiversity where actions are location specific – destroying one hectare (ha) of bear habitat in one place cannot be counteracted by protecting or restoring one ha of wetlands elsewhere.” 

Due to location specificity, it is also difficult to definitively claim when the negative impacts of an activity on local biodiversity have been offset, adds Nazarova-Doyle from Scottish Widows, noting that offsets that occur at site-level could be considered a more viable option.  

There is also demand for pure play biodiversity credits. In May, Swedish bank Swedbank purchased credits (at an undisclosed price) from a domestic pilot forestry project protecting boreal forests, which covers 13 ha of the 75,000 ha forest and will generate credits over a 20-year period. 

“Like a Venn diagram, there is overlap between what biodiversity and carbon credits are trying to achieve, but there are also separate objectives for both that need to be upheld,” says Hoefnagel. “The stacking principle is something I could see developing.” 

Murky data 

Investors and companies have often cited the challenges around procuring comparable, reliable and relevant biodiversity and nature-related data – an issue which bleeds into the nascent biodiversity credit market.  

“Carbon credits are much simpler; one credit for a measurable unit of CO2,” says ERM’s Hoefnagel. 

“Biodiversity metrics are murkier, as there are millions of diverse species of flora and fauna, and they are typically unique to each area.  

“Developing a methodology to equate an environmental and financial value for each is much harder.” 

Zadek from NatureFinance argues that measuring biodiversity impacts is becoming easier.  

Corporate disclosure and engagement guidance is being introduced through the likes of the Taskforce on Nature-related Financial Disclosures (TNFD) and Nature Action 100 (NA100), and companies are innovating to develop biodiversity data collation and measurement tools, he says.  

“The important thing now is how to bring all these different data flows together into one analytic platform – there’s the complexity,” adds Zadek.  

Turner from Trove agrees a framework is pivotal to “ensure that suppliers of [biodiversity] credits provide clarity on the additionality, permanence or longevity of their activities, and that outcomes result in measurable protection and restoration of biodiversity”. 

Groups like the Biodiversity Credit Alliance (BCA) are attempting to do just that.  

The BCA is an alliance of field-based conservation practitioners and academics that aims to define and categorise biodiversity credits, identify global biodiversity credit principles that all methodologies should aim to achieve, and develop and/or identify a model set of digital standards that can be adopted into distributed ledger technologies (DLT) to establish a transparent, auditable and scalable virtual ecosystem for biodiversity credits.  

The group further plans to introduce a peer review mechanism for methodologies against its global principles and implement a community of practice for organisations in the quantification of biodiversity credits.  

Third-party carbon credit verification firm Verra is also developing a nature crediting framework to facilitate contributions to Target 19 of the GBF, which it plans to publish later this year.  

“At the same time buyers need to state their impact on nature through their supply chain, show they are minimising detrimental impacts on nature in their own supply chains, and that the credits are used in a nature positive way,” Turner adds.  

Nazarova-Doyle says that, as a first step, it is critical that an agreement is reached across industry and schemes as to what a high-quality biodiversity credit fundamentally means.  

She suggests it should maximise societal outcomes and incorporate the voices of all impacted stakeholders to remove bias and siloed thinking. 

The industry needs to ensure appropriate scheme design and administration, including developing a comprehensive registry, setting overarching standards, approving the scientific methodologies underpinning the units, approving and registering projects in accordance with wider standards, independent auditing to verify outcomes, issuing units via the registry, and facilitating of trade and cancellation of units via the registry,” Nazarova-Doyle says.  

“Last, but not least, these markets need to be regulated.” 

Clarity and incentives 

“It’s inconceivable that either carbon or biodiversity credits can scale to hundreds of billions of dollars – which they need to do – without governments providing clarity and incentives,” according to Zadek.  

The European Commission recently published the environmental delegated act (DA) for its taxonomy, which categorises all sustainable economic activities for investors. Within the DA (admittedly using slightly confusing wording), the Commission said biodiversity offsetting can be considered a sustainable activity – specifically, “only net biodiversity gains resulting from conservation/restoration can be accounted for as substantial contribution under this activity”.  

This prompted pushback from civil society groups. They argued that offsetting only compensates for environmental damage already done and, therefore, cannot represent a substantial positive contribution to the EU’s environmental objectives.  

The EU Platform on Sustainable Finance (PSF) also questioned the inclusion of biodiversity offsets in its response to the draft DA published in April.  

However, mandated biodiversity offset schemes are already in place across several jurisdictions globally, including Australia, which introduced the Biodiversity Offsets Scheme (BOS) under the Biodiversity Conservation Act in 2016.  

Under the BOS, any applications for development or clearing approvals need to outline how biodiversity-related impacts will be avoided, with remaining residual impacts offset by the purchase and/or retirement of biodiversity credits. 

“I think there is a role for well-managed offsets; striking them out completely would perhaps be a bit naïve,” says Burgass.  

Either way, further clarity is needed to determine the exact parameters for biodiversity offsets as a sustainable economic activity. Fortunately, the Commission is no stranger to calls for clarity.  

A global roadmap to mobilise nature finance launched last month by the UK and France was more positively received. It includes collaborating with existing initiatives and identifying new country partners to co-develop an equitable and impactful biodiversity credit market at scale.  

The roadmap will also facilitate the sharing of best practice on the governance mechanisms for credit funding and the fair distribution of income to Indigenous peoples and local communities.  

“We need nature-rich countries to work together to drive positive change at scale,” says Zadek, noting that NatureFinance contributed to the development of the roadmap. 

Now that there are global goals agreed by governments under the GBF, more jurisdictions will be considering how to facilitate increased investment in the protection of biodiversity and nature. Biodiversity credits may be a widely appealing vehicle to deploy.  

“As with all ambitions on the matter of biodiversity – and climate – we must see leadership align with the goals of the UN’s GBF,” says Nazarova-Doyle. 

Biodiversity credits alone will not sufficiently move the dial, she notes, but rather “a combination of measures and activities will help us achieve our global goals on biodiversity restoration and preservation”.  

“Stakeholders from across all organisations, whether in the public or private sector, can help shape the future of our [biodiversity credit] markets through thoughtful and persistent engagement with decision-makers and market pioneers,” Nazarova-Doyle adds.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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