We are at a crucial point in time for the development of voluntary biodiversity-credit schemes, where CFOs
of companies can choose to shape the market to help ensure a just and
sustainable transition to a nature-positive
future.
Biodiversity credits are generating significant global interest across both the
public and private sectors as a potentially scalable mechanism for investment in
nature. They are a way for companies to pay for enhancing critical biodiversity
by protecting and restoring nature. This new market mechanism enables companies
to contribute to a nature-positive future by providing a sustainable funding
source to truly support positive biodiversity outcomes in perpetuity.
As this market continues to evolve, it can become difficult to determine where
to invest, what to measure, and which outcomes to track. However, strong legal,
policy and regulatory frameworks can provide both supply-side and demand-side
actors with the confidence to scale their investment in biodiversity.
Company leaders should be following these developments and thinking about how
investing in biodiversity credits and projects could help with meeting company
targets for
nature
and be used to mitigate exposure to physical nature-related risks that will
require disclosure under the Taskforce on Nature-Related Financial
Disclosures (TNFD) framework.
Investing in biodiversity-credit markets
Nature markets (including large and mature markets, such as agricultural
commodities;
as well as emerging markets that reflect an increasing recognition of the value
of nature, such as biodiversity-credit markets) are worth $9.8
trillion
worth of goods and services — equivalent to 10 percent of global GDP. However,
this value represents only a fraction of nature's true worth; and the
degradation and loss of species and ecosystems over the last 50 years is
evidence of the inadequate economic valuation of
biodiversity.
Actions to protect and regenerate biodiversity have not been attributed economic
value — relying instead on philanthropic and public funding, which is
insufficient. There is an estimated financing gap to fill of between $598-824
billion per year by
2030 to
address global biodiversity loss.
Biodiversity credits are a mechanism that allows companies to support projects
that result in positive biodiversity outcomes, with a view to funding the
long-term conservation and restoration of
nature.
They are tradeable units generated by a nature-based solutions project
registered under a biodiversity credit scheme. At this stage of the market
development, there is broad alignment on the idea that biodiversity credits are
not intended to be used to offset an equivalent, negative impact on biodiversity
elsewhere.
With that in mind, there are two reasons companies might choose to invest in
biodiversity credits:
-
To fulfill a voluntary corporate
commitment
to contribute to a nature-positive future by 2030, by helping to finance the
systemic change required to address biodiversity loss; and
-
To demonstrate positive action towards the mitigation of nature-related
risks associated with biodiversity
loss
to which companies are exposed, and which they will increasingly be expected
to disclose under the TNFD framework from 2023.
The benefit of investing in biodiversity credits to demonstrate a company’s
action against these objectives is that the ‘unitization’ of biodiversity
outcomes in the form of credits takes the guesswork out of designing the
investment. Commonly accepted approaches track the key characteristics of
biodiversity — including richness, abundance of species, vulnerability of those
species and ecosystems, functionality and integrity — which can be used to
define biodiversity baselines and track changes over time; and define those
outcomes in the form of tradeable ‘units’ in accordance with robust, scientific
methodologies.
Legal, regulatory and policy developments to be aware of
NatureFinance and Pollination recently published a
paper
on the role of law, regulation and policy in the biodiversity-credit markets
that outlined developments to be aware of in this space. As with voluntary
carbon
markets,
governance and integrity considerations are being discussed for voluntary
biodiversity-credit markets to answer key questions about how these markets will
help to deliver high-integrity outcomes for people and
biodiversity.
Who holds the legal rights to the biodiversity that underpins credits? Who
should the benefits from the proceeds from the sale of biodiversity credits be
shared? What infrastructure is required to enable the administration of a
biodiversity scheme? How can we mitigate the risk of greenwashing
litigation?
Creating the right environment for investment in biodiversity-credit markets to
scale will likely lead governments to implement a range of different legal
enablers — such as mandatory natural-capital
accounting,
requiring periodic reports on natural-capital trends for real assets; mandatory
nature-risk disclosures for banks, investors and corporates to disclose
nature-related financial risks; and possible nature/biodiversity taxes on
corporates with a negative impact on nature, incentivizing them to reduce their
impact and funding biodiversity protection through credit markets.
To establish these enablers and ensure companies are not greenwashing, strong
governance and integrity measures — underpinned by a framework of laws, policies
and regulations — are needed to develop the market and close the biodiversity
financing gap.
As a CFO, it is important to understand the potential implications of these
legal, regulatory and policy actions for your company's financial and
risk-management strategies; and to consider the role that biodiversity credits
could play as part of the company’s broader nature strategy.
In this context and as nature risk continues to become more important to
investors, CEOs, CFOs, compliance officers and sustainability coordinators
should be aware of biodiversity-credit markets as a tool for financing positive
biodiversity outcomes and how to incorporate it into the company’s investment
strategy — including how investments can be structured to achieve high-integrity
outcomes and mitigate exposure to nature-related risks.
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Laura Waterford is Director at Pollination — a global climate-change investment and advisory firm accelerating the transition to a nature-positive future. Laura has deep expertise on carbon markets and is also a member of the World Economic Forum and Taskforce on Nature Markets working groups on voluntary biodiversity-credit markets.
Published Jul 27, 2023 8am EDT / 5am PDT / 1pm BST / 2pm CEST