Biodiversity credit markets: what are next the next steps?
Environment Bank’s Emma Toovey talks about how voluntary markets can avoid the mistakes of the carbon market and why asset owners would buy credits
Environment Bank in its current form is a product of the UK Environment Act’s Biodiversity Net Gain Rules.
Those rules, which come into force at the end of January, stipulate that English real estate developers must not only offset the impact of their projects but ensure that 10% more biodiversity is left than before (hence the “net gain” wording).
One way to achieve this is to purchase tightly controlled “biodiversity units” from the Environment Bank.
“The reason this works,” explained Emma Toovey, Environment Bank’s chief ecology officer, “is because we use a government-prescribed formula to calculate the units and measure the gain. This gives the market transparency and consistency.”
The units themselves derive from one of 23 nature restoration sites across the UK (with 29 more in the works). The ultimate aim is to have one of these sites or “habitat banks” in every local planning authority to make it easier for the developers to meet their statutory requirements.
Environment Bank, which is funded using pension fund money via Gresham House, is now expanding into and facilitating the development of the new and emerging global “voluntary market” based on its experience with the UK’s regulated compliance market.
Net Zero Investor sat down with Emma Toovey, chief ecology officer at the bank to discuss how the new rules will shape the future of the bank.
What are the main drivers for a voluntary market?
The voluntary market responds to a number of drivers. First, there are various laws coming in across the world. In Europe, for example, there’s the CSRD, which requires in-scope corporations to measure and disclose their biodiversity impact, both in their own operations and through their supply chains. The public nature of that transparency incentivises them to not only mitigate their negative impact but also have a positive impact on nature. Voluntary initiatives like the TNFD are also ramping up the pressure. More and more companies want to be seen as environmentally friendly and biodiversity credits will help them achieve this goal.
Who is looking to invest in voluntary credits?
It's quite a diverse mix at the moment. We're in a really nascent market and the early movers are a small number of forward thinking organisations. Typically they're big. They're ahead of the game in terms of their ESG sustainability, both in terms of performance but also ambitions. They also tend to be in sectors with a high dependency on nature. So sectors like agriculture, food and drink production, businesses whose fundamentals depend on a healthy natural environment. Mining, pharmaceuticals, chemicals, beauty and fashion companies have also shown interest. These corporations recognise a strategic advantage in getting ahead of the game and start putting nature onto the boardroom agenda..
How about pension funds and insurance companies?
Insurance companies have very strong incentives to invest in nature as it manages their long term climate and nature risks. A nature-degraded world is an uninsurable, crisis-ridden world. Some are incredibly forward-thinking. Aviva recently made a huge nature-based investment, donating £38 million to restore Britain’s lost temperate rainforests in the UK as part of a £100 million programme of nature-based projects.
Pension funds may have two reasons to invest in nature or biodiversity credits. The first is as an investment from which they look to secure a return. They would purchase the biodiversity credits with the view that those credits will increase in value over time and can therefore can be sold for a profit in the future. In that case, the motive is purely financial. They couldn’t claim the benefit of the credit because if they did, the credit would be used up and they wouldn’t be able to sell it.
Another motive might be to flip them into the nature-positive space. Even a portfolio of environmentally-friendly companies will still have a neutral or slightly harmful impact on nature. You can’t build buildings, mine for lithium, or grow food without having some environmental impact, no matter how responsible your operations. Purchasing the credit will enable pension funds that invest in such firms to go from nature-neutral or slightly harmful to nature-positive.
Will you measure biodiversity gain in the voluntary markets as you do in the compliance market?
No. The compliance market uses offsetting units designed for real estate developers. If you are building 100 homes, you need to know exactly where the impact is taking place and what's going to be lost. There are very prescriptive formulas to measure this.
The voluntary market, however, works differently. The operational impacts of global firms are difficult to quantify, especially when you take into account the complexity of their supply chains. The impact of water consumption, for example, is inherently site-specific and hard to pin down. Nor should the biodiversity credits be used for offsetting, due to these complexity issues. No two ecosystems are the same. Firms can’t purchase a voluntary credit from Columbia and use it to offset a negative impact in say Italy, because the damaged ecosystem and the protected or restored ecosystem aren’t comparable in any way.
If not for offsetting, then what for?
The credits are an opportunity for companies to have a positive impact on nature.
How do you measure biodiversity uplift in the voluntary markets?
There are emerging methodologies, though no universally accepted one yet. This is because both the ecosystems and the ways to achieve positive impact on the ecosystems vary so much. It will be difficult to reach a consensus here.
What sort of timeline do you see for the voluntary market?
It is already here, though extremely nascent. Companies do want to invest in nature positive projects, but I think there's an inertia at the moment due to all the confusion on how to safeguard the integrity of the market. The controversies from the carbon market have exacerbated the fear of greenwashing claims, as firms are wary of investing in a product that might be subject to criticism or scandal further down the line.
That said, there is a clear direction of travel in terms of finding ways to halt and reverse nature loss by 2030, which is the goal enshrined in the Global Biodiversity Framework. Firms are under pressure not only from policy but also from their own investors and customers. This means the market demand side of things is rapidly ramping up. So I expect the market to scale rather quickly, in months or years as opposed to decades.
Have early architects of biodiversity credits such as Environment Bank learnt any lessons from the controversies of the carbon markets?
Absolutely. It’s key that we learn from the carbon market mistakes, especially the market infrastructure and governance issues. Nature markets need to start with high-integrity parameters from day one so that buyers can purchase the credits with confidence.
We’ve also learnt a lot from the English compliance market. Every site earmarked for the compliance credits legally can’t change its usage for at least 30 years. Without a time-locked guarantee for the land, the buyer may lack confidence in the credit. While laws differ in the different countries, that principle of ensuring the continued use of land is absolutely essential for the integrity of the market.
You also need to incentivise the stewards to look after the land. In practice, that means funding security. You need to make sure what you’re offering the stewards is as good as or better than the money they can make by using the land for another purpose, such as reverting to agriculture.