Nature finance: are biodiversity credits moving too fast?

Scientists, conservationists, financial analysts and policymakers around the world are working hard to develop what have become known as biodiversity credits. 

These UN-backed credits aim to attach economic value to the preservation or restoration of ecosystems. Momentum has significantly picked up since the UN Biodiversity Conference (COP15) and the landmark Kunming-Montreal Global Biodiversity Framework.

COP15 in Montreal sought to reverse nature loss and restore biodiversity, when some participants at the summit came up with a creative financing structure for this huge task: 'biodiversity credits'.

According to the UN, the world needs over $384 billion a year by 2025 to protect nature. That goes up to $674 billion by 2050. Biodiversity credits may play a critical role in this process.

Credit structure

Basically, the way this mechanism works is that the revenue stream generated by the credit is split between the party responsible for the conversation and the biodiversity credit developer. 

The credit developer, or a third party, is responsible for monitoring the progress of the restoration project, using metrics such as species richness, water quality, and ecological integrity to quantify success.

The overall aim is to standardise such credits in order to scale them up and trade them internationally as any other commodity. 

The World Economic Forum estimates that the cost to halt the current loss of biodiversity is as high as $1 trillion annually. However, less than $150 billion has so far been spent.

“The power of bringing finance to the table in a meaningful way has the potential to be transformative for an area which is typically underfunded,” said Dr Michael Burgass, director and co-founder of Biodiversify, which helps businesses manage their impact on nature.

“My fear is that in a rush to bring this finance in, we may set something in motion that is potentially damaging in the long run," Burgass told Net Zero Investor.

That fear reflected the mood at Lincoln University's first annual conference on nature-based solutions using carbon and biodiversity credit funding, where Burgass was a key speaker.

One major obstacle turned out to be that would-be market practitioners “don’t seem to be close to any consensus of how biodiversity should be measured”.

“A variety of approaches will likely emerge from this rush to bring biodiversity credits to market,” Burgass noted. “This could be hugely problematic."

'Offsetting' challenges

Another problem is who the buyers of these credits would be and how they plan to use them. After all, biodiversity offsetting is already a hugely controversial concept. 

While there is a legitimate argument to be made in favour of carbon offsetting, unlike carbon tons, no two ecosystems are the same. 

That means buying credits as compensation for causing possibly irreversible damage to one ecosystem is highly unlikely to be acceptable.

Burgass said the main argument is that corporates and financial firms will require credits to meet their "nature positive" goals, which means they should have a net-positive impact on nature. 

Frameworks such as Science Based Targets Network (SBTN) are already pushing companies to work on their own operations, value chains and mitigation hierarchy.

However, for a voluntary biodiversity credit market to be credible, it needs “a clear and meaningful overarching framework otherwise it risks merely greenwashing," Burgass pointed out.

Roel Nozeman, head of biodiversity at ASN bank, said in agreement that “there have been some developments, but the high level of governance required for a biodiversity credit market is not there yet."

He called it a “mistake to let the private sector regulate itself”, adding that buying a biodiversity credit should “never equate to being a license to pollute” while carrying on with business-as-usual practices.

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Meanwhile, sustainability consultant Dr Ann Smith said biodiversity credits need to be done “credibly from the beginning” and the carbon market is “still in turmoil over what’s working and what’s greenwashing”.

Also sharing her take, Abby Chicken, head of sustainability at Openreach, said she doesn’t see “a compelling business case” for biodiversity credits, though she was quick to add that does not mean there is not one.

Furthermore, the renowned environmentalist Dr Tony Juniper, chair of Natural England, recently said the UK’s new tool for biodiversity net gain, due to be launched in November, could be a game changer. 

The tool is a market-based mechanism whereby developers of new infrastructure or housing projects will need to show that they’ve improved the overall state of biodiversity by 10%. 

“This will generate demand for biodiversity credits, which will then create a financial incentive,” he stressed.

Pension funds

Controlling nearly $60 trillion worth of assets globally, pension funds have a major role to play in driving responsible investment into projects that could make or break natural regeneration efforts.

Whether biodiversity credits are viable for pension funds, and under what circumstances, is still an open question.

“I don't see why purchasing biodiversity credits – which don’t generate any returns – would make sense to pension funds,” said Burgass. 

“They are better placed investing in companies tackling nature in a holistic sense across all of its operations," he concluded.

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