SB'24 San Diego is open for registration. Register early and save!

Finance & Investment
What CFOs Need to Know About Fast-Emerging Biodiversity-Credit Markets

When companies invest in biodiversity credits, the ‘unitization’ of biodiversity outcomes in the form of credits takes the guesswork out of designing the investment. But they are not intended to offset an equivalent, negative impact on biodiversity elsewhere.

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:

  1. 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

  2. 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.

Advertisement