Do you know what are Nature markets?

The Finance for Biodiversity Initiative (F4B) has recently published "The Future of Nature Markets" a document that establishes a baseline on the evolution of Nature Markets and sets out an ongoing framework for considering their various forms. It also highlights issues that need to be addressed to ensure that nature markets deliver equitable and positive outcomes for nature.

The sustainability of our economic systems depends on the sustainability of ecosystems and their biodiversity. Yet nature and its contributions have historically been undervalued and its economic benefits unevenly distributed. The resulting deterioration of nature increasingly affects us all, especially those who depend most directly on it, such as farmers and local and indigenous communities. The destruction of nature also hampers our efforts to address climate challenges with potentially existential consequences.

Recent developments point to nature becoming increasingly visible and valued through "nature markets" that generate nature-specific income streams. Nature markets can and do include trade in nature as a primary product, such as food, wood products, minerals and nature-based health products. Beyond this is the growth of trade in nature's functions or "services". Of particular note are the links between carbon markets and nature's ability to store carbon, but also the growth of markets for water embedded in what we make, and the value of property near nature and nature-linked tourism, as well as the emergence of a broader set of biodiversity offset markets.

Investors are also waking up to the value of nature. Nature has joined climate as a risk to be accounted for and integrated, whether it arises from physical dependencies, nature-linked regulation and policy, litigation or reputational issues. Beyond risk, nature is an area increasingly suitable for investment due to the development of nature markets. In addition, the valuation of nature by investors and consumers makes nature-friendly technologies and companies more attractive.

Societies have deep traditions and diverse ways of valuing and stewarding nature. Nature's critical relationship to the economy is both a source of pressure on nature's health and its continued richness, and a mechanism through which it can be valued, invested in and conserved. Properly developed, nature markets could unlock and channel innovation in the provision of new nature-positive products, engaging and benefiting public and private actors, including local and indigenous communities. Success in targeting nature markets could bring direct value to many actors in the sustainable use of nature, and catalyze investments linked to nature-offset markets, including those linked to carbon markets. All this and more is possible, thanks to the deeper values and social conscience of individuals and communities.

Uncontrolled monetization of nature could lead to further depletion and damage. For example, unintended consequences could arise if too much emphasis is placed on markets based on measurable metrics (e.g., carbon reduction or offsets) and other aspects of biodiversity are overlooked, which would have a negative impact.

Nature markets could be responsible for another historic round of inequitable outcomes. Unfettered competition in the carbon market, for example, could lead to the purchase of nature-linked carbon offsets at a price below the real price, or, conversely, to skyrocketing land prices that dispossess nature's quintessential stewards: local communities and indigenous people.

Given the critical role that healthy and thriving nature plays in reducing climate change, these detrimental outcomes could ultimately hinder our collaborative efforts to address climate change, with existential consequences.

Simply put, we need to put nature and equity at the center of our economic activity and support the development of purposeful nature markets. The question is how.

Markets must be designed to generate revenues consistent with equity and nature-centered principles, while being attractive to potential sellers, buyers and investors. This is entirely possible by building on a long history of integrating public objectives into private markets, from the regulatory basis of health and utility markets to the outcomes of social and environmental markets driven by citizens as consumers, savers, investors and taxpayers.

Principled markets of nature need the right balance of innovation, power and accountability. Existing governance institutions must be involved in the effective governance of nature markets, including those responsible for trade, competition and finance, as well as those with priority socio-environmental mandates. Classic governance instruments can and should be used, but they are likely to be inadequate for this task. A new generation of decentralized, digitally-backed governance instruments can also play a role in advancing appropriate governance solutions, such as blockchain and tokenization to improve transparency, verifiability and trust. These tools would be especially useful in countries with weak or absent institutional frameworks.

But what are these markets?

F4B proposes 3 types of nature markets:

Intrinsic nature markets refer first and foremost to trade in nature itself. The most direct nature markets are those in which nature itself is the main aspect of the product or service being traded. The most obvious is food, but we can also think of nature-based medical products, wood products and, of course, the sale of sand, soil and minerals.

These markets include embedded nature markets, where the explicit value of nature is included in the value of what is traded. Consider the value of nature in tourism, for example, through the use value of a park or beach. Even if the park or beach is not itself marketable, the marketable value of a nearby hotel, house or restaurant may be increased by its proximity to these natural assets. In general, this value of nature is not monetized, i.e., it cannot be separated from the economic asset.

Offset nature markets refer to investments and/or trade in aspects of nature to compensate for a negative impact elsewhere. As we have seen evolve in the case of carbon, nature markets can be, and are, created to offset the effect of an economic agent on nature elsewhere in time and/or space. The main challenge in developing these offset markets is that of equivalence: for example, a liter of water used in drought-stricken Kenya is not equivalent to a liter of water in rainy Amsterdam. However, many biodiversity offset approaches are already in use in particular, regulated requirements in developed countries linked to investments in specific projects that affect nature. The equivalence problem is essentially solved because these agreements are local and there are no secondary markets for offset agreements.

Among these markets are nature's carbon-linked markets, i.e., those that trade in nature's attributes of carbon sequestration. These markets have been extracted as a distinct category given the importance and distinct political and market dynamics of carbon sequestration. The natural capital offered by carbon sequestration potential is now highly sought after, especially with the growth of voluntary carbon markets. Indeed, today, carbon offset markets are the most powerful machine for generating nature-related revenues. These markets are seen as a gateway to the development of markets around other ecosystem services.

Derivative nature markets refer to markets that trade in instruments that reflect the value of nature embedded in the underlying economic assets and companies. Most obvious here are financial instruments and markets that consider nature-related risks and opportunities as the basis for valuing and trading financial assets, from sovereign debt to nature-intensive and nature-dependent businesses. Beyond this, valued representations of nature, such as non-fungible tokens (NFTs) and other forms of tradable tokens linked to nature, could be included in these markets.

This three-fold classification of nature markets proposed by F4B is a work in progress and is likely to evolve over time. There are overlaps between the definitions, and many nature markets may fit into more than one of the categories. That said, it is hoped that the classification will help to highlight the breadth and diversity of nature markets and thus also some of the challenges of both understanding what is already happening and innovating what can be done to shape them forward.

[The information presented here is a summarized version of some parts of "The Future of Nature Markets", produced by the Finance for Biodiversity Initiative, all credits to the authors Simon Zadek, Ralph Chami and Marcelo Furtado.]