New in Biodiversity Finance: July 31, 2023

In this Issue:

• Regulation: EU nature restoration law, deep-sea mining, making measuring soil carbon accurate and efficient,
• Market Update: Biodiversity credits, nature-based carbon credits, plastic credits and development impact bond for plastics recycling, first blue bond index.
• Reports: Materials' requirements for energy transition, blue economy opportunities, blue carbon.

In the global regulatory developments, the contested EU law to restore and recover nature on at least 20% of EU land and sea by 2030 with biding targets for habitat and species restoration passed by a narrow margin. The final text of the nature restoration law contains amendments in response to strong opposition from farmers. These amendments include the deletion of restoration targets for agricultural areas and weaker goals on restoring terrestrial, coastal, and freshwater ecosystems. (Carbon Brief)

The International Seabed Authority (ISA) missed the July 9 deadline to enact regulations for deep-sea mining. That means that ISA must accept license applications from mining companies. But it is not clear whether and how ISA should act before the rules for deep-sea mining are in place. Countries, such as China, South Korea, Russia, Japan, and Norway, are eager to push ahead with deep-sea exploration, while others such as France, Germany, Chile, Palau, Fiji, Portugal, Canada, Finland, Brazil and others call for a full moratorium. In addition, 36 financial institutions with $3.7 trillion in assets under management, such as Aviva, Federated Hermes and UBP Asset Management, called for a moratorium on deep-sea mining until biodiversity risks are understood. (Environmental Finance). India, in the meantime, has started exploring nodules in the Indian Ocean for nickel and cobalt. For now, ISA is back at the negotiating table to design regulations that could allow mining to begin. (Carbon Brief).

In the US, legislators introduced the Advancing Research on Agricultural Climate Impacts Act to make measuring carbon sequestration in agricultural soils accurate, cost efficient and deployed at scale. The goal is to empower and incentivize farmers to implement practices that sequester carbon while enhancing soil health, resilience to climate change, and productivity. In parallel USDA will spend $300 million to create a Soil Carbon Monitoring Network. In addition, USDA included biochar into incentives for climate-smart agriculture. Biochar is produced from agricultural and forestry biomass waste using a high-heat, low-oxygen burn process (pyrolysis). When it is mixed into soils it permanently stores carbon and improves soil health, biodiversity, nutrient content, water retention, and productivity while reducing the need for fertilizer. Removal carbon credits from biochar have been growing in the voluntary carbon markets. You can find information about specific projects, buyers, and pricing of biochar credits here. (Carbon180)

MARKET UPDATE

Biodiversity Credits

Biodiversity credits have been in the spotlight over the last few months. The development of the market for biodiversity credits is proceeding on parallel tracks: 1) creating a separate biodiversity credit market (currently estimated to be at $8 million) and 2) leveraging the existing $2 billion and growing voluntary carbon credit market by adding biodiversity benefits to carbon credits from nature-based solutions projects.

This Carbon Pulse piece looks at the benefits and pitfalls of the second approach where biodiversity outcomes could be “bundled” with or “stacked” onto carbon credits. The “bundling” combines climate and biodiversity outcomes into the same credit, effectively creating a premium carbon credit with a premium price. The “stacking” adds a biodiversity unit on top of that of a carbon unit, allowing for those units to be kept separate but offered as a combination of two outcomes from the same project. Overall, bundling and stacking biodiversity and carbon outcomes allows to channel finance towards nature conservation and restoration projects at scale and faster than waiting for a separate biodiversity credit market to mature. Such approach allows to leverage the existing and robust demand from buyers for high value and high integrity carbon credits. Furthermore, it allows to avoid fragmentation of interrelated outcomes from nature-based projects which is key if you want to achieve scale in financing. The potential to increase revenue through monetizing both climate and biodiversity outcomes incentivizes project developers to focus on biodiversity work and can make certain nature-smart land management projects commercially viable, which otherwise would not proceed. ?

The UK government is taking another step towards creating a domestic market for tradable biodiversity net gain (BNG) units. The Department for Environment, Food and Rural Affairs will provide ￡30 million in seed capital to a new fund co-designed and co-managed by Finance Earth and Federated Hermes. The fund, expected to close in October, will invest in projects that produce BNG units aligned with the Woodland Carbon Code and the Peatland Carbon Code. BNG units are measured based on the metric created by the UK government which assigns all habitats a unit value according to their present biodiversity value. Landowners and managers can generate BNG units through creating or improving natural habitats. To create the demand side of the market, starting in November, UK will require some new building developments to achieve 10% biodiversity net gain which can be accomplished by purchasing BNG units. (Environmental Finance).

Across the English Channel, the French parliament passed ‘Green Industry’ bill that includes provisions to allow biodiversity and carbon credit stacking for ecosystem restoration projects.?(Caron Pulse).

Carbon Credits

The Integrity Council for the Voluntary Carbon Market (ICVCM) published its full global benchmark for high integrity carbon credits. The benchmark currently includes criteria for assessing which categories of credits and which crediting methodologies are eligible to meet ICVCM’s high integrity Core Carbon Principles (CCPs).?In the future, the benchmark will include CCP approved categories. Credits from nature-based solutions such as large-scale forest programs as well as improved forest management, afforestation and reforestation, improved agricultural management, and coastal ecosystems conservation and restoration are expected to be among the categories approved for a CCP label. ?(ICVCM)

AXA Investment Managers will invest $49 million and take an undisclosed minority equity stake in the Amazon reforestation startup Mombak. The project seeks to reforest over 10,000 ha of degraded pastureland with planting native tree species and through assisted natural regeneration. The project is expected to generate up to six million carbon credits, restore local biodiversity and hydrological cycle. (Environmental Finance).

Circular Economy

A plastic collection and recycling project in Senegal became fourth to register Waste Collection Credits and Waste Recycling Credits with Verra. The project is expected to collect around 3,000 tons of plastic and generate 4,300 waste recycling credits annually. Thirty other plastic credits generating projects by other companies are awaiting Verra’s registration. (Carbon Pulse)

SDG Outcomes Fund issued a €1.5 million Development Impact Bond with KPIs linked to collection and recycling of plastic waste, among others, to finance the expansion of Lagos-based Wecyclers in Nigeria. If the company meets all the agreed targets, Unilever – which drives much of Nigeria’s plastics pollution – will repay the Fund in full, plus an additional return. If Wecyclers misses some of the targets, Unilever will have to pay less and nothing at all if no impact is achieved. Wecyclers will pay Unilever half of the bond amount with varying levels of interest depending on how many targets it achieves and no interest if the company achieves all targets. Unilever benefits through an opportunity to offset its plastic pollution footprint with minimum financial risk in case the project fails. (FT Moral Money).

Adidas, Inditex, Target and Zalando are partnering with recycling firm FastFeetGrinded to test a process to recycle post-consumer footwear to create materials to produce new products. (eddie)

Blue Economy

German financial index provider Solactive launched the first blue bond index that includes any self-labelled blue bonds included in the Climate Bonds Initiative database. Back in 2014 Solactive launched the first green bond index. (Environmental Finance).

IFC is providing a BRL 260 million ($52 million) blue loan and advisory services to Brazilian sanitation company Sociedade de Abastecimento de Agua e Saneamento S.A. (Sanasa). The blue loan will assist Sanasa expand its water supply systems and sewage treatment capacity in the city of Campinas. The project will also reclaim water and reduce pressure on the Piracicaba, Capivari and Jundao River basin. (IFC press release).

Investor Action

Dutch ING bank is looking to develop and integrate biodiversity KPIs into its lending products and eventually create focused biodiversity-linked lending. (Environmental Finance). ?

The financial sector will get an assist on how to calculate and manage biodiversity risk from the actuaries sector known for its expertise in calculating complex risks. Areas of focus include assessing how to mitigate extreme weather risks, identifying opportunities in nature-based solutions, identifying regulation and reputational risks, and integrating nature within climate assessments. (Environmental Finance).

Twenty of the largest UK banks, including Aviva, Barclays and Lloyds, formed the UK Financial Institutions for Nature Group (G-FIN). The group will develop a national database of private sector investments in nature restoration against UK Government’s goals of ￡500 million annually by 2027 and ￡1 billion by 2030. As a first step, the group will work to define what constitutes nature investments. ??(Environmental Finance)

REPORTS

The Energy Transitions Commission published a report “Material and Resource Requirements for the Energy Transition” that looks at the projected demand for cobalt, copper, graphite, lithium, neodymium, and nickel and how to scale their supply rapidly to meet the energy transition goals. Improving efficiency of materials use and recycling must be a key strategy to meet the demand for these resources by 2030. From biodiversity standpoint, these are also crucial to reduce the number of new mines required that the report estimates to be about 40 for copper, 55 for nickel, and 65 for lithium by 2030.

Citi’s “Sustainable Ocean Economy: Charting a Prosperous Blue Future from Risk to Resilience” report advocates for businesses and financial institutions to take a more integrated approach across climate change, biodiversity loss and ocean health in their operations. The report states that virtually all economic activity drives deterioration of ocean’s health and considers business risks as well as opportunities across marine and land-based industries.

The Ocean Panel put out Blue Carbon Handbook which among other things examines how to put together strong blue carbon projects and looks the current blue carbon market.

Thank you for reading!

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