New in Biodiversity Finance: June 2024

In this Issue:

• IFC's landmark biodiversity finance transactions
• Global debate on the use of carbon credits and what it means for nature-based solutions
• Market transactions in the nature-based solutions voluntary credit market
• Updates on nature-related standards and regulation

I will start with great news from IFC which closed two landmark biodiversity finance transactions in June.

IFC committed to invest $50 million into a biodiversity bond to be issued by BBVA, the world’s first biodiversity bond by a private bank. The selection of projects for the use of proceeds from the bond is guided by IFC’s Biodiversity Finance Reference Guide and will focus on reforestation and regeneration of degraded lands, climate smart agriculture, habitat restoration and other activities that help protect, maintain or enhance biodiversity and ecosystem services.? On a personal note, it is massively rewarding to see the work on the IFC Biodiversity Finance Reference Guide I started several years ago with a few committed colleagues to lead to this first-of-a-kind and other investments.

In the Brazilian Amazon, IFC invested BRL300 million ($55 million) in a BRL1.3 bn Sustainability Linked Bond (SLB) issued by Natura , Brazilian natural skin care products company. As an anchor investor, IFC also helped Natura mobilize additional funding to support investments in the Amazon. This is the first SLB with sustainability performance targets linked to the development and sourcing of ingredients from the Amazon to promote bioeconomy to generate economic opportunities for local communities, support agroforestry sustainable supply chains, and contribute to the protection and regeneration of the Amazon. (Press release )

Nature-based solutions carbon credit market developments

At the global stage, the debate around the use of carbon credits to decarbonize the global economy continued. A number of organizations from the ‘Global South’ called on Science Based Targets Initiative (SBTi) to allow the use of environmental attribute certificate, such as carbon credits, to abate scope 3 emissions. They note that doing so would allow for funding to flow to the communities that implement programs to reduce deforestation, restore grasslands and improve biodiversity. (Environmental Finance ) This follows an open letter to SBTi sent by nature investors and conservation advisors, such as Conservation International, The Nature Conservancy, and Wildlife Conservation Society. The called on SBTi to allow use of carbon offsets, especially from nature-based solutions that “promote global biodiversity” and “deliver climate progress now and not in 2050,” as part of low carbon transition plans. (Environmental Finance ).

A contrary view was expressed to SBTi via a letter signed by 378 people, calling SBTi Board’s proposal to allow carbon offsetting to achieve climate objectives “ineffective and dangerous.” The letter called on SBTi to abandon the proposal. The signatories consider it “contrary to the scientific consensus and ineffective, harmful even, to the climate cause.” (Environmental Finance ) Gold Standard also publicly opposed the use of carbon credits by companies to achieve their scope 3 GHG emission reduction targets. (Quantum Commodity Intelligence)

As I noted in the past, the types of credits – i.e. avoidance credits generated through conserving intact forests and their rich biodiversity or removal credits generated through reforestation, changes in agricultural management practices, biochar and alike – matter in the decarbonization debate. Most of the guidance to buyers in the voluntary carbon market is to buy removal credits that take CO2 out of the atmosphere. A recent report “Finding New Futures for the Old Voluntary Carbon Market ” by cCarbon (behind a paywall) forecasts that the avoidance carbon credits will “fade into irrelevance” by mid 2030 and will be completely overshadowed by carbon removals. The report forecasts an oversupply of 12 years’ worth of avoidance credits from nature-based solutions by 2030, growing to 35-40 years by 2040. This, sadly, makes forest conservation projects high risk to investors and developers and weakens one of the few market mechanisms we have for forest and biodiversity conservation. In contrast, the removal credit market is poised to scale significantly and hold 95% market share by value by 2040, with cheaper ($16 – 49 per tCO2 in Latin America, Bloomberg NEF) nature-based removals scaling over the next 10 years before currently expensive ($125-355 per tCO2, IEA ) technological removals start to grow.?

Even within removal credits, nature-based solutions seem to start getting into controversy. Within EU approved Carbon Removal Certification Framework (CRCF), carbon removals generated from nature-based solutions are labeled as “temporary” while mechanically removed carbon is labeled as “permanent.” A group of nature-based carbon projects developers raised concerns that such labels imply lower quality of carbon removals from forestry and reforestation projects and petitioned to the EU to reconsider and recognize additional benefits of forests to biodiversity that machines cannot provide. (Quantum Commodity Intelligence)

Some hope for forest conservation projects (at least in the short term) comes from government sponsored jurisdictional REDD+ programs according to a survey by EDF and MSCI . According to the survey 20-40% of corporate buyers would prioritize jurisdictional REDD+ programs over individual REDD+ projects and pay a premium, pushing an average price to $15 per tCO2 in 2028 (up from $6-12 today).

Nature-based solutions carbon credit transactions

In the market Microsoft agreed to purchase 8 million nature-based carbon removal credits from BTG Pactual’s Timberland Investment Group generated through its $1 billion reforestation and restoration strategy in Latin America. (Environmental Finance ). Counting this believed-to-be-the-largest-carbon-removal-credit transaction, Microsoft has committed to buy 17 million carbon removal credits in 2024 thus far, based on Quantum Commodity Intelligence analysis of publicly announced deals. The vast majority of these credits are from the reforestation projects, soil carbon sequestration – including a recent purchase of 40,000 credits from Indigo Ag, and biochar. (Quantum Commodity Intelligence)

Paris-based France Valley is setting up a €200 million ($214 million) fund to invest in afforestation, reforestation and revegetation projects in Europe. (Quantum Commodity Intelligence)

A Philippines-based Klima 1.5 Corporation, owned by Ayala conglomerate, and Toronto-listed Ostrom Climate Solutions will partner on afforestation, reforestation and revegetation projects in Mindanao, the most southerly island in the country. (Quantum Commodity Intelligence)

US soil carbon project developer Boomitra signed agreements with the government of Mongolia and Mitsubishi Corporation to develop regenerative agriculture projects across 1.2 million ha with the potential to reach 20 million ha by 2030. Regenerative agri projects are expected to enhance soil health, biodiversity and carbon sequestration and provide additional income to farmers and herders through carbon credits. (Quantum Commodity Intelligence).

Ocean-based carbon removal

Carbon removals companies Equatic and Deep Sky started engineering work on North America’s first and world’s biggest commercial-scale ocean-based carbon dioxide removal (CDR) facility. The project seeks to remove 109,500 tCO2 from the atmosphere over its lifetime and produce 3,600 t of green hydrogen per year, which would help to achieve the cost of carbon removal of $100 per tonne by 2030.? The project will use Equatic's patented electrolysis technology that uses seawater, air, rock, and renewable electricity to remove and store CO2 while simultaneously generating carbon-negative hydrogen. (Quantum Commodity Intelligence).

Meanwhile, Quantum Commodity Intelligence reported on two marine carbon removal companies – Running Tide and Oceanid MRV – stopping their operations due to a lack of financing and corporate buyers for their credits. A recent State of the Ocean Report 2024 by the Intergovernmental Oceanographic Commission highlights further technical, environmental, legal and regulatory challenges that ocean-based carbon removal industry will face due to many unknowns about how removal approaches will interact with the carbon cycle in the oceans and whether they might lead to unintended consequences. And if you add marine biodiversity into the mix, things get even more complicated.

Investor action

Twenty two new members banks such as Visa, Citibank, Aqua Capital, Bemol and others, joined the Amazon Financial Network, an initiative launched by IFC and IDB to increase financing of sustainable projects in the Amazon region. The current membership now includes 46 financial institutions from across Latin America, Europe and the US. (EFE )

Over 200 investors with $15 trillion in assets under management joined nature-focused SPRING initiative by the UN Principles for Responsible Investment . The initiative will target 60 companies across cosmetics, car manufacturing, food retail, mining, finance and chemicals sectors on issues of deforestation. The engagement with companies will focus on improving their forest related practices, business operations, supply chain management, and political engagement practices, i.e. not engaging in lobbying against policies and regulation to prevent deforestation. (Environmental Finance , FT )?

More than 100 global financial institutions called on 1,029 high water use companies, including tech companies and airlines, to disclose their water related impacts and risks to CDP. (Environmental Finance )

Regulation

EU managed to reach a compromise to approve its Nature Restoration Law which requires member countries to restore at least 20% of their land and sea by 2030. Under the new legislation, member states must submit national restoration plans to the European Commission and monitor and report on progress against EU-wide biodiversity indicators. The compromise text includes a provision for suspension of agricultural targets if those threaten food security. (Environmental Finance )

Standards

The European Financial Reporting Advisory Group and the Taskforce on Nature-related Financial Disclosures published a document to help companies understand the commonalities between ESRS Standards and the TNFD Disclosure Recommendations. The document provides a detailed mapping of the disclosure and core metrics recommended by the TNFD and required under ESRS.?

Quantum Commodity Intelligence put out a comprehensive summary of the available methodologies and mechanisms for issuing credits for carbon sequestration in soils. Such credits can be generated through avoided conversion of ecosystems to crop production, altering agriculture management practices to mixed farming, intercropping, regenerative agri, precision agriculture to reduce inputs and improve water management, and others. In a separate article the publication covered a project in the US to generate soil-based carbon credits through rotational cattle grazing practices, which happen to improve habitats for birds and soil health.?

?Swiss Carbon Standards International issued an update to its standard for biochar carbon sequestration – Global Biochar C-Sink Standard. Key updates include more rigorous tracking and holistic GHG accounting, including for emissions associated with the lifecycle of the biomass, and advanced carbon and energy efficiency requirements. (Quantum Commodity Intelligence) A side note: according to the International Biochar Initiative , the global biochar industry generated a record $610 million in revenue in 2023, split between producers ($330 million), equipment manufacturers ($241 million) and distributors ($39 million). Annual revenues are projected to reach $3.3 bn by 2025.

Reports

An ounce of prevention is worth a pound of cure when it comes to mitigating adverse impacts on marine biodiversity and communities in offshore wind developments. This publication by the World Bank Group provides guidance for sensitivity mapping at the earliest stages of offshore wind planning to avoid developments in environmentally and socially sensitive areas.

Aquaculture is a fast-growing segment of food production. The Global Aquabusiness Investment Guide by the World Bank Group captures the necessary requirements and enabling factors that need to be in place to stimulate aquaculture investment and business growth that is socially, environmentally, and economically sustainable.

Thank you for reading!