New in Biodiversity Finance: May 2024

In this issue:

• The state of nature-based solutions carbon credits in the Voluntary Carbon Market
• Biodiversity credits market development
• Nature-related bonds, funds and other private sector transactions

May was a big month for the Voluntary Carbon Credit (VCM) market. EcosystemMarketplace came out with its annual 2024 State of the Voluntary Carbon Market report -- an analysis of the key market developments during 2023. At the end of 2023, the cumulative value of the VCM stood at $10.8 bn. The annual market value of the VCM in 2023 was $723 million, a 61% decline from 2022 (56% drop in volume and 11% drop in prices). ?The decline is in part attributed to the controversy surrounding REDD+ projects, which represent the largest share of credits sold in the VCM along with other credits from Forestry and Land Use.

The value of Forestry and Land Use (or Nature-based Solutions) carbon credit market in 2023 dropped nearly 70% to $351. 3 million from 2022 (a decline of 68% in volume and 4% in prices). Within this segment, the volume of REDD+ credits dropped 51% and prices declined 23% to $7.87, leading to a 62% decline in their market value. Whereas the prices for both Afforestation-Reforestation and Revegetation (ARR) and Improved Forest Management (IFM) increased by 31% to $15.74 and by 11% to $16.21 respectively. However, the volume of ARR and IFM credits in 2023 declined by 58%, leading to a 47% decline in the market value.??

Other Nature-based Solutions credits related to sustainable farm and pasture land management saw a 24% increase in the volume of credits but ended up with a 26% drop in market value driven by a 41% decrease in price to $6.51.

In 2023, VCM buyers continued to put a premium on carbon removal credits – a 245% price premium. (I have discussed how the emphasis on the removal credits poses a challenge to preserving intact ecosystems and their rich biodiversity in my previous digest ). Credits with social and biodiversity co-benefits continued to get a price premium, although this premium fell to 37% in 2023 compared to a 63% premium in 2022. Finally, credits selling directly to buyers vs intermediaries had a 33% price premium.

To address the on-going concerns that VCM can undermine decarbonization efforts by allowing companies to buy their way out of reducing emissions in their operations, the report highlights research demonstrating that companies engaged in the VCM exhibited higher levels of climate action and ambition compared to peers that don’t use carbon credits.

Looking ahead, Morgan Stanley estimates that the VCM could grow to about $100 bn in 2030 and $250 bn in 2050. This is a long way to go from the $723 million market in 2023. ?

The US Government’s decision to back the VCM may help. The US Government published Voluntary Carbon Markets (VCMs) Joint Policy Statement and Principles that articulates its commitment to advancing the responsible development of the VCM and sets out incentives and guardrails to ensure that this market “drives ambitious and credible climate action and generates economic opportunity.”? The document states seven Principles for Responsible Participation in VCMs that address supply and demand integrity, market integrity, and lowering transaction costs. They build on significant work already done in the market to improve its integrity and seek to further strengthen the market and enable VCMs to deliver on their full potential. The statement expresses an expectation for removal credits to constitute a growing share of the market over time. (White House Fact Sheet , Environmental Finance ).

To push for increased supply of high-quality carbon removal credits from nature-based solutions focused on restoration, Microsoft, Meta, Google and Salesforce launched ‘Symbiosis Coalition’ for buyers looking to purchase large quantities of such credits. The coalition aims to contract up to 20 million of such credits by 2030 as a way to stimulate supply and build the global market for high-quality nature-based solutions for carbon removal. (Eddie ) To put the level of ambition of this undertaking in context, the entire supply of removal credits from nature-based solutions in 2023 was 4.1 million tons with a market value of $65 million.

In parallel, Meta jointly with Carbon Direct published 'Opportunities for Ecological Restoration in the Voluntary Carbon Market ' report that captures challenges for ecosystem restoration projects in the VCM and outlines how buyers can address them. ?Microsoft jointly with Carbon Streaming Corporation and Rubicon Carbon Capital partnered with project developer Ponterra for the Azuero Reforestation Project in Panama. The project seeks to restore 10,000 ha of degraded tropical forest to generate 3.24 million tons of carbon removal credits over 30 years. Microsoft also agreed to purchase 3 million removal credits over 15 years from Brazil’s Re.Green which will restore over 16,000 ha of degraded pastureland in the Atlantic Forest and the Amazon. (Quantum Commodity Intelligence)

OTHER MARKET DEVELOPMENTS

Biodiversity Credits

Following in the path of the carbon markets, many players are working to develop the nascent biodiversity / nature credit market, which is currently valued under $10 million. ?

Biodiversity Credit Alliance (BCA) put out “Definition of a Biodiversity Credit ” issue paper that presents a definition of “biodiversity credit” and the associated definitions and terms. ?The objective is to avoid a proliferation of different approaches and to help biodiversity crediting avoid a “false start.” BCA defines a biodiversity credit as “a certificate that represents a measured and evidence-based unit of positive biodiversity outcome that is durable and additional to what would have otherwise occurred.” The paper provides further definitions and explanations for (1) biodiversity outcome, (2) measured and evidence-based, (3) durability, and (4) additionality.

Conservation International published a Position Statement on Nature Credits “to catalyze and shape high-integrity and equitable nature credit markets that deliver new finance that supports net-positive and lasting outcomes for nature and people and the transition to nature-positive economies.” The statement notes the potential of nature credits, with effective and transparent governance in place, to facilitate business activity, increase investment, reward stewards of nature, and support transition to nature-positive economies. Conservation International will focus on demonstrating high-integrity and high-quality supply and high-integrity demand – and the statement outlines principles to guide both, effective and transparent governance, partnership with Indigenous People and Local Communities, and applying science and technology. While the statement notes that nature credits are not designed to enable biodiversity offsets, it leaves the door open to consider biodiversity offsets under certain circumstances.

Colombia’s habitat bank developer Terrasos listed 10,000 voluntary biodiversity credits on US-based Regen Network Development trading platform. Each credit, priced around $25, represents the protection of 10 square meters of conserved or restored ecosystems in the Colombian habitat bank El Globo for 30 years. (Carbon Pulse )

The High Integrity Forest (HIFOR) initiative by the Wildlife Conservation Society (WCS) released its methodology to identify and issue HIFOR units – a new tradable asset that recognizes and rewards the essential climate mitigation and biodiversity conservation services that intact tropical forests provide. The goal is to incentivize the protection of high integrity, largely untouched tropical forests in addition to existing financing instruments such as REDD+. Each HIFOR unit represents a bundle of carbon sequestration, high biodiversity value, support to Indigenous Peoples and Local Communities, and biophysical cooling effect associated with one hectare of a well-conserved and high-integrity tropical forest. The units do not promise biodiversity uplift and, thus, cannot be used for any kind of offsetting mechanism. (Carbon Pulse ) It is not clear if there is a strong demand for HIFOR units to achieve the stated objectives in the absence of a well-functioning biodiversity credit market and an increasing emphasis on carbon removal credits from restoration projects in the VCM. ?

Nature-related Bonds and Funds

IFC is working with BBVA toward issuing a $50 billion biodiversity bond that would be the first issued by a commercial bank. (BBVA )

South African FirstRand bank is looking to issue five-year wildlife bonds worth $233 million this and next year to channel finance toward conservation of lions and wild dogs. These bonds would be modeled on the World Bank’s Rhino Bond. (Bloomberg )

The Ocean 14 Capital Fund I raised $126 million from The Green Earth Impact Fund, HQ Capital and Nestle for its first blue economy fund. (Environmental Finance )

Ecuador’s Banco del Austro issued the first blue bond in the Panama stock market. The size of the bond in $50 million. (GFL ).

Philippines water and waste firm Maynilad Water Services is planning to raise $261 million blue bond, the country’s first. (Environmental Finance )

For a good overview of the recent trends in the Blue Bond market, please see this FT piece. It covers IFC’s partnership with T Rowe Price to raise $500 million fund to support blue bond issuances in emerging markets.

Dendra Systems tech company providing services for ecological restoration raised $15.75 million in its Series B funding round. (Environmental Finance )

Three Dutch pension funds – AP Pension, Laernernes Pension, and Sampension – will collectively invest $160 million into the latest fund by Ecosystem Investment Partners that invests in environmental restoration in the US, focusing on wetlands, streams and endangered species. (Environmental Finance )

French Mirova, Singapore’s GenZero and US Rubicon Carbon provided catalytic funding (amount undisclosed) to project developer Imperative Global to restore the ecosystem on 10,000 ha in South Africa. Imperative Global will replant native shrubs on private farms that have been overgrazed and now face soil erosion and biodiversity loss. Carbon credits generated through the project can be sold on a voluntary or regulated market. (Quantum Commodity).

Regenerative agriculture investor SLM Partners reported a 40% growth of assets under management in the last year, reaching $610 million. (Environmental Finance )

Circular Economy

UK headquartered Circtec raised €150 million for construction of an end-of-life tire recycling facility in the Netherlands, to transform tires into circular materials through thermal decomposition. (Environmental Finance )

Malaysian developer Karbon Hero launches its plastic waste collection and recycling methodology to generate plastic credits. Plastic credits will be issued by Genesys Reserve, a carbon registry established and operated by Karbon Hero. (Carbon Pulse )

Concessional funds for governments

China established a $210 million Kunming Biodiversity Fund aimed at supporting biodiversity conservation in emerging markets. (Carbon Pulse ) It is a parallel structure to the multilateral Global Biodiversity Framework Fund managed by the Global Environmental Facility which recently approved $70 million worth of grants for 18 projects in 21 countries. (Carbon Pulse )

UNDP and the Global Environment Facility launched a $135 million Blue and Green Islands Integrated Program to prevent environmental degradation and increase nature positive outcomes in urban development, food production and tourism in select island nations. (Carbon Pulse )

New tech and innovation

Renewable energy company Low Carbon partners with Lancaster University to develop a novel acoustic monitoring techniques and AI to assess diversity of insect population at an agrivoltaics farm that combines solar production with planting native grasses. UK startup Rubies in the Rubble is sourcing fruit and vegetable waste to produce condiments. While Canadian startup Bioform created a low-energy process to make packaging from waste pulp fiber to substitute plastics. (Eddie )

Other

Campaign group ‘It’s Now for Nature’ featured a first batch of nature strategies by five companies: Anne Veck Limited, ENGIE, GSK, Kering, and Taiwan Cement Corporation. For a nature strategy to be featured by the campaign, it has to have a materiality assessment of impacts, dependencies, risks and opportunities, SMART targets aligned with this assessment, actions to achieve the targets, and board or management approval and responsibility for delivery.

Tetra Pak published its Approach to Nature that states the company’s targets across all of its operations for sourcing materials and resource use.

Nature Action 100 formed a science council to support its technical advisory group and provide oversight on its science-based research. (Environmental Finance )

Thank you for reading!