New in Biodiversity Finance: November 2023

In this issue:

• Assets under management in biodiversity funds; state and outlook for the voluntary carbon market and nature-based solutions for climate
• Market transactions: IFC and T. Rowe Price Blue Economy Bond Strategy; Uruguay and Brazil sustainability bonds for forest protection.
• Reports: agroforesty, ocean-based carbon removal, nature and the future of business.

Investor interest in the biodiversity theme continues to grow.? According to recent MSCI research , about $60 bn has been invested across 149 biodiversity-themed funds globally as of Q3 2023. These funds collectively represent about 2% of the estimated $3 tr invested in sustainable funds as of September 2023. Fifteen of these funds were ‘pure-play’ biodiversity-labeled funds, representing $1 bn in assets under management. The other 134 funds with $59 bn in assets under management focus on biodiversity-related themes such as circular economy, sustainable water use, waste reduction, and regenerative practices.

The returns on the pure play biodiversity-labeled funds, on average, were lower than the returns on the biodiversity-related funds. Biodiversity-labeled funds, on average, had twice the exposure to revenue from sustainable-impact-solutions than biodiversity-related funds.

Speaking of market-based instruments to mobilize private finance for biodiversity, there were several important developments related to the Voluntary Carbon Markets. Ecosystem Marketplace published its State of the Voluntary Carbon Markets 2023 report “Paying for Quality.” ?Key findings point to significant price premiums for nature-based solutions projects and projects with certified community, biodiversity and other development co-benefits. After a tough 2023, the fundamentals point to a strong future growth in the market.

Market overview

• In 2022 the market grew another $2 bn, reaching a total market size of $10 bn.
• Average credit prices in 2022 were $7.37 per ton, up from $4.04 in 2021. This price hike kept the market steady in 2022 despite a 51% drop in the volume of traded credits.
• Credits connected to nature-based solutions – Forestry and Land Use and Agriculture projects -- were a primary driver of high market value, making up a 46% market share.
• Credits with certified additional environmental and social co-benefits in addition to carbon saw a 78% price premium in 2022, while projects with Sustainable Development Goals co-benefits saw an 86% price premium.
• Newer credits with more robust recent methodologies also sell at a 57% price premium than older credits, while CORSIA eligible credits saw a 126% increase in price.

Market outlook

2023 has been a tough year for the voluntary carbon market, mired in controversy and resulting depressed market conditions for carbon sales. However, the authors of the report anticipate “accelerated growth” of the market following the current “regrouping” period. The reasons for an optimistic outlook include:

• Reaching the goals of the Paris Agreement is not possible without project-based and jurisdictional REDD+ carbon markets as well as engineered carbon removals.
• While some buyers got spooked and exited the market, those remaining are willing to pay higher price for quality credits and are directly engaged in setting up sourcing principles and requirements and working directly with project developers. This is good news for project developers who are much better off selling directly to end users who pay more for credits ($8.35) than re-sale intermediaries ($5.96).
• Increasingly buyers want ‘beyond carbon’ impacts such as community and biodiversity benefits; and co-benefits certifications like the Climate, Community, and Biodiversity increasingly become more of a requirement for REDD+ projects.
• Compliance carbon markets offer new opportunities for the VCM in the form of projected demand for CORSIA eligible credits and Article 6 of the Paris Agreement.

Meanwhile, the Voluntary Carbon Markets Integrity Initiative (VCMI) released updated Claims Code of Practices that now includes a Monitoring, Reporting and Assurance Framework for any integrity claims. ?It reiterates that carbon credits must account for real and verified reductions or removals in emissions while meeting stringent environmental and social safeguards. Companies can now formally start making claims under the VCMI Code of Practice. In addition, VCMI released a beta version of the ‘Scope 3 flexibility claim’ that allows to credibly use carbon credits by companies that will not be able to meet short-term or interim net zero emissions targets. (Environmental Finance )

Verra release an updated version of its REDD+ methodology to increase trust in the market and create a pipeline of nature-based solutions projects for climate mitigation. (Environmental Finance ).

The World Bank released its Engagement Roadmap for Carbon Markets . The World Bank sees trustworthy and transparent carbon markets as a “game changer” in advancing climate action and bringing tangible benefits for developing countries. ?

MARKET TRANSACTIONS

Uruguay raised $700 million to grow its last year’s groundbreaking $1.5 billion sovereign sustainability-linked bond that introduced a forest conservation and restoration target tied to the pricing of the bond. If the country fails to maintain 100% of its native forest area by 2025 compared to 2012 levels, the bond coupon will increase (a step-up). But if the country increases its native forest area by at least 3% by 2025, the bond coupon will decrease (a step-down). ?The additional capital raise on the bond, maturing in 2034, was oversubscribed in excess of $2.7 billion, attracting interest from 139 investors and allowing Uruguay to lower the bond price by 15 basis points in the secondary market. (Environmental Finance )

Brazil’s first sovereign sustainable bond of $2 bn for forest conversation and sustainable resource management among accepted use of proceeds was oversubscribed three times. This high investor interest allowed the government to sell the seven-year old bond with an interest rate of 6.5% below its target of 6.8%. (FT )

Brazil discussed plans to launch a global financing framework to support tropical forests. The proposal is to create a fund that would offer compensation to residents and landowners to help preserve forests. Details are sketchy, but apparently one option under consideration is an investment fund capitalized by institutional investors with a set rate of return. The returns earned by the fund about this rate would go to local communities to maintain forested habitats. (FT )

IFC and T. Rowe Price announced plans to raise $500 million over the next 12 months for the Emerging Markets Blue Economy Bond Strategy to invest in blue bonds by financial and non-financial companies. The strategy will target a return of 300 to 600 basis points over the US Treasury yield curve. IFC will set up a technical assistance facility to increase the quality and quantity of blue bond issuances under the program. (Bloomberg )

Ocean 14 Capital invested into Bureo that collects and processes discarded fishing nets into NetPlus? pellets that make a premium recycled? material for nylon fabric and plastic products used by Toyota Tsusho, Patagonia, Trek. Quicksilver, Orvis and others. (Press Release )

Estonian eAgronom ag tech company will cover 200,000 ha across five African countries under its “carbon farming” program. The company generates Verra-certified carbon credits for sale in the voluntary carbon market from increasing soil health through changes in farm practices. (Carbon Pulse ) ?

China’s Cofco and Mengniu Group announced a $30 million deal to import deforestation-free soybeans from Brazil. (Carbon Pulse )

DATA AND TOOLS

An open-data platform - ?Forest IQ - was launched to help financial institutions track companies’ exposure and performance on deforestation. The platform has data on more than 2,000 companies, covering deforestation, land conversion and human rights abuses data points. Further data will be incorporated from CDP Forests. The platform was developed by Global Canopy, Stockholm Environmental Institute, and Zoological Society of London with participation from BlackRock, BNP Paribas, HSBC, and Storebrand. (Environmental Finance ) ?

Data company Vizzuality launched five open-access datasets to help companies understand their impact on land, carbon, and biodiversity in their agri supply chains. (Carbon Pulse )

Bloomberg will partner with UK’s Natural History Museum to combine Bloomberg’s data on one million physical assets with Museum’s Biodiversity Intactness Index to build a tool for investors to screen for companies operating in areas with diminishing ecosystem’s biodiversity. (Environmental Finance )

REPORTS

If you want to know what agroforestry is and its benefits for food security, biodiversity, climate change and communities, this US based policy paper on agroforestry is a good overview .

As the topic of ocean-based carbon removal methods is gaining traction, there are efforts to put guardrails in place to ensure they do no harm. Here are a couple of recent papers: Ocean Visions ' roadmap ?and the Aspen Institute's code of conduct .

FT Moral Money’s primer on understanding nature and biodiversity in the business context: Why nature’s future underpins the future of business.

The UN Food and Agriculture Organization in its annual State of Food and Agriculture report estimates the “hidden costs” of food – i.e. impact on climate change, natural resource degradation from unsustainable food systems and unaffordability of healthy diets -- to be $10 tr per year.?