New in Biodiversity Finance: September 2024 - Countdown to COP16

The Biodiversity COP16 in Cali, Colombia, is starting next week. It is taking place against the backdrop of continued rapid decline of biodiversity across the globe. According to the new 2024 WWF Living Planet Report, between 1970 and 2020, wildlife populations declined by 73%. COP16 is expected to be the “implementation COP,” measuring progress against the 23 targets of the Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse this rapid biodiversity loss by 2030. Over 190 countries agreed to these targets in December 2022 and are expected to submit their revised, and hopefully more ambitious, National Biodiversity Strategies and Actions Plans (NBSAPs), representing whole of economy transformation required by the GBF.

To monitor countries’ progress on submitting their revised NBSAPs ahead of COP16, CarbonBrief has set a tracker, listing available NBSAPs and analyzing how each country has pledged to meet the key GBF targets. With less than a week to go before COP16, the list is alarmingly short, indicating that 80% of countries will fail to submit their revised NBSAPs (the Guardian). ?

Financing the implementation of the agreed targets is another central theme of COP16. The GBF set a target to raise $700 bn per year by 2030. $500 bn is expected to come from governments repurposing harmful subsidies; and $200 bn is expected to come from all international and domestic private and public sources. No doubt, the private sector and private finance will have to play a key role in closing this financing gap.

What are the sources of private capital to halt and reverse biodiversity loss and which ones have the biggest potential to deliver results before 2030? I think of the market for biodiversity and nature finance in three tiers, measured by the market’s ability to drive private capital at scale for nature-related transactions in the nearest term: (1) thousands of US $ market (biodiversity credit market); (2) hundreds of millions of US $ market (nature-based solutions carbon market), and (3) billions of US $ market (sustainable finance debt market).

1.?????? Thousands of US $ market for biodiversity and nature finance. ??

It is the biodiversity credit market. It is tiny with small size transactions being executed here and there. Most recently, US Regen Network Development, an environmental credit platform, reported the sale of 92,000 biodiversity credits worth $129,000 generated by three project developers. Terrasos sold 1,272 biodiversity units with $32,000 (around $25 per unit), ERA Brazil sold 15,000 units for $30,000 (around $2 per unit), and Foundacio Pachamama and IP from the local Sharamentsa community sold 76,000 biocultural jaguar credits for $67,000 (about $0.88 per credit). (CarbonPulse)

Other recent transactions included biodiversity credits generated from a 200 ha area in Mexico, using BioCarbon biodiversity standards (Carbon Pulse), and a “handful” of credits by Colombian standard Cercarbono (Carbon Pulse). The UK government, seeking to create a regulated market under its Biodiversity Net Gain scheme, sold a first batch of statutory biodiversity credits for ￡35,120. (Carbon Pulse). (For further information of the UK regulated Biodiversity Net Gain, please see this piece in Environmental Finance.)

While the major constraint to the growth of the biodiversity credit market is the lack of the buyer demand at any significant scale, another sticking point on the supply side is the complexity and high cost of methodologies to calculate biodiversity credits. In this context, I noted a recent Savimbo Indicator Species Biodiversity Methodology released by Cercabono. The significance of it is that it seeks to substantially simplify and reduce cost of measuring biodiversity improvement by using indicator species as a proxy for healthy ecosystems. The methodology is developed for biodiversity credits. In the immediate, I think this methodology could be helpful to estimate biodiversity co-benefits of conservation and reforestation projects for carbon credits – a much bigger market -- to help monetize these biodiversity co-benefits through higher priced carbon credits.

While it is a worthwhile effort to develop a biodiversity credit market, we have to be realistic that it is not likely to play a major role in meeting the $200 bn annual finance gap before 2030.

2.?????? Hundreds of millions of US $ market for biodiversity and nature finance. ?

It is the Nature-based Solutions (NBS) for carbon credits traded in the voluntary market. Carbon removal credits in particular, generated through reforestation, biochar, regenerative agri practices, and enhanced rock weathering are gaining traction among corporates looking to meet their net zero commitments.

Microsoft is the behemoth of this market, having committed to purchase 17 million credits from the 17.6 million credits made available for purchase between May 1 and August 31, 2024, according to the analysis by Quantum Commodity Intelligence. Assuming a price of around $50 per credit, such purchases will channel about $850 million to NBS over several years. Notable recent purchases by Microsoft include 8 million removal carbon credits from Brazil’s BTG Pactual Timberland Investment Group (IFC client) and 3 million from Brazil’s Re.Green from reforestation projects. Other purchases by Microsoft included 234,000 carbon removal credits from a forestry project in Mexico by Toroto, 11,400 tCO2e removals from enhanced rock weathering from US Lithos Carbon and 8,000 from another US-based company Eion. Microsoft is also investing into US fund Farmland that generates soil carbon credits from organic regenerative farmland practices. ??

Meanwhile Meta agreed to buy 1.3 million nature-based carbon removal credits with an option for an additional 2.6 million from Brazil’s BTG Pactual Timberland Investment Group’s Forest conservation, restoration, and replanting of degraded areas. ?

Other recent transactions included Climate Impact Partners buying 371,000 credits from Form’s reforestation project in central Ghana. UEA developer Blue Forest reaching an agreement with French Removal Carbon for financing a first phase of MozBlue mangrove restoration in Mozambique. The first phase will focus on restoration of 5,000 ha expected to remove 3 million tCO2e. The UK Government and the Dutch FMO invested $55 million in a Latin America reforestation program by the Brazilian investment bank BTG Pactual. British Airways purchased 33,000 carbon removal credits over six years from UK-based CUR8 for $12 million. The purchase includes credits generated from biochar in India and reforestation in Wales. (edie)

In the biochar carbon credit market, Canadian BluSky Carbon will sell over 380,000 tons of biochar to a buyer in the US over 10 years for more than $105 million, contingent on it securing finance for two new pyrolysis systems. Exomad Green, operating the world’s largest biochar plant in Bolivia, announced plans to open three other facilities totaling 560,000-ton capacity by 2027.? In Cambodia, a commodity firm CSNC is setting up a biochar facility to generate 10,000 carbon removal credits per year connected to its cashew nut processing factory. It plans to expand once it secures additional biomass suppliers.

As I discussed in several previous notes, the demand from corporates for carbon avoidance credits generated through conservation is declining due the lack of their acceptance to count towards net zero commitments in addition to the well-known reputational concerns. One promising area for conservation credits is jurisdictional REDD+ credits. The Brazilian state of Para recently signed a $180 million deal with the Leaf Coalition of buyers to sell jurisdictional REDD+ credits from the 2023 to 2026 period. Leaf agreed to buy up to 12 million credits at a minimum price of $15 per credit. ?The Brazilian state of Acre is following suit, having applied to generate jurisdictional carbon credits against the protection of its forests, using the Architecture for REDD+ Transactions (ART) scheme, from the year 2023 onwards.?

Nature-based solutions market, particularly for the carbon removal credits, has been developing at a good clip; although the dominance by a single buyer could pose a risk. In the near term this market can deliver single digit to high teen billions of dollars towards the $200 bn annual biodiversity finance gap. ?

3.?????? Billions of US $ biodiversity and nature finance market

The market directing billions of US $ already to nature-related transactions and which has the biggest potential to contribute most to closing the $200 bn annual biodiversity finance gap and fuel whole of economy transformation is the multitrillion US dollar sustainable finance market.

In 2023, 30% of the $900 bn in sustainable bond issuances included nature-related use of proceeds focused on biodiversity, sustainable management of living resources, sustainable water management, and pollution prevention and control (see report by Sustainable Fitch). This represents a rapid growth from only 5% of sustainable bond issuances with biodiversity use of proceeds in 2022. Nature-related blue labeled sustainable finance products also took off in the span of about 4 years to reach $12.6 bn, according to a recent report on blue finance by Sustainable Fitch.

Growing the share of the sustainable finance market directed towards financing transformation of economic activity to practices that conserve, restore or avoid a negative footprint on biodiversity and ecosystem services has been the primary focus of IFC’s approach. IFC does so through investing its own capital and sharing its experience with the market. IFC’s first-of-a-kind Biodiversity Finance Reference Guide published in 2022 articulates what constitutes biodiversity and nature finance by providing indicative list of investment activities that focus on addressing the key drivers of biodiversity loss in economic activity, support conservation and restoration, and integrate nature-based solutions across economic sectors to deliver infrastructure services to displace grey infrastructure. Each activity in the guide is also mapped to individual GBF targets they contribute to.

IFC’s recently released supplement to the guide - ?Biodiversity Finance Metrics for Impact Reporting – includes impact reporting metrics for each eligible activities to support issuers and borrowers in reporting on impact across individual projects and wider portfolios. Big thanks to the organizations that worked with IFC on this document: BNPP, the Finance for Biodiversity Foundation, Natixis CIB, the Taskforce on Nature-related Financial Disclosures, and the Wildlife Conservation Society. The intent of this supplement is to advance transparency and credibility of impact reporting in biodiversity and nature finance -- essential to enabling transition to nature-smart approaches and to attracting private capital at scale to meet the GBF targets.

While IFC has been focusing on defining investable opportunities in biodiversity and nature finance, the nature finance market is also being shaped from the regulatory side. Financial regulators, the Network for Greening the Financial System (NGSF), are stepping up efforts to understand macrofinancial risks associated with nature loss and its interaction with climate change and what the regulators need to do about them. Recently, there have been several research and working papers on the topic:

-????????? “Ecosystem Tipping Points: Understanding the risks to the economy and the financial system” by the UCL IIPP and the University of Exeter discusses the macrofinancial risks posed by nature loss and climate change, focusing specifically on non-linear and tipping point dynamics, which present particular challenges for economic modelling.? ?

-????????? DNB Working Paper “ The ecosystem service degradation sensitivity indicator (EDSI): A new framework for understanding the financial risk repercussions of nature degradation” introduces a new framework for integrating dependence on nature (ecosystem services) and the degree of nature degradation in estimations of credit risk-related losses for banks.

-????????? Banque de France Working Paper on “Assessing Integrated Assessment Models for Building Global Nature-Economy Scenarios” reviews both the theoretical and applied Integrated Assessment Models linking nature and the economy at a global scale, and provides a critical assessment of the suitability of these models for building global nature-economy scenarios.

-????????? ECB Legal Working Paper “Birth of a naturalist? Nature-related risks and biodiversity loss: legal implications for the ECB” looks at international law and policy on nature and offers a first legal assessment of the implications of nature degradation for the ECB. It studies the relevance of nature degradation to ECB’s primary objective of maintaining price stability and its secondary objective of supporting the general economic policies in the EU. It also provides an overview of how nature degradation and biodiversity loss are integrated in ECB supervisory policy. ?

Financial institutions and corporates that look to proactively start shifting their portfolios and activities towards nature-smart practices stand to gain, in my view. Sustainable finance market can provide the nearest term solutions at the scale needed. ?

Thank you for reading!