Why a market for biodiversity credits is not far away

The development of private sector biodiversity credits schemes is “really advanced”, and transactions will see “a significant uptick inside five years”, according to Pollination director Laura Waterford.

Waterford recently authored a paper in conjunction with the Taskforce on Nature Markets examining the current state of the biodiversity credit market and providing recommendations for how it should develop.

Launched in 2019, Pollination is an asset manager and venture capital firm focused on natural capital. In 2020, the firm entered into a joint venture with HSBC Asset Management to establish Climate Asset Management, a series of funds targeting $6 billion in total. As part of the strategy, CAM distributes carbon credits to LPs in place of financial returns for one of its funds.

While government schemes may take longer to bear fruit due to the need to run consultations and pass legislation, private sector schemes are “moving so fast” that many are already piloting projects, Waterford told New Private Markets.

Waterford has seen around 20 schemes being developed globally which are looking to standardise the value of biodiversity protection. It is likely that, as the market matures, a bias will develop towards schemes that allow for multiple issuances of credits for a single area, rather than a single issuance, and “that look to either show uplift over time or the maintenance of a fairly high level of biodiversity value.

“That’s what creates the opportunity for ongoing finance for good biodiversity outcomes, whereas it’s a bit more challenging to see how sustainable the financial flow off the back of a single issuance and sale of a certificate or a single issuance of a credit would be for a protected area,” she added.

Establishing a market for biodiversity credits would unlock a new area of natural capital investment strategies. “Not all landscapes have carbon that can be sequestered or avoided from being released into the atmosphere,” Waterford explained. “There are some landscapes like desert, like arctic landscapes and also things like coral reefs that just do not have access to carbon finance from carbon projects. Those landscapes will suddenly be able to potentially participate in environmental markets and generate a new revenue stream that wasn’t available to them before.”

Challenges

Stakeholders in the developing biodiversity market will need to be careful to avoid the same issues seen in the carbon markets, where there have been concerns around the quality of credits being issued. At the project level, “there’s really nothing to substitute for really rigorous due diligence”, said Waterford.

More significantly, market actors will need to develop a consensus of the role such credits can play in the investment landscape, as well as their limitations. “The single biggest challenge will be around the nature of the claims that can be made. In relation to biodiversity credits, the general feeling is that we’re unlikely to go down a route of biodiversity credit supporting offsetting claims in a voluntary sense. For many reasons, one of them being that actually calculating scientific equivalence for offsetting biodiversity outcomes is really challenging and the ability for corporates to do that meaningfully in a voluntary context, particularly where we start thinking about supply chain impact, is just really not realistic in the near term,” Waterford explained.