INSIGHT by Stefanie Kaiser, Senior Environmental Markets Strategist at Okala. Photo:© Miranda Richey
In 2023, a notable upswing in the promotion of private nature finance marked a transformative shift in the sustainable investment landscape, responding to the urgent need to address the nature funding gap.
Despite a $7 trillion annual flow in nature-negative finance, Nature-based Solutions (NbS) – in this market context defined as investments in nature conservation and restoration – are underfunded at $200 billion, mostly from governments (UNEP, 2023)1
Over the last one or two years, the long due realisation that biodiversity and nature have a place in corporate balance sheet eventually took root. The momentum for corporate behaviour change was likely propelled by a confluence of influential factors, such as the unveiling of the Global Biodiversity Framework in 2022 or release of the draft framework of the Task Force on Nature-related Financial Disclosures (TNFD).
One of the latest positive market signals was the fact that a 2023 Pledge signatory round of the Finance for Biodiversity Foundation has now been signed by 163 financial institutions from 25 countries and representing €21.7 trillion of combined assets (under management) in total. The pledge is a commitment of financial institutions to protect and restore biodiversity through their finance activities and investments. Amongst the signatories are not only boutique institutions focused on nature and climate but big names including Abrdn, Allianz France, Greenbank, HSBC Global Asset Management, Lombard Odier Investment Managers, Raiffeisen and Triodos.
In 2024, the focus should lie on ensuring that the positive momentum of 2023 leads to a consistent scaling up of private finance flowing towards nature and biodiversity positive activities. We are only at the beginning!
| How are corporates investing and reporting on nature and biodiversity2?
The main factors that drive demand for investment in nature positive action are the management of reputational risk and ensuring readiness for compliance with nature-related financial disclosure.
In 2024, there will be an expectation for large corporates to move beyond net zero towards nature-positive reporting. Disclosure will cover both within-supply chain nature impact and investment in nature-positive projects or activities.
Nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue alongside climate change.
–TNFD
As nature-related disclosure becomes more imperative, the reporting expectations will become more granular, too. ESG investors can expect a shift in expectation from higher-level investment screening towards robust reporting on measurable impacts resulting from project activities.
There are currently different approaches for corporates or funds to invest in nature restoration / conservation and biodiversity. They come with different requirements to adhere to reporting methodologies and therefore granularity of biodiversity data. From my personal experience talking to corporates investing in nature restoration and conservation, I would describe three main scenarios:
| Biodiversity impact claims as part of corporate nature-related disclosure
As part of their journey towards TNFD readiness, corporates will have to disclosure their impact on nature and biodiversity. As was the case for net zero reporting, nature reporting is also based on the expectation that a mitigation hierarchy approach is followed. After reducing negative impacts within supply chain, investment in nature-positive action is an essential part of any nature-positive strategy and the associated reporting. In 2024, in the absence of mature and transparent markets to invest in tradable biodiversity units, corporates will likely continue to focus on backing their impact claims with quality data. For nature-based solutions investments, robust biodiversity monitoring, verification and reporting (MRV) provides evidence of best practice and minimises reputational risk. In this scenario, biodiversity impact monitoring is not dictated by strict accounting methodologies but informed by higher-level biodiversity indicators and reporting guidelines. The TNFD framework offers sector and biome specific tools for target-setting.
| Positive biodiversity impact through high-integrity voluntary carbon markets
The voluntary carbon market (VCM) remains the prevailing market-based mechanism to channel private finance into nature-based solutions projects. Linking biodiversity impact claims to carbon projects is a compromise or interim solution between corporate in-house impact claims and full-blown biodiversity credit markets.
Last year, the VCM came under increased scrutiny after an infamous investigative journalism piece in The Guardian raised serious concerns over flawed carbon accounting methodologies. The article, featuring a clickbait headline claiming that 90% of rainforest carbon credits are valueless, triggered a media storm focusing on projects with alleged malpractices on social and biodiversity aspects.
The negative PR attention severely affected trust in carbon markets and as a result, projects are being scrutinised like never before. A key message at COP28 was that quality concerns are an opportunity for improvement and do not negate the fact that nature-based solutions and the VCM are crucial to solving the dual climate and biodiversity emergency.
As the biodiversity market is still in its infancy, yet carbon markets are not considered a stand-alone pathway for holistic nature-positive action, many corporates and investors are likely to take an approach of upgrading their net zero / carbon strategies towards a more holistic nature-based solutions approach with a stronger focus on biodiversity and social impact.
In this context, the focus has shifted from quantity to quality. Buyers are on the hunt for so-called high-integrity project investments, and organisations like the Integrity Council for the voluntary carbon market (ICVCM) have created a framework to help buyers identify those quality investments, based on Core Carbon Principles (CCB). Furthermore, a number of companies are offering quality and risk assessment services for carbon and nature-based solutions investments.
How does the high-integrity VCM relate to biodiversity impact? Core carbon principle 9 is about sustainable development benefits and safeguards, including biodiversity. This is still open to interpretation and there are no clear methodology requirements for evidencing this aspect; however, corporate investors are increasingly desperate to get their hands on best-in-class project investments that will stand scrutiny for ‘high-integrity’.
Nature-based solutions projects that can transparently and robustly measure and report on their biodiversity impact, while showing best social practice, will be highly sought after by investors.
Whilst formal biodiversity markets are maturing and methodologies are being defined, the above-described pathways of nature finance are currently the ‘lower hanging fruit’; they are not linked to strict biodiversity accounting methodologies as no tradable units are defined.
Overall, reporting on nature-related impact – whether linked to carbon markets or TNFD reporting – will be driven by a strong need to show high-integrity of nature investment assets. Proving adherence to the principles of transparency, robust accounting, good governance and strong social safeguards at project level is the new norm in 2024.
| Biodiversity credits
According to GEF (Global Environment Facility), a biodiversity credit should be “a unit of biodiversity that finance nature conservation and restoration and provide funds for local communities living in and amongst nature.”
Biodiversity credit markets are anticipated to work in a similar fashion to existing carbon markets albeit with the need for important tweaks to respond to lessons learned from carbon markets and considering the complexity of biodiversity.
The purpose of biodiversity credits is to act as another market mechanism to channel private finance into nature restoration and conservation. So far, nature-based solutions carbon markets have aimed to fulfil a similar purpose but with limitations around project eligibility due to additionality criteria, and a limited focus on biodiversity. Environmental markets in the wider sense would comprise carbon markets, biodiversity markets and markets around other ecosystem services, such as water or pollination.
Biodiversity credits are an attempt to convert biodiversity into an investible asset in the hope to provide further financing options for restoration and conservation projects that would be underfunded (or excluded from funding) if solely relying on carbon finance. Biodiversity credits require the definition of a ‘unit’ of biodiversity to which a monetary value can be assigned. This has proven to be very complex and, unlike for carbon credits, there is no universal methodology to define a biodiversity credit for all ecosystems and project scenarios. Biodiversity credits are also not fungible in the way carbon credits are. Currently, a number of frameworks and methodologies for biodiversity credits are being developed, with some close to market readiness or even trading, such as Plan Vivo Nature, Cercarbono, or the Verra Nature Framework.
“The current market for voluntary biodiversity credits is estimated at around $8 million and yet, with effective progress on governance, global demand for voluntary biodiversity credits could reach $2 billion in 2030 and $69 billion by 2050”
The World Economic Forum has identified four key challenges that need to be addressed to unlock this market potential:
- Establish a clear business case for buyers
- Develop high-integrity supply at sufficient scale
- Consolidate common principles, standards and methods
- A supportive policy environment can enable these actions
| Making nature board-room friendly – the need for a strong data foundation for biodiversity markets
I worked in the productive forestry sector for many years and one phrase that I repeatedly heard from pragmatic, down-to-earth forest managers was that “what doesn’t get measured, doesn’t get managed”. In the case of biodiversity, if it doesn’t get measured, it doesn’t have a market value, and it won’t receive the investment it needs.
And precisely, a recurring sentiment that I picked up on numerous Natural Capital Investment conferences over the last 18 months is the fact that a perceived inability to measure biodiversity is what keeps investors from acting on their otherwise strong commitment to partake in nature funding activities.
The challenge is to turn the complexities of nature and biodiversity into data and metrics that can go onto balance sheets and investor reports.
Figure 1 clearly illustrates the obvious fact that market mechanisms are only as good as the data foundation that underpin them. Whilst a number of organisations and international key expert groups are working on a consensus for suitable financing mechanisms and higher-level biodiversity accounting frameworks, discussions become fragmented and outcomes confusing as the debates moves downwards in the pyramid.
As practitioners and investors in biodiversity are still paralysed by the varying biodiversity accounting and biodiversity crediting methodologies that are emerging, questions around data quality are not properly addressed. This lack of guidance results in a sadly common scenario where projects are aware of the pressing need to build a biodiversity baseline at the start of the implementation phase but are held back by a lack of clarity on how to collect futureproof field data to participate in emerging biodiversity markets.
We urgently need to fast-track the development of clear and actionable guidelines from the major biodiversity crediting standards and think tanks (Verra, BCA, Plan Vivo etc) on biodiversity data requirements.
Some key challenges around biodiversity markets (moving downwards in figure 1):
- In 2023, money flows have been held back by immature verifying standards and no clear direction on accounting methodologies.
- Market standards for biodiversity credits are emerging. Biodiversity is complex and location-specific and there will be a number of different standards and methodologies. Fungibility is limited for biodiversity credits. Comparability of credits will be an issue.
- Biodiversity is most likely best expressed as a suite of metrics, but the challenge is to define a list of acceptable metrics and offer guidelines on selecting suitable metrics for a given project. A balance between comparability and project specificity needs to be struck.
- Biodiversity metrics, once defined, are only as good as the data used to create them. Consistent guidelines on data collection (sampling design, sampling intensity, methods being used, quality assurance) are urgently needed. There is controversy around whether reference sites should be in accounting methodologies.
If we fail to push for consistent data quality guidance now, the biodiversity crediting market is likely to follow the path of carbon markets, which have been brought to their knees thanks to aggressive accusations of flawed accounting methodologies – an example where details at the data and accounting level compound to unacceptable mismatches in sold credits versus actual impact on the ground.
| Expressing biodiversity in metrics
To perfectly capture the biodiversity impact of a project investment, a suite of biodiversity metrics should ideally tick the following boxes:
- Be ecologically meaningful and representative of actual condition and change
- Be scientifically robust
- Be feasible to produce
- Be easy to communicate
This perfect suite of metrics is impossible to achieve, and therefore, all accounting methodologies for credits will have to deal with trade-offs. A key trade off is cost vs data quality. As biodiversity metrics for credits require on-the-ground data collection, good data come at a cost. For investors, this is an additional budget line and the willingness to pay has not quite caught up with reality yet.
The definition of a unit of biodiversity requires very careful thought in order to avoid unfair payments for biodiversity positive action. In this sense, robust data and accounting methodologies could play a role in avoiding the pitfall of social injustice further down the line. Having learned painful lessons from last year’s severe criticism of the integrity of carbon claims, transparency and robust MRV methodologies are the new default expectation. Monitoring methods need to be robust and auditable with clearly defined assumptions and limitations to avoid the risk of unfounded or exaggerated nature impact claims.
| Nature-tech: collecting biodiversity data – on the ground but at scale!
Recently, tech-based biodiversity monitoring methods are increasingly seen as the most appropriate means of collecting data that are fit-for-purpose to enable investment in biodiversity and nature positive assets at scale.
Tech-based monitoring methods such as eDNA, wildlife cameras, and bioacoustics can enable the collection of auditable, consistent, and robust biodiversity data at scale to enable nature finance.
“Nature-tech” is a trending buzzword, and I must emphasize that, modern biodiversity monitoring methods, as attractive as their mentioning might look on investor pitches, are mere tools to streamline and scale the measurement of biodiversity impact on the ground. Before any data are collected, a clear theory of change for biodiversity impact must be developed. Investors and project developers must ask: “how can we maximise biodiversity impact in our project? What are trying to achieve?”
| How can project investors get started with collecting biodiversity data?
Navigating the complex landscape of emerging biodiversity standards and TNFD reporting requirements can make any investor in nature-based solutions experience analysis paralysis. My advice would be to focus the attention of finding trusted experts to help you through the design and monitoring stages for your nature-based solutions projects.
1. Define project activities for biodiversity impact
Design biodiversity-enhancing interventions on your projects and define your expected biodiversity impact. This is called the ‘theory of change’ and is a crucial concept for biodiversity reporting under any framework, whether it is TNFD or Verra. Identify the key aspects of biodiversity that should be priorisitised for measuring. To give some real-life examples:
- An impact fund may have created a global agroforestry project portfolio. They may be keen to evidence the improvement of soil quality and biodiversity, but possibly also the return of a certain charismatic species of local importance. They will have certain needs in terms of reporting of the impact to their investors and local partners.
- In another example, the Natural Climate Solutions department of an industrial corporation focuses on REDD+ forest conservation projects and would like to assess the wildlife biodiversity in their forest, emphasizing charismatic and endangered wildlife species and prove that their protection activities maintain biodiversity in the area. They will be keen to include storytelling elements in their biodiversity reporting.
Biodiversity impact can be anything from an increase in soil biodiversity due to a shift towards regenerative agriculture, to jaguars recolonising areas that have been reforested to increase forest connectivity.
2. Design a monitoring strategy to evidence your biodiversity impact
Design a robust sampling strategy to create a biodiversity baseline for your project, with a view on longer term monitoring to assess biodiversity change over time. This will involve collection of data on the ground! Considerations to feed into the survey design should be:
- The required data granularity and the reporting frameworks that will be used. Will the project use a biodiversity crediting methodology with defined metrics and data collection methods? The collected data need to be fit-for-purpose!
- Biodiversity aspects that should be prioritised – this can vary from project to project.
- Budget
- Project characteristics: ecosystem type, homogenous the landscape is, accessibility and other logistical aspects.
From an ecologist’s perspective, measuring biodiversity on the ground in a robust yet pragmatic way is absolutely doable.
3. Find someone you trust to help
If you are an investor in nature-based solutions projects and are looking for a reliable technical partner to take care of your biodiversity monitoring and reporting, you may want to consider the following selection criteria. Does the provider:
- have staff with proven ecological experience in the field? Do they understand the logistical challenges of field surveys?
- Have the capacity to implement biodiversity monitoring in the field or to assist your field teams with implementation?
- have in-house data processing and reporting capacity?
- stay on top of developments in biodiversity markets and do they understand the different certification and reporting requirements?
- the capacity to deliver biodiversity monitoring at scale?
- use surveying methods that are fit for purpose for large-scale biodiversity monitoring for nature markets?
- enable auditability of data?
- have strong social safeguards in place?
2024 is the year when, at last, experts in ecology and finance stakeholders can come together to create tangible solutions to channel private finance into nature restoration and conversation. A year to look forward to.
Stefanie Kaiser is a Senior Environmental Markets Strategist for Okala. Okala offers scalable, tech-based biodiversity MRV services globally. The company also develops and invests in nature-based solutions projects on the African continent, with large-scale initiatives in the DRC and 300,000ha of own concessions in Gabon.
Connect with Stefanie on LinkedIn or learn more at Okala.
Stay up to date on biodiversity markets by following Biodiversity Credit Alliance
[1] Top of Form State of Finance for Nature 2023 | UNEP – UN Environment Programme
[2] For simplicity, in this article, we will use the terms ‘nature’ and ‘biodiversity’ interchangeably. Both terms are used in the nature finance sector, together with ‘Natural Capital’. The shift from investing in emissions reductions activities to investment in biodiversity is seen as move towards more holistic conservation and restoration of nature. However, nature, of course is a much wider concept.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
