Is now the right time to pursue biodiversity credits for nature's sake?

While biodiversity is at the core of nature, should it be the primary nature unit that we focus on to channel finance to nature today? And how might this change over time?

For those who know me, you know that I often dance between two worlds when it comes to making progress on nature positive. One, the private sector world of corporations and institutional investors that are trying to understand how nature affects their fiduciary responsibility to generate profit for their shareholders. And two, the world of those who deeply understand the value of nature, often scientists, indigenous actors and environmentalists who are trying to influence societal norms as to how humanity values nature.

These two worlds speak quite different languages and often lack a depth of understanding/empathy as to the reality of those in the other world. But I believe the key to navigating the next few decades when it comes to climate and nature is key people and organizations (often policy folks) translating between these two groups and facilitating a transition on both sides that meets each other where they are at and starts to work towards a system that full internalizes the value of nature within our economy (and equitability for those participating in the economy.

In the last few months, I’ve found philosophies around the role biodiversity in nature frameworks to be a great example of the gap between these two groups and I wanted to propose a path forward that perhaps can bridge this gap over time.

The Gap - Biodiversity

Corporates, Financial Institutions (and oftentimes government) - Care about their nature dependencies and biodiversity is usually not directly linked to a material impact on their financial bottom line. In a nutshell, biodiversity is a hot topic today but it’s not easily translated to financial terms.

Nature positive first folks (My apologies for this terrible catch all term) - This group largely believes that biodiversity is the fundamental building block for all ecosystem services based on the unique ecological functions of each species. Furthermore, that we should be centering ‘life’ within any framework that is optimizing for the best outcomes for humans and the planet. This group also feels strongly that ecosystem services for humans and, especially for businesses, only capture a portion of the value that a broad ‘diversity of life’ provides for overall ecosystem function and integrity.

Essentially, if we only measure ecosystem services then we might over-optimize actions to achieve one of those instead of optimizing actions for the full suite and biodiversity. Tom Quigley noted, “I think the challenge with focusing transaction units on specific ecosystem services is that it creates a set of incentive structures around that one thing which don’t necessarily all benefit biodiversity. Which is better, not best. Carbon is a good example. There are some forest carbon developers who focus on native biodiverse forests, and there are others that focus on the ecosystem service provision specifically, and that’s where we get eucalyptus monocrops.”

So the main question I am sitting with is…

What is the right approach for designing nature positive mechanisms today to immediately engage and make progress with corporates, especially in a voluntary paradigm, while working towards a nature positive framework where biodiversity is at the core of the nature positive mechanisms (whether market or non-market)?

Meet corporates where they are at - start with Dependencies and work towards Impacts

I am seeing far more traction and engagement from corporates on their nature dependencies rather than their nature impact.

So what is a dependency?

“The TNFD defines dependencies as aspects of ecosystem services that an organisation or other actor relies on to function. Dependencies include ecosystems’ ability to regulate water flow, water quality, and hazards like fires and floods; provide a suitable habitat for pollinators (who in turn provide a service directly to economies), and sequester carbon (in terrestrial, freshwater and marine realms). A dependency of a business on nature for operations and business continuitymay be direct or through its supply chain.”

If we want corporates to take action today (especially voluntary action), we’ve got to meet them where they are at - where they have material nature dependencies that could in the near or medium-term significantly impact their financial bottom line. The vast majority of corporate dependencies on nature are in the form ecosystem services (water, nutrient availability, climate mitigation, pollination, etc) but seldomly **directly** in the form of biodiversity.

Usually biodiversity is at least one step or more removed from impacting a corporates bottom line. For example, say Coca-Cola has a plant that pulls water from a nearby watershed to make it’s products. Coca-Cola can speak the language of water quantity and quality, but it may be too big of a leap today for them to understand how not only restoring and maintaining forests in that watershed is key to maintaining water quality and quantity, but that the flora and fauna (and funga) biodiversity within those forests is key to those forests staying healthy and continuing to provide clean water to Coca-Cola.

When I talk to a corporate about water stress and water resources, they immediately know how to link this to their bottom line. When I talk about biodiversity, it’s still too much of a leap to translate biodiversity outcomes into the effect on their bottom line.

This is the bee in my bonnet when it comes to biodiversity credits. Yes, biodiversity is life (the highest order outcome we should optimize for) and one of the best proxies for ecosystem integrity, but if corporates don’t understand it, then should we be starting our nature finance mechanisms focused on biodiversity?

Or, should we start establishing mechanisms that link to the ecosystem service dependencies that corporates understand today and transition to a model centered on biodiversity over time?

It will take time to link biodiversity/ecosystem integrity to the provision of each ecosystem services that a corporate currently values.

And it will take time to transform human societal values to intrinsically value biodiversity and get government to engage to protect and restore biodiversity/ecosystem integrity creating mechanisms where anyone who does harm to nature has to pay and anyone who maintains or regenerates nature is rewarded.

But this might mean not focusing all of our energies on biodiversity credits today. We must play the long game while taking incremental steps where we can make progress today.

So what does this look like in visuals…

Biodiversity & Nature Frameworks

Instead of starting with biodiversity as a core area of measurement alongside ecosystem services and a core unit of transaction:

Or with biodiversity as the primary area of measurement and the primary unit of transaction:

Perhaps we should be starting with ecosystem services as the primary components of measurement and units of transaction (with the linkages clearly established between biodiversity and outcomes for ecosystem services):

And ultimately be working towards biodiversity as the core unit of measurement and unit of transaction once it’s linkages with ecosystem services are fully quantified and understood or naturally humans intrinsically value biodiversity as the fundamental building block of nature and representation of the state of nature.:

**disclaimer that the ecosystem services included in the graphics above are not exhaustive or picked for any particular reason, simply for visualization purposes.

The transition from Dependencies, to Impact, to Societal Shifts

How do we create a system that right now that starts to bridge indigenous traditional relationships with and valuing of biodiversity with current private sector thinking and function?

Today, we likely want to start with meeting corporates where they are at. I’ve talked to a handful of the worlds top agricultural and tech corporates over the past few months. Overall, they don’t have the institutional knowledge, understanding or ability to quantify biodiversity’s impact on their bottom line, but they can quantify and understand the impact of ecosystem services (like water provisioning and nutrient availability) on their financial bottom line. And, many ecosystem services are highly dependent on biodiversity to continue to provide that service.

The good news is that the Global Biodiversity Framework has put biodiversity on the radar of the private sector with more and more corporates starting to look at how best to engage. But ultimately, if we want nature positive to go beyond a CSR (Corporate Social Responsibility) exercise, I believe we need to start by focusing on dependencies and then shift to impacts over time. Start by focusing on ecosystem services that materially affect corporate activities and shift to biodiversity over time.

So here’s my step-by-step very over-simplified transition model to go from getting corporates to engage on nature positive today to achieving the end state system across public and private sector that truly internalizes the value of nature into the economy and human values.

1. Start with Dependencies (not linked to biodiversity) - Get corporates to understand the impact of ecosystem services on their financial health and take immediate action where investing in maintaining or restoring ecosystem services that affect their value chain and operations will have a positive ROI. This will largely be driven by voluntary guidance like TNFD and SBTN. My totally back of the envelope estimate is that 30-40% of ecosystem service maintenance and uplift opportunities will have a positive ROI for most AFOLU corporates.

2. Then move to Dependencies (linked to biodiversity) - Establish the linkages between biodiversity and those ecosystem service investments that have a positive ROI for corporates so that biodiversity is established as a key design component for ensuring the provision of ecosystem services. Yes, we understand this implicitly, but we need to make these connections explicit and magnitudes understood for corporates to truly begin to value biodiversity.

3. Then expand into Impacts - For the remaining 60-70% of ecosystem maintenance and uplift opportunities, investments by corporates will not have a positive ROI for corporates but we need to stop negative nature impacts. This is where we likely need government to engage with regulation that internalizes nature value externalities, or restricts negative nature activities, so that companies are forced to reduce their nature negative and increase their nature positive impact even if it isn’t profitable. Much of this 60-70% is actions that corporates could take that would have a benefit for other actors, both public and private, who depend on ecosystem services that are affected by corporate activities. In the current market and in most countries (not all), the lack of regulation of nature negative activities or taxes to ensure that impact is factored into decision-making is not present so corporates are able to operate and profit while doing harm to nature that negatively affects public and private entities beyond the corporate itself. The key question here is how many corporates will be able to do so and still be profitable overall and what is the role of corporates vs government in financing these transitions.

4. Then go for the end state system with biodiversity at the core - Now for a huge leap to step four, which is achieving a societal shift in value preferences where humans explicitly value biodiversity and biodiversity is at the core of all nature positive frameworks and the primary unit of transaction/measurement. There are two pathways to achieve this. One is we map and understand quantitatively exactly all of the interdependencies between biodiversity and ecosystem services (long and expensive road and likely never will get to 100%, but say 50% likely feasible with enough time and resources. The other is to get all of human society to intrinsically value biodiversity to the extent that we don’t need to fully quantify the linkages of biodiversity and ecosystem services to make economic decisions that optimize for global biodiversity outcomes.

So.

Looping back to whether we should start today with a system where biodiversity is a pillar of TNFD/SBTN and we are transacting biodiversity credits vs a system where biodiversity is an underlying enabling factor for ecosystem services vs a system where biodiversity (life) is the core unit for optimizing all nature positive decisions.

I see this as a yes/and where, in the near-term, we need to focus on meeting the private sector where they’re at (incremental) and, longer-term, we continue to work towards societal/system values shifts.

I recommend that the nature folks group (which I include myself in this group) accept and allow for an imperfect model to start (ecosystem service provision’s material impact on corporates, ideally with a link established between biodiversity and the provisioning of those services, ie biodiversity is one layer removed but the link is there) to make progress as long as we hold onto and keep working towards the what I think is the North Star (government regulation and ecosystem integrity being the primary unit of measurement and regulatory mechanisms).

We’ve already seen the beginning of regulation centered on ecosystem integrity and biodiversity with the EU’s recent passing of the Nature Restoration Law. So the long-term play may not be as long as one might think.

Disclaimer that this discussion largely only focuses on corporate value chains. It does not discuss how to incentivize/finance the provision of ecosystem services in contexts outside of value chains such as smallholder farmers. For catalyzing nature positive outside of value chains, my sense is this responsibility largely falls on the shoulders of government and requires significantly more financial support from global north to global south governments.

Word of warning

Before signing off, I do want to highlight the need to get the carrots and the sticks right within the mechanisms (market or non-market) that will be the primary drivers of this nature positive shift.

With the nature positive movement, if we entirely go the regulatory route (sticks) without strategically using financial incentives and new sources of revenue (carrots) for especially smaller farmers/land stewards to make a nature positive transition, we might find ourselves in a coal and climate situation (see article I previously wrote on this subject).

And we’ve seen how coal played out in the US driving climate to be highly politicized with renewables taking away people’s livelihoods in the heart of coal country. The EU farmer backlash is the canary in the coal mine for nature. If we want to make the nature positive transition without nature becoming politicized as well, let’s take good note of that canary (I really wanted to make a biodiversity metaphor out of that canary but am not quite witty enough to pull that off.

Thanks for tuning in for another episode of, “Eric thinking out loud”. I very much so welcome your opinions/feedback as to whether the path laid out above is the right approach to make progress today and achieve the proper “end state” or whether it may lead us down the wrong path…

- Eric