What's driving demand for biodiversity credits (and nature writ large) and are credits the right mechanism?

A compilation of the different initiatives driving demand for nature positive outcomes and what we can learn from carbon markets to ensure that demand, finance and outcomes, continue to scale.

As the climate world decompresses from COP28, it is clear that nature has begun to take center stage. Over the past year since the Convention on Biological Diversity was signed at the Biodiversity COP, we seen a surge in initiatives that are focusing on driving positive action to address the other global threat, biodiversity and nature loss. Many of the initiatives focus on nature writ large while some explicitly focus on biodiversity.

The image above aims to capture the different initiatives, guidance and laws that are driving the public and private sector towards nature positive action gleaned through conversations with others in the space and, in particular, a fantastic biodiversity working group session within the Art of Forests Alliance to which many members contributed their thoughts.

This is by no means exhaustive, please let me know if anything is missing. I’ll continue to update this graphic over time and re-share periodically.

And now for a bit more of a narrative from me on the risks and opportunities for the nature positive movement to succeed where carbon has struggled.

What keeps me up at night

One important piece of this nature positive puzzle that I’ve been reflecting on lately is how nature positive action (I’ll focus on biodiversity today) can avoid the boom and bust that we’ve seen in carbon markets. I’m seeing a similar story take shape with biodiversity as we saw with carbon:

1. Technology is developed to measure outcomes on the ground

2. Nature restoration and conservation project operators start to launch pilots to see if outcomes can provide an additional revenue stream to support activities

3. Certification schemes become operational

4. VCs start deploying capital into startups focused on MRV, project development, marketplaces

5. Philanthropist and early mover investors start to fund projects delivering outcomes

6. Corporates measure their impact according to initial guidance from multi-stakeholder initiatives

7. Corporates start to make claims on their progress according to the guidance

8. The market starts to boom and then all of a sudden….

9. Media and other actors start to critique the quality of projects

10. Media and other actors critique the claims made by corporates as greenwashing

11. Corporates reduce their ambition and start to walk back action because they are afraid of reputation backlash

12. Investors reduce their investments because they don’t believe that there will be a demand for these outcomes

13. Trust/engagement has to be rebuilt in the market/mechanism causing significant delays in finance/action when we simply do not have time for reduced ambition.

Sound familiar? (looking at you, carbon markets) Biodiversity could follow this path, or we could do things differently in these early days instead of going three steps forward and two steps back. Because we all know that we don’t have time for going backwards, we must make forward progress.

What have we learned from the challenges with carbon credits/markets that can inform how we design for maximizing biodiversity outcomes?

Here are ten key components of design features of biodiversity credits/outcomes, accounting, claims and markets that I think are critical to making forward progress and ensuring that demand (action and finance for biodiversity positive outcomes) only continues to grow overtime.

1. Avoid offsets - Reducing harm to zero is a given and regeneration of habitats and biodiversity is the expectation. We must ensure biodiversity markets and non-market mechanisms don’t become a #LicenseToDestroyNature which will lead to a distrust in the mechanism and heavy critiques of corporate action as we’ve seen with carbon markets.

2. Set the right expectations (ie the right claims) - Corporate/Government claims need to have margin for some imperfection on the projects side. Projects won’t be perfect and we need to ensure expectations aren’t based on perfection so that the regulations, rules and accounting have time to evolve as we learn together without unforeseen issues, that can be addressed, killing the mechanism. My strong recommendation is that the claim is based on a two-ledger system where corporates have clear (1) harm reduction goals and targets and (2) positive contributions goals and targets.

3. Subscription instead of a credit? - Instead of a one-time payment for a one-time outcome, should compensation for biodiversity outcomes be structured as an annual payment for an annual outcome as the benefits from biodiversity are ongoing (unlike carbon which only has a benefit at the instant that it is sequestered/avoided being emitted)? Also, this will create a financial mechanism that will finance those outcomes in perpetuity.

4. Perfection is the enemy of progress, find the balance between accuracy and action - Corporates are already struggle to do the assessments and accounting for SBTi and their climate impact and nature, especially biodiversity, can be even more complicated. Recommendation to create assessment and accounting frameworks that follow an 80/20 rule. Regulators/guidance creators should find the point at which the increase in the accuracy is not worth the time and resources needed to attain that level of accuracy to ensure that we can start taking action. For example, if we can take action 10x as fast with 80% accuracy or 1x speed at 100% accuracy, we’ll end up with 800 units of impact versus 100 units.

5. Focus on value chains to start, but with 3rd party verification - Encourage corporates to focus on their value chains and reducing their impact and transitioning to positive impact out of the gate, but ensure there is 3rd party verification of corporate biodiversity outcomes. This lack of 3rd party verification of corporate emissions has undermined consumer belief in the integrity of those claims.

6. But go beyond value chains asap via government action - Develop a mechanism that will channel finance towards projects that fall outside of corporate value chains. Nature is inherently a public good, so this likely will need to come from governments. In the global north, this should be financed by the governments. In the global south, my recommendation is trying to create an Article 6.2 of sorts but for biodiversity (and other nature positive) outcomes that is financed through bilateral mechanisms where the global north is financing global south action (debt-for-nature swap is an example of this).

7. Voluntary is sandbox for compliance - Design voluntary guidance, mechanisms and markets not to be the end all solution, but to be the testing ground where we iterate on different models and ensure mechanisms evolve to the point where they are robust enough to be written into law when the political climate is right.

8. Admit failures when found and address them immediately - Part of getting the general public and especially environmentalists to support the sandbox period is to be fully transparent regarding any shortcomings or issues with current guidance, rules, methodologies, etc and address them as soon as possible.

9. Be humble - It will take time and lots of learning to build out robust methodologies, accounting systems, MRV systems and claims language around biodiversity. If you are leading a new initiative to develop these, don’t claim to have all of the answers, but be curious and humble. Welcome feedback from a broad stakeholder group and iterate quickly.

10. Indigenous inclusion and ownership from Day 1 - Indigenous groups currently protect 80% of the world’s biodiversity. It is absolutely critical that any mechanism created to deliver biodiversity positive outcomes is designed in partnership with indigenous leaders and has not only proper safeguards, but actively works to elevate indigenous ownership and compensation for outcomes fully following their rights to self-determination.

And I know I didn’t mention anything related to the unit of measurement for biodiversity. For now, I’m largely leaving that to the ecologist experts but I will say that a land-based approach with an ecological integrity unit (comprised of multiple indicators) tied to a specific area of land is the most logical proposal I’ve heard to date. Fundamentally, biodiversity is tied directly to land use. Finding the right balance between our need of natural resources from the land/ocean and our needs for biodiversity and ecosystem services provision.

More to come as I continue to get into the weeds and as always, feedback, thoughts, questions, critiques are most welcome!