The rise of biodiversity markets

Yuejia Peng unpacks the efforts and challenges in bringing biodiversity to market, and how functioning market mechanisms have the potential to bridge the sizable biodiversity funding gap and incentivize nature-positive action.

As global attention turns to address nature and biodiversity loss, the concept of biodiversity markets is fast emerging as a potentially valuable and impactful solution.
It is widely accepted that a vital way to channel financing to nature is through market-based mechanisms, and biodiversity markets can play a key role in expanding and scaling up financing for nature-based solutions and projects. The notion is endorsed by global agreements such as the Kunming-Montreal Global Biodiversity Framework (GBF) and numerous national governments, and it is increasingly being championed across the private sector.

We already see many nature-based projects – such as REDD+ programs – trading on the voluntary carbon market (VCM), aiming to deliver both carbon and biodiversity benefits. In fact, additional environmental merits can also include water quality and supply, soil richness and clean air – all of which are ecosystem services provided by nature. However, in a biodiversity market, you are accounting for the impact on biodiversity, instead of carbon emissions.

The idea of biodiversity markets is to make biodiversity as a good – in the form of biodiversity credits or certificates, also called biocredits – that can be bought and sold in an open marketplace. The hope is that such a market would hopefully encourage financing of a broad spectrum of projects – such as reef restoration and ocean conservation, for example – with or without a clear direct carbon component.

Biodiversity markets are new and rapidly growing, evolving largely in response to the urgency of the global biodiversity crisis and awareness of the potential impact on nature and our economies.

There is a general agreement that the huge biodiversity funding gap cannot be filled by public funds or philanthropy alone; companies and investors need to play a role, too, and the hope is that they can do so via a functioning biodiversity market.

There are questions around how much these nascent markets can contribute. Some stakeholders are not optimistic that markets will help to meet the $20 billion finance target for biodiversity by 2025 under the GBF, but many are hopeful that such markets can play a key role in closing the biodiversity funding gap.

What might a functional biodiversity market look like? Biodiversity markets are a fledgling concept with rapidly forming building blocks emerging across the globe.

Successful biodiversity markets could have many elements, including timely scale of credits volume and value along a reasonable pathway, a fair price to nature’s stewards – such as sovereigns and indigenous peoples and local communities (IPLCs) – and deliverance of credible impact to people, nature and climate.

One key challenge to overcome is how to measure biodiversity. Unlike CO2, biodiversity is very location-specific and there is no single metric that will work across geographies. A tropical rainforest, savannah, coral reef, peatland, mangrove or freshwater lake are very different environments.

Over the years, scientists have developed different measurements for various aspects of ecosystems and biomes. Here are some common ways to measure biodiversity:

species richness - the total number of species within the area
genetic diversity - total variety of genes within a single species
endemic species - species that occur in a particular place and nowhere else
ecosystem diversity - total number of ecosystems in the region
unique ecosystems - ecosystems that occur in a place and nowhere else

Given the complexity, how should we define a unit of a biodiversity credit?

Various bodies and entities are contributing to this discussion, and we are beginning to see distinct methodologies emerging globally. Influential work has been done by the International Union for Conservation of Nature (IUCN), the world’s largest environmental network, to develop the Species Threat Abatement and Recovery (STAR) metric, which measures impact of investments on reducing species’ extinction risk. Verra is also planning to release a new biodiversity credit standard later this year. The organization’s methodology could potentially be area-based and include a permanence component.

In addition, being able to quantify results is important. There will be many ongoing discussions on which methodology works best, how will they apply in practice, and what processes need to be adopted. It is important to remember that keeping the methodology simple means that local landowners, IPLC and potential buyers can also understand the basics and take part in the marketplace as intended.

Importantly, biodiversity markets are expected to make full use of learnings from the VCM. On the supply side, this includes best practices and robust integrity standards, ensuring high-integrity credits that represent real, additional and verifiable benefits – mirroring elements under the Core Carbon Principles (CCPs) by the Integrity Council for the Voluntary Carbon Market (ICVCM). Some of the key processes that have proven successful under the VCM including reporting and monitoring requirements as well as third-party verification.

Unfortunately, biodiversity markets could be prone to some of the same trappings that ensnared the VCM – such as questions around additionality, permanence, safeguarding issues, baseline setting, monitoring and reporting. The hope is that these new mechanisms can learn and improve from the experiences under the VCM and sidestep some of the thorniest issues from the beginning.

There is also the opportunity to embrace some of the latest technological advances; for example, carrying out monitoring using satellite and light detection and ranging (LiDAR) in setting dynamic baselines and using DNA sampling to monitor and report biodiversity.

There are also developments around environmental DNA, or eDNA – also known as "forensics for wildlife" – the recovery and analysis of DNA that has been shed from organisms into the environment, which can be used to understand the biodiversity present in a certain location, as well as measure changes in species distribution and progress over time. Markets can also take advantage of blockchain technology and tokenization to improve transparency and safeguard against double counting.

On the demand side, a key learning from the VCM that is already dominating conversations is the intended use of a biodiversity credit. One issue is that, unlike carbon, biodiversity is a very local concept based on the ecosystem that hosts it. There is no global standardization possible, hence, many parties are asking that most biodiversity credits not be used as offsets, as the loss of biodiversity in one place cannot easily make up for gains in another. The purchase of such a credit would then be considered as contributing to a positive biodiversity change at source.
This is similar to the "mitigation contribution" in the VCM, or "results-based payment" in deforestation pledges, where resulting credits are not used as offsets, but contribute to the climate financing of mitigation efforts in the host country.

Indeed, the Science-Based Targets Network (SBTN) recommends that companies set up goals to reduce local environmental impact, and that aim seems incompatible with the use of offsets. This setup could help the fledgling biodiversity market side-step the greenwashing debate when it comes to companies making offsetting claims.

In situations where offsetting is considered, proponents are seeking assurances that buying biocredits does not replace preventable ecosystem damage. In such cases, advocates are pointing to the need for a "biodiversity offset hierarchy" – similar to the "emission mitigation hierarchy" for carbon offsetting – to ensure that offsets should be used only against nature loss that cannot be avoided or minimized at the original site.

This, then, brings into question the potential demand for and use of these credits. If not used as offsets in majority of cases, then how can the credits be used? Who might buy them? How many would they want to buy?

There are many unknowns that makes the potential size of the market highly uncertain at present. Furthermore, what would be the size of compliance versus voluntary demand?
Companies could take part voluntarily in this market, perhaps as part of efforts to meet their corporate social responsibility goals. They could also be mandated to take part. Numerous countries such as Australia, Canada, the UK and the US already require the negative impacts on nature from projects be compensated with offsets by restoring or protecting another habitat under certain circumstances.

What about prices? How much would these credits be?
At this early stage, there have not been many trades yet beyond the occasional over-the-counter bilateral agreements on a few projects scattered around the world. Prices will likely vary significantly, based on what the biocredit measures, where it is from, and what additional features it represents – much like the additional attributes of a carbon credit. A potential price floor could help to ensure quality and impact of this market.

Another question arises from the intersection between VCM and biodiversity. Currently under the VCM, biodiversity is seen as a co-benefit that accompanies many nature-related projects. A biodiversity market would effectively separate out and monetize that specific component. A VCM project can also theoretically issue biodiversity credits, in a process is known as "stacking." There are questions, however, about how the carbon and biodiversity elements will interact with and affect each other. How would one measure and account for the carbon and biodiversity benefits separately? Are there issues to do with additionality for one versus another if they are coming from the same project?

These questions are not exhaustive but rather represent some of the fundamental questions on biodiversity markets that many interested parties are working on to push the concept forward. What we do know is that some high-level principles are needed before the market can scale, and that a wide range of biodiversity credit types is likely to emerge from different institutions and sources.

It is important to remember these are early days for these markets. In the coming months, we expect extensive dialogues, more research and collaborations as well as additional standards and news to emerge.

Consultation with various stakeholders and proof of concept via pilot projects are now key. We expect most bodies will use learnings from pilots to improve their methodologies and processes over time.

Businesses now have the opportunity to engage in these processes and shape market developments.

This makes biodiversity markets an exciting space to watch as an instrumental tool to finance biodiversity conservation and restoration.

This article first appeared in the October 2023 issue of Commodity Insights Magazine

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