Biodiversity Credits Not the “Next Generation” of VCM

Lessons have been learned from carbon offset missteps, but new market will also be marked by differences in project design, benefits and rationale.

Investors have grown to regard carbon credits with caution, particularly when used by firms to offset CO2 emissions as part of their net zero commitments.

While the nascent biodiversity credit market has learned lessons from overstated offset claims, experts at ESG Investor’s Nature Data for Institutional Investors event insisted it also represents a very different proposition – with potential to support the nature-positive journeys of corporates and governments.

Jeremy Eppel, Senior Advisor at non-profit Nature Finance, said biodiversity credits should not be considered as a tradeable commodity, nor as the “next generation” of the carbon market, partly due to lack of comparability between the impacts of projects generating biodiversity credits.

“Don’t think of this as a slightly improved version of carbon credit markets,” he said. “Investors should view biodiversity credits as a way of investing in a new form of nature-based infrastructure, for mitigation of environmental impact but also adaptation.”

A key difference between the biodiversity credit market and the voluntary carbon market (VCM), according to Thea Philip, Associate Director at Pollination, a global climate and nature investment firm, is that the latter has been bestowed with a set of high-level principles ahead of the scaling up of supply and demand.

“As we build biodiversity credit markets, we need to learn lessons from the carbon markets by focusing on integrity from the get-go, so that we don’t spend the next 20 years fine-tuning them,” she said.

A principles-led market

A framework for high integrity biodiversity credit markets, containing 21 high-level principles (HLPs) across three pillars, was released during COP16 in Cali by the International Advisory Panel on Biodiversity Credits (IAPB). The panel was established last year by the French and UK governments to accelerate market development and develop practices, norms and standards to underpin integrity.

The new framework seeks to ensure the biodiversity credits market delivers verified positive outcomes for nature through rigorous measurement, validation and verification processes. It also aims to ensure equitable benefits to Indigenous Peoples and local communities (IPs and LCs) through project design and development, while following transparent and sound governance principles at the project and macro levels.

According to Philip, participants in the framing process sought to learn from the VCM experience not only through the development of the principles, but also with regard to how the purpose and benefits of biodiversity credits are described.

“There has been a strong focus on the language of contribution to the global goals for nature and the national goals of the countries in which projects are situated, moving away from language around compensation and offsetting,” she said.

Demand from companies and investors to generate and buy biodiversity credits would stem from their role as science-based, third-party verified evidence of positive impact on natural ecosystems and their stewards, Philip added.

The UN-convened Biodiversity Credit Alliance has defined a biodiversity credit as “a certificate that represents a measured and evidence-based unit of positive biodiversity outcome that is durable and additional to what would have otherwise occurred”.

Also speaking on the panel, Ingrid Kukuljan, Head of Impact and Sustainable Investing at
Federated Hermes, said robust measurement to demonstrate project additionality was critical to the market’s ability to deliver high integrity credits.

“A credit is a measurement of biodiversity outcome, so if you want a certificate, you have to prove it,” she said, adding that corporate participation in the generation of high integrity credits would send a strong signal to investors about firms’ commitment to managing their nature risks and impacts.

Carbon credits have attracted high degrees of criticism and scrutiny due to loose claims by some participants in a largely unregulated market as to their ability to sequestrate additional volumes of CO2.

The VCM sector has developed principles to increase the transparency and integrity of its processes, both through standards developed by the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets initiative (VCMI).

The development of the carbon market was further boosted at COP29 last month through agreement on Articles 6.2 and 6.4 of the Paris Agreement, which should enable the trading of carbon credits between polluting and nature-rich countries.

People and planet

Panellists also addressed the need for projects generating biodiversity credits to provide strong economic and social benefits, while also achieving nature-positive outcomes.

The IAPB framework emphasised that the knowledge, experience, traditions and values of IPs and LCs are “of crucial importance” for the maintenance, restoration and sustainable use of nature.

“Biodiversity credit markets from the beginning must show enhanced emphasis on leadership by IPs and LCs from project design to delivery,” said Philip at Pollination.

Dr Dan Exton, Director of Strategy at project developer rePLANET, said participants in biodiversity credit markets would need to maintain a balance between environmental and social impacts. RePLANET’s approach involves ensuring land on which credits are generated stays in the ownership of IPs and LCs.

“Money talks. It’s all well and good to have ethics, but if money is not finding its way to the custodians of biodiversity, then you have failed,” he said.

Exton also said projects should be designed on a collaborative basis to ensure local control and responsibility.

“There is a network of community-based NGOs that have the passion and interest to develop projects, but who lack technical expertise. As project developers, we need to work with those organisations so that we’re no longer needed over time and they can take leadership,” he said.

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