(Bloomberg) —
An international market for biodiversity credits is gaining traction, but as questions arise concerning the risk of greenwashing, proponents are seeking to distance these new instruments from their much-criticized predecessor, carbon offsets.
Momentum has been building since the end of 2022 when almost 200 countries signed the Kunming-Montreal Global Biodiversity Framework, a pact dubbed the “Paris Agreement for nature” that calls on signatories to come up with “innovative” financing initiatives—such as biodiversity credits.
A biodiversity credit is a tradable security representing a unit of biodiversity improvement, which is brought about by some form of land-management change.
France and the UK have led the charge to expedite the market’s growth, which the World Economic Forum estimates may reach $69 billion by 2050. In June, the countries co-launched an international advisory panel on biodiversity credits, chaired by State Street Corp. non-executive director Amelia Fawcett and Sylvie Goulard, a former deputy governor of the French central bank.
In December, Ursula von der Leyen, president of the European Commission, extolled the benefits of so-called nature credits, and a new trading platform was launched by Emsurge in partnership with a carbon market broker called Emstream.
Some countries, like England, have introduced rules requiring infrastructure developers, homebuilders and other companies to provide compensation for any harm they cause to the natural environment. They can do this either on-site by rebuilding a destroyed forest or pond, for example, or they can do it off-site by purchasing so-called biodiversity net-gain units from third parties, typically landowners but also market intermediaries and traders.
Read More: Carbon Market Faces Chaos as Mega-Project Collapses
An unregulated international market is developing as well, one in which companies can source biodiversity units from across the globe to meet their biodiversity targets. It’s similar, however, to the market for carbon offsets, which has faced increased criticism in the past year for being a venue for greenwashing rather than having any substantive positive effect on greenhouse gas emissions.
To address this—and the fundamental issue that biodiversity, unlike carbon dioxide, is not fungible and is highly localized—proponents of biodiversity credits are seeking to make a key distinction. Namely, between their use to offset harm and their use to help finance do-good projects.
Aleksandra Holmlund, chief executive of Qarlbo Natural Asset Co., which is developing biodiversity credit projects, said at the recent COP28 climate summit that “you can use offsets to get to net zero and credits to get to net positive.”
BloombergNEF has outlined a similar distinction. First, companies must avoid negative biodiversity impacts, and then they must minimize any harm that occurs and restore any damage done to the natural environment. As a last resort, companies can purchase an offset to compensate for any residual impact. A credit, BNEF says, sits outside (or exceeds) that hierarchy. Companies can purchase credits for net positive impact.
It’s a narrative that’s emerging among carbon market participants as well.
But Alex Bush, a lecturer at Lancaster University, warns that the lack of clear definitions means the biodiversity concept is still preliminary. “On a practical level, we’re not quite there yet,” he said. “The market is keen, but until there is regulation on how we define a credit, I don’t think we’re ready for a market trading system.”
Read More: UN Says New Biodiversity Credits Can Succeed
Indeed, many of the same flaws that bedevil carbon offsets may afflict their biodiversity brethren. Sam Sinclair, co-founder and director of the consultancy Biodiversify, says many people are seeking to exploit the confusion and sell products that are based on “what they want to be true, rather than what’s actually possible.”
The overhanging issue remains that there’s no current oversight or rules governing the use of biodiversity credits, or the corresponding claims made.
For now, Frédéric Hache, a lecturer in sustainable finance at Sciences Po university and executive director of the Green Finance Observatory, likens this burgeoning market to a salesman selling guns that aren’t for shooting or a farmer selling marijuana that’s not for smoking.
“The business case for purchasing nature credits at scale without offsetting is weak,” Hache said. The reality is any notion that there’s a difference between credits and offsets is “disingenuous,” he said.
Sustainable finance in brief
Litigation finance, long a lucrative enterprise in America, is now becoming big business in Europe as investors eye huge returns as they contemplate the fallout of new laws addressing ESG compliance. Last year, citizens in the European Union won access to the kinds of class-action lawsuits that have long fueled US litigation. And another piece of EU legislation nearing passage exposes firms to legal risk if environmental or human-rights violations are detected in their supply chains. Bankrolled by hedge funds and other alternative investors, such lawsuits can target alleged corporate misdeeds such as broken environmental pledges, exploited workers or corporate governance failings. A successful case can leave a litigation funder with returns well in excess of 25%, something that’s drawn the scrutiny of legislators. “Funders are always working in their own economic interests rather than that of claimants,” said Axel Voss, a member of the European Parliament. “I don’t want to see the legal system becoming a playground for profit seekers.”
- For the second year in a row, global banks made more money underwriting bonds and providing loans for green projects than they earned from financing oil, gas and coal activities.
- A study examining how often asset managers vote in accordance with climate goals has singled out BlackRock and State Street for consistently blocking green resolutions.
- A climate activist group is urging securities regulators to investigate Canada’s biggest banks over their green-finance claims and whether “inadequate or misleading” disclosures could be putting investors at risk.
To contact the author of this story:
Natasha White in London at nwhite107@bloomberg.net
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