Biodiversity’s Big Year?

With the 15th meeting of the Conference of the Parties to the Convention on Biological Diversity (COP15) concluding in Kunming, China, this spring, government representatives from across the world have a chance to deliver a global biodiversity framework that finally bends the curve on nature loss into recovery. 

As we’ve written about before, restoring ecosystems at scale will require private sector leadership and huge amounts of private finance to be deployed. With the Dasgupta review and Taskforce for Nature-related Financial Disclosures (TNFD) highlighting our economic dependencies on biodiversity, I wonder if 2022 will finally see the emergence of markets that make possible the dream of a ‘nature positive’ world.

The global loss of biodiversity is just as important as the climate crisis. Yet, until recently, humanity’s dependence on functioning ecosystems has been overlooked, with our planet’s ecological crisis often playing second fiddle to climate emergency. Now, at last that imbalance is starting to be addressed, as the realisation that these crises are wholly intertwined sinks in, and that restoring ecosystems is one of the most effective ways to prevent - and mitigate against - our changing climate.

That said, we’re still seeing our response to biodiversity playing catch-up, often piggy-backing on climate-inspired initiatives. A good example of this is the TFND, which followed the lead set by the Taskforce for Climate-related Financial Disclosures (TCFD). Likewise, in the corporate space, net zero climate targets are being mirrored with an ambition for businesses to be ‘nature positive’. Within the voluntary carbon market too, biodiversity gain is largely being monetised by marketing it as a carbon co-benefit, in the hope that ‘charismatic’ carbon credits can be sold for a premium.

Yet if we’re to close the financing gap for ecological restoration and halt the global decline of biodiversity, we have to move beyond carbon and a climate-centric approach to nature. We will need new markets for biodiversity, so that economies and livelihoods can be supported by regenerative practices that don’t rely solely on government subsidies or philanthropy.

But what would it take to create these markets, and how might they dovetail with the international frameworks that are being agreed at COP15? By looking at the current approaches being taken, perhaps we can glimpse the course we need to chart if 2022 is truly to be biodiversity’s big year.

The Natural Capital Approach

One way to capture the value of biodiversity within a landscape is to adopt a natural capital approach, recording the stocks of natural assets and flows of ecosystem services within a landscape.

Such accounting is vital for any land manager who wants to understand both the true value of the assets in their care but also the impacts, including non-financial ones, of the decisions they make. Logging a forest may be economically advantageous, but if the value of the carbon sequestration and biodiversity provided by that forest are accounted for in monetary terms, it may become clear that felling the trees will lead to a net loss of value overall.

The problem with natural capital appraisals, however, is that there remains a big difference between valuations and cash. Only one of them can pay the bills and, as a result, the decision to log a forest may still be the most appealing to a land manager, even if they are aware of the non-financial value they are sacrificing.

That would give valuations a monetary underpinning, transforming the biodiversity value of a piece of land from theoretical to financial.

The Voluntary Market Approach

On the back of the rapid growth in the voluntary carbon market, there is an expectation that a similar credit-based approach can be rolled out for biodiversity and work is already underway to make that happen. Land managers who enrich the ecology of their estates could have that biodiversity gain verified, selling credits to businesses that want to (claim to) be ‘nature positive’.

It sounds straightforward, but several aspects of biodiversity gain make its tokenisation more difficult than is the case for carbon emissions. For starters, desirable biodiversity outcomes are subjective in a way that emissions reductions aren’t; not every land manager, or business, agrees on what wildlife should exist in which landscapes. In Scotland, for instance, moorland is a contested habitat, which some see as denuded and low in species diversity and others view as a nature-rich repository of important breeding bird populations. Such views are intimately tied up with cultural values, individual livelihoods and landscape aesthetics, which makes a universal, objective measure of biodiversity gain difficult to produce.

For the buyers of biodiversity credits, too, the need to be ‘nature positive’ is often not felt as keenly as a requirement to be ‘net zero’. Every business is directly responsible for greenhouse gas emissions but for lots of companies their impacts on nature are less apparent, which can reduce the sense of responsibility they feel to pay for mitigation. This is why the work of the TFND is so important, as it will highlight the nature-related impacts, dependencies and risks businesses face, making clear the need to be (and often the business case for being) nature positive.

Finally, the metrics required to substantiate a biodiversity gain are numerous and it isn’t always apparent which ones to use. Should a land manager measure changes in the abundance of insect populations for instance, or would vegetation surveys be more useful? What if their interventions are only targeting one rare or charismatic species in particular? What if some species benefit from the change in habitat quality, but others fare worse? These sorts of trade-offs will almost inevitably occur and, again, they introduce a value-laden element to measuring biodiversity, which makes its standardisation more complex and contested.

The compliance market approach

Despite these challenges of standardisation, the UK government has created a compliance market for biodiversity in England under the legislation contained in the Environment Act (2021).

The Act requires that developers deliver a net gain for biodiversity, by ensuring a minimum 10% uplift in local biodiversity as a result of their developments. DEFRA has created a metric that allows biodiversity losses and enhancements to be quantified, with developers obliged to purchase offsets if they cannot deliver the biodiversity gain on site.

The result is that most developers will now have to pay for biodiversity units, generated offsite by third parties, to fulfil their statutory obligations. The resulting flows of money will see huge investment being channelled into habitat creation and enhancement right across the country, as land managers capitalise on the opportunity to deliver biodiversity uplift on less agriculturally-productive land.

None of this is to say that England’s biodiversity net gain (BNG) market is perfect. The DEFRA metric has been criticised for its coarse resolution – it uses habitat not species-level data – and there is widespread disapproval of the exemption for national infrastructure projects. There are also concerns that funding for nature being yoked to continued housebuilding is fundamentally unsustainable. However, the overall approach of the UK government has to be seen as progressive. They have created a market for biodiversity where demand is assured, where the metrics have been standardised and where the financial incentive for land managers is significant. Now it’s for Scotland, Northern Ireland and Wales to follow suit and roll out their own versions of BNG.

The outcomes-based approach

Payments for outcomes are growing in popularity, with a variety of ecosystem services now being financed through environmental or ‘green’ bonds. This approach is effective at driving private finance into projects, with investors providing the initial capital that a project needs. However, its true utility is determined by the ultimate buyer of the outcome, and whether they are a public or private entity.

If biodiversity gain is the outcome being paid for, it is hard to imagine the payor being anything other than a public-sector or charitable organisation. For green bonds to truly drive private finance into the restoration of nature, the end buyer must also be a private company. Otherwise, the state is footing the bill and could perhaps fund the project more efficiently through grants or a subsidy.

Once again, the need for strong and assured private sector demand for biodiversity gain comes to the fore. It is the essential prerequisite for driving large amounts of private finance into this space.

The way ahead?

At the start of 2022 several things are clear. The first is that we need more finance to halt the loss of biodiversity. The second is that much of that investment will have to come from the private sector. As a result, there will need to be a clear investment case for lots of businesses, to incentivise that flow of money.

Creating that investment case, however, will require multiple different approaches to be developed. The good news is that we aren’t starting from scratch with lots of these, and there is huge scope for the development of these approaches to be complementary and synergistic. But we need key players in these emerging systems to step up this year and build unstoppable momentum. Specifically, we need private sector leaders to pick up and run with the TNFD’s framework for nature-related risks, which is due for initial release this quarter (Q1 2022). The more private sector businesses that feel they have skin in this game, the more demand there will be for both voluntary and the outcomes-based approaches to restoring biodiversity.

We also need wider private sector stakeholders, whether customers, employees or shareholders to demand their companies become ‘nature positive’. This will fuel the demand side of a voluntary market for biodiversity gain, helping to stimulate the standardisation of the necessary protocols and metrics to grow that market and match its carbon equivalent.

We need a natural capital approach to become the norm, so that some form of biodiversity value appears on our balance sheets and cannot be ignored when economic decisions are being made.