New in Biodiversity Finance: July 7, 2023

In this Issue:

• High seas treaty, EU draft laws on nature and soil health
• Nature-based carbon credits, biodiversity credit market
• Transactions in blue and circular economies, investor action on biodiversity

In the developments at the global policy and regulatory level, more than 190 countries finally, after 20 years of negotiations, adopted a treaty to protect marine life in the high seas (i.e. international waters) covering two-thirds of the global ocean. The treaty will create an authority to manage conservation and establish marine protected areas in the high seas. It establishes ground rules for conducting environmental impact assessment for ocean-based commercial activities and establishes principles for equitable sharing of marine genetic resources, a key demand by developing countries. (Associated Press ). For an in-depth look at the treaty and what it means for climate and biodiversity, see CarbonBrief.

EU’s environment ministers have reached an agreement on highly debated draft Nature Restoration Law which seeks to halt the loss of biodiversity. The agreement was reached on the condition to establish “dedicated funding” to help meet the targets articulated in the proposed law such as developing national nature restoration plans that address pollinator loss, drained peatland, and conservation and restoration of 20% of land and seas. However, it is not clear that the EU bloc will have the required funding and whether the proposed legislation will gain the needed parliament approval to become law amid a strong opposition from farmers. (FT , eddie) .

Another proposed EU law related to biodiversity – on soil health -- is facing strong opposition. While companies such as Nestle and Unilever called for ambitious legislation that would set specific targets for soil health, the current draft only sets out a framework to identify areas with poor soils and assess their level of erosion, carbon, presence of harmful chemicals, and other indicators. (FT )

Global Environmental Facility approved plans to establish Global Biodiversity Framework Fund dedicated to support developing countries’ implementation of the Kunming-Montreal Global Biodiversity Framework. (Press Release )

MARKET UPDATE

Nature-based Carbon Credits

The price for carbon credits from Nature-Based Solutions declined from around $15 to under $2 per credit in a matter of a few months. Carbon credits from NBS account for 45% of all credits in the voluntary carbon market. These credits have been highly valued in the market and have been trading at a premium due to often significant additional biodiversity and social co-benefits that they generate. The recent steep decline in pricing defied expectations of NBS premiums and expectations of sustained and even growing prices for NBS credits.  According to Carbon Credits , the decline in prices is driven by slowing demand for carbon credits across the board due to tough macroeconomic conditions and reduction in sustainability initiatives, uncertainty in the market around setting up the intergovernmental carbon credit trading system under the Article 6 of the Paris Agreement, and increasing public scrutiny for greenwashing.

Speaking of the demand side of the market and the scrutiny, the Voluntary Carbon Market Integrity Initiative (VCMI) released its Claims Code of Practice . The Code seeks to provide clear guidance to companies on when and how they can credibly use carbon credits as part of their net-zero commitments and climate mitigation strategies. The Code emphasizes that companies using carbon credits under VCMI Claims cannot count them towards internal emission reductions. Instead, such credits should represent companies’ contribution to their climate goals and to the collective global mitigation efforts. The Code requires companies to disclose their annual greenhouse gas emissions and their near-term reduction targets, validated by the Science Based Targets initiative, besides having publicly committed to reaching net zero emissions no later than 2050, before they buy any carbon offsets.

AstraZeneca will invest $400 million through its forest restoration scheme to plant 200 million trees across Brazil, Ghana, India, Rwanda, and Vietnam to remove 30 million tons of CO2 between 2030 and 2060. The company plans to use the carbon removal credits to reach its global net-zero goal at 2045. Its goal is to reduce absolute emissions by at least 90% and use offsets for the residual emissions. (eddie )

Biodiversity Credits

During the recent Summit for a New Global Financing Pact in Paris, France and UK announced plans to work on creating an international biodiversity market. The initial concept of what a global nature market might look like is expected to be presented at the climate COP28 in Dubai this December. Following that, the intention is to work with a broad range of stakeholders to develop a market framework in time for the biodiversity COP16 next year. Both pure biodiversity credits and biodiversity-positive carbon credits would be considered as part of the market. (Carbon Pulse ).

This paper by NatureFinance and Carbone4 and commissioned by France in time for the Summit provides a summary of the existing carbon credit approaches and schemes as well as outlines the core design challenges that need to be addressed in the development of the global biodiversity credit market. These challenges include availability of data, creating demand, ensuring supply, distribution of benefits, and governance.

As a side note, AXA IM Alts expects the market for biodiversity credits to take between five and ten years to develop. (Environmental Finance ).

Separately, New Zealand released Biodiversity Credit System Discussion Document that outlines its proposal for developing a biodiversity credits system to channel funding to nature-positive actions. The government seeks public comment on the proposal.  (RNZ )

Carbon standard Verra is seeking projects to pilot its SD VISta Nature Framework and biodiversity methodology ahead of the public consultation process to start in September. The idea behind the Nature Framework is to verify biodiversity outcomes of a project and issue tradable credits as a standalone assets (Carbon Pulse ).

Blue Economy

IFC subscribed to a $400-million green and blue bond issued by Thai Bank of Ayudhya Public Company Limited (known as Krungsri) to further support climate action and sustaining ocean health. The blue portion of the investment is $50 million earmarked for projects in water supply, fisheries, aquaculture and others in line with IFC’s Guidelines for Blue Finance. (Press Release ).

One third to UK banks with £2.3 trillion in assets under management, including Standard Chartered and Lloyds Banking Group, joined other investors and corporates, including Google and Volkswagen, in a pledge not to invest in the deep-sea mining industry. The main concerns center around the potential of the nascent industry to cause irreversible damage to the seabed and marine ecosystems. (edie ).

Among the proponents of deep-sea mining are several Pacific states -- Nauru, Tonga, Kiribati and the Cook Islands. They consider deep-sea mining as a chance to develop their economies while contributing the metals and minerals needed to decarbonize global economies. These countries serve as a state sponsor of international companies applying for exploration permits. While other Pacific states such as Fiji, Tuvalu, Palau, Samoa, and Vanuatuand demand a full moratorium on deep-sea mining.

The UN-affiliated International Seabed Authority is supposed to complete regulations to govern deep-sea mining by July 9 to guide mineral-resource guided activities on the sea floor while ensuring protection of the marine environment. In the meantime, the authority has issued 30 exploration contracts to governments of India, South Korea, Poland and companies supported by the four Pacific sponsoring states. (the Guardian ).

Circular economy

Startup DePloy raised nearly $14 million to expand its plastic recycling capacity. The company has developed a method to process most complex plastics without relying on simple and clean plastics to produce high quality recycled plastic. (Environmental Finance ).

Swiss waste treatment startup TreaTech raised $10 million to further develop its technology to convert waste, that is usually incinerated, into renewable gas, clean water, salts and minerals. (Environmental Finance ).  

Investor action

Shareholders in some of the world’s largest food and retail companies such as Kraft Heinz, Archer Daniels Midland, Texas Roadhouse, and Costco Wholesale withdrew deforestation-related resolutions after these companies committed to act on deforestation and biodiversity. (Environmental Finance ).

Nature Action 100 (NA100), an investor-led initiative modeled on Climate Action 100, published investor expectations for corporate action on nature loss in eight sectors with greatest pressure on biodiversity loss: biotech and pharma, metals and mining, food production and retail, consumer goods manufacturing and retail, chemicals, and forestry and paper sector. Target companies in these sectors (to be announced later) are expected conserve and restore ecosystems in their value chains, disclose nature-related impacts, risks and opportunities and set time-bound and science-based targets on nature as well as develop action plans and establish board oversight. (Environmental Finance ).

French private markets investor Swen Capital Partners announced its Nature policy that seeks to integrate nature-related assessments along with climate considerations into all of its investment decisions. (Press Release )

Manulife Investment Management will pilot a natural capital accounting framework for its timber and agricultural assets. Learnings from the pilot will be then applied its real estate and infrastructure portfolio. It identified efficiency of collecting data to feed into the framework as the greatest anticipated challenge. (Environmental Finance ).

Fidelity International sees investments in the solutions for biodiversity loss to be “possibly the largest investment trend in our lifetime.” The investor expects solutions to biodiversity loss to develop quickly, spurred by regulation. It identified over 30 investable solutions, including lab-grown meat, sustainable fish bait, desalination, and changing business models by corporates to address the key drivers of biodiversity loss in their operations. Fidelity’s own Sustainable Biodiversity Fund is currently small, however, at $5 million. (Environmental Finance ).

Cardano intends to use ‘bioacoustics’ method to measure the type and abundance of animals to understand the impact of its investments on animal biodiversity across different landscapes. Bioacoustics involves placing a recording device in a location and analyzing recorded clips for frequencies associated with specific species. This allows to map species’ presence and abundance. (Environmental Finance ). 

REPORTS

The World Bank put out a major report “Nature’s Frontier ” that looks at how to achieve both development and environmental outcomes through better allocation and management of land, water, and other inputs. While not directly targeted at investors, the approach articulated in the report and the country-level data that underpin the key findings can help impact investors develop natural capital strategies tailored to specific country contexts. For example, some West African and the Amazon countries have two-thirds of their land in natural habitat and thus score high on environmental efficiency scores. If investors seek to achieve impact to protect those habitats and advance sustainable development objectives, an effective strategy would focus on investing in sustainable intensification of agriculture to boost yields. In some middle-income countries in Asia and Africa with significant levels of natural habitat conversion to agriculture, and where yields might be low, investors can help achieve economic and environmental outcomes through focus both on more intensive agriculture practices and the restoration of natural habitats. 

McKinsey’s report on sustainable farming , covers a range of solutions that can help reduce GHG emissions and address key drivers of biodiversity loss, including through tackling food waste and addressing land use with nature-based solutions.