The rise of natural capital fuels Australian biodiversity markets

At the United Nations Biodiversity Conference (COP 15) in December 2022, over 190 countries agreed to the Kunming-Montreal Global Biodiversity Framework (GBF). Historic in its ambition to commit nations to protect 30% of the earth by 2030 (30x30), the COP15 agreement is also consequential for business.

Over half of the world’s GDP – or approximately $44 trillion of economic value – is moderately or highly dependent on nature, and the 23 voluntary targets within GBF include goals to stem the risks that biodiversity loss poses to the global financial system.

Reflecting this, Finance Day at COP 15 was the first time the private sector had attended a UN Biodiversity Conference en masse with 850 companies and investors taking part.

When discussion turned to Target 15 of the GBF, which requires countries to ask companies in their jurisdictions to disclose nature impacts in their corporate reporting, over 330 companies and investors petitioned to make this a mandatory goal rather than optional.

Business support for mandatory disclosure of their impact on nature is not just altruistic. Companies want a level playing field for nature-based reporting requirements and need to mitigate the financial and legal risks from further biodiversity loss. It also reflects the financial opportunities for first movers.

There is potential for huge upside in a nascent market that already commands significant demand for instruments like biodiversity credits, which are measurable, traceable and tradeable units that allow companies to invest in long-term nature conservation and restoration.

A new market

Although still small relative to the carbon market, the creation of new voluntary and mandatory biodiversity credit markets is predicted by many conservation finance experts to grow rapidly.

Among the domestic risk drivers for this, a recent EY report commissioned by the Australian Council of Superannuation Investors estimates that the Australian economy could lose up to US$20bn annually from nature loss by 2050. The introduction of emissions regulations on the import of goods and services into overseas markets, like the European Union’s Carbon Border Adjustment Mechanism (CBAM), could also prove to be a strong driver for companies in the future.

However, the real game changer will be the new Taskforce on Nature-Related Financial Disclosures (TNFD) framework, which is due to be released in September 2023. It will provide a way for companies, financial institutions, asset managers, and owners to assess and disclose their impact on the natural world like they have done with climate change under the Taskforce on Climate-related Financial Disclosures (TCFD).

The TNFD aims to level the playing field for companies to measure and mitigate their impact on nature by providing clear guidelines that include guidance on recommended disclosures, establishment of an assessment framework, and a consistent language. TNFD is not the only biodiversity disclosure framework and others such as the science-based targets for nature will also have an important role.

Once such corporations are able to assess their nature impacts and dependencies, the intention is that they will then need to take steps to avoid or reduce where practical, or restore and regenerate, which is where emerging biodiversity markets could assist.

For those that take early, robust steps to restore, regenerate and protect nature, the opportunities could be significant. The United Nations, OECD and World Economic Forum all acknowledge that governments and philanthropic investment cannot solve the biodiversity crisis alone. Substantial private sector involvement will be needed if the world is to fill the US$598bn to US$824bnannual global funding shortfall in the estimated funds required to stem nature-related risks over the next decade.

This confluence of risk and opportunity has led some experts to predict that the global market for biodiversity credits could eventually rival that for carbon credits. In Australia alone, PwC estimates that a biodiversity market could be worth $137 billion in financial flows by 2050.

A market of this size will enable companies to mitigate nature-related risk and reduce the transaction costs from investing in positive biodiversity outcomes. The Australian Federal Government has been a global leader in proposing a nature repair market to sit alongside the carbon credit market, where a biodiversity certificate can be generated and traded. However, there have been concerns about liquidity and the growth of secondary markets if only one certificate per project is generated.

While issues of fungibility, additionality and liquidity still need to be resolved, what is clear is that those markets that can demonstrate high integrity for their tradable credits will likely flourish.

Verified co-benefits

The potential impact is broader than just market growth. Co-benefits from biodiversity credits – measurable improvements in social factors, the environment or the economy that result directly from a biodiversity improvement – can be substantial. The added value from the Yarra Yarra Biodiversity Corridor, a biodiverse reforestation project funded through carbon credits, is estimated to be between $82 to $148 per carbon credit alone.

Nevertheless, there are legitimate concerns that the rapid growth of biodiversity credits could lead to greenwashing, in the same way that the Australian Government’s own carbon neutral certification programme, Climate Active, has recently come under fire for its PNG carbon credit projects. But the United Nations Development Programme and The World Economic Forum argue that participants in biodiversity credit markets can learn from some of the mistakes that have plagued carbon credits.

It's a sentiment echoed by GreenCollar, an Australian company that recently launched NaturePlus biodiversity credits, each of which represents one hectare of biodiversity improvement delivered through projects that aim to enhance the condition of ecosystems, habitats, and threatened species, like koalas. These credits will be verified by environmental accountants Accounting for Nature and the first issuance – scheduled for early 2023 – has already attracted global demand.

Nerida Bradley, Chief Impact Officer at GreenCollar, says measurement and independent verification globally is key to building confidence that biodiversity credits are providing reliable measures of impact and co-benefits. This increased awareness of integrity in credit markets is driving buyer demand for new biodiversity credits that represent real, verified nature improvement, rather than investment in activities in the hope that improvement will occur.

“You can’t invest in biodiversity and natural capital unless you have robust and explicit ways to demonstrate that environmental assets have been improved, measured and verified,” she explains.