Biodiversity credits are making waves in the nature-based solutions space – albeit with few transactions. However, there have been several lessons learned from the voluntary carbon market that the biodiversity credit market wants to learn from and build on.
In this article, I discuss the latest on biodiversity credits, the recently released science-based targets for nature and what all of this has to do with sound ESG management – how your forest investment can benefit from traditional wood markets, while also access emerging markets for nature.
The Run-down on Science-Based Targets for Nature
The Science Based Targets Network, a global coalition of 80+ environmental non-profits and mission driven organizations has released the first corporate science-based targets (SBTs) for nature.
Who and What are the Science-Based Targets for Nature for?
The SBTs for nature are primarily a tool to give companies guidance for assessing their environmental footprint and set targets to reduce negative and increase positive impacts for nature and people.
Why Science-Based Targets for Nature?
With all the attention of recent years centered around the climate crisis, scientists have confirmed that meeting the Paris Agreement’s 1.5-degree containment target cannot be achieved without preventing, and reversing nature loss.
Nature absorbs approximately half of annual carbon emissions and is the foundation of our economy (with 55%) of the world’s GDP moderately or highly dependent on nature (SBTN).
What is the Process of Implementation of the Science-Based Targets for Nature?
The SBT for nature give companies the technical instructions to assess impacts on the following segments of nature:
- Freshwater
- Land
- Biodiversity
- Oceans
- Climate (already addressed through SBTi)
The framework includes the steps of 1. Assess, 2. Interpret & Prioritize, 3. Measure, Set & Disclose, 4. Act, 5. Track.
Comprehensive methodologies are not complete for all segments, nor all phases in the process. Currently companies can use the SBT for nature for Steps 1-3, where they
- Identify key issues and locations to focus on for target setting,
- Prioritise target setting, using a mix of environmental, social and financial considerations, and,
- Set land and freshwater targets (others are not yet finalized) that address dominant drivers of biodiversity loss and climate change.
SBTN and TNFD
Being developed in tandem, both the SBT for nature and Task force on Nature-related Financial Disclosures (TNFD) fit different pieces of the puzzle for businesses to act on nature. Where SBTN provides the technical tools to set targets for nature, TNFD provides the framework for companies and financial institutions to manage and disclose nature-related risks. TNFD adopts the SBTN’s definitions of impacts and dependencies on nature, supporting a fluid and streamlined approach for companies to follow.
Developments in Biodiversity Credits
In my view, climate action has won the hearts of the private sector for the following reasons:
- Public pressure and regulatory requirements for companies to decarbonize,
- Material climate-change related threats to business,
- The ability to monetize positive climate impacts via the sale of carbon credits.
The same enabling environment is unfolding for biodiversity. The Convention on Biological Diversity held in Montreal in 2022 (COP 15) gave way to nature’s equivalent to the Paris Agreement. The TNFD and SBTN mentioned above are following suit to their climate counterparts TCFD and SBTi. Companies, particularly those whose supply chains are directly dependent on nature, are opening to the risk and consequences of biodiversity degradation. And now, the market opportunity for protecting and restoring biodiversity (likened to avoided emissions and emission removals) is starting to develop.
Setting the Foundation for a Solid Biodiversity market
In light of recent criticism of the voluntary carbon market – ranging from inflated baseline measurements in REDD+ to painful inefficiencies in the crediting process, proponents of biodiversity credits are setting out to ensure the same mistakes are not made. A few of these are listed below.
The Biodiversity Credit Alliance comprises conservation practitioners and academics and has direct connection to communities, project supply and science. It tasks itself with defining and categorizing biodiversity credits, co-developing a model set of digital standards for the market, and establishing a peer review mechanism for biodiversity credits. In acknowledging the carbon credit market’s failure to plan for scalability, the BCA is designing a digital approach to support scale and credibility.
The World Economic Forum has identified the conditions for success to be integrity and inclusion. Where strong governance, and inclusion of all actors and market participants, such as indigenous people and local communities, private sector, public sector, and civil society are critical.
The Taskforce on Nature Markets, an initiative of Nature Finance, brings together policy, legal and governance, market, technology, civil society and indigenous communities to build awareness of nature markets, develop communities of practice, encourage innovations, establish a roadmap of recommendations for key actors, and create a number of exemplary pathfinder initiatives.
How an integrated ESG approach supports access to biodiversity markets in forest and other land-based investments
If you’re a regular reader of my articles, by now you are familiar with my approach to ESG:
- Reduce environmental, social and governance risk,
- Create environmental, social and governance benefits, and,
- Generate investment value from environmental, social and governance interventions.
It is through intentional ESG integration into the strategy design, and the development of strong management systems that make this triple bottom line possible. If we consider the current players and their role in biodiversity markets mentioned above, SBTN provides the instructions to set targets, or objectives and provides an implementation pathway to reduce negative impacts (Reduce ESG risk) and improve nature (Create ESG benefits). Groups like the BCA, WEF, and Taskforce on Nature Markets are providing the opportunity to monetize nature (Generate ESG investment value).
So how can we use this enabling environment to add biodiversity to a forest or other land-based investment strategy? To do this, I’ll walk you through my basic ESG integration strategy framework.
- Strategy Design – Here it is important to set targets for multiple objectives – both traditional markets, such as timber, but also rising carbon and emerging biodiversity markets. Utilize the SBTN when setting biodiversity targets.
- Assess your Resources – It’s important to get real on the capacity and expertise you have in your company/team to manage the myriad of objectives set in your investment strategy. If you are a traditional forest investment manager, you may need to bring in some additional biodiversity expertise.
- Assess for conflicting objectives – There is often concern that biodiversity is at odds with extractive industries. It is important that your organization acknowledges this, and identifies where objectives might conflict with each other, and how you are going to address this.
- Select credible Standards – As forest investment managers weigh heavily on forest management certification, such as FSC and PEFC and carbon certification, such as VCS and Gold Standard, you will also want to watch the evolving space to align with robust standards for biodiversity. When considering application of certain Standards, take into account the efficiency concerns listed above by BCA – where in the investment world, bottlenecks in the certification process or in finding buyers could cost you basis points in your IRR.
- Align Investment Policies, Procedures and Plans with Standards – As you develop your documentation, ensure that your investment requirements and instructions for implementation are aligned with the Standards you commit to upholding.
- Source suitable Investments – Ensure your DD process includes robust ESG considerations (risk reduction, benefit creation, and value generation) aligned to your biodiversity objectives and the Standards you commit to upholding.
- Manage, Monitor, Disclose – As you onboard and transition into the management phase of your investments, ensure that you manage, monitor and disclose – not only for results in traditional markets like timber, but also for biodiversity and carbon performance. This is where having a robust framework, where you have already addressed contentious areas is important, and will remove the guesswork.
- Evaluate – use the data you’ve acquired from your monitoring, any unintended consequences of your actions and your financial performance to evaluate your investment.
- Exit – Consider how ESG risk reduction, impact creation and value generation can be sustained after you exit the investment. This requires being visible publicly in your contributions to the space, so that your ideal investment successors are waiting for the opportunity to invest in your assets.
Learn more about my ESG Integration Approach
If you are interested in combining traditional forest or other land-based investments with credible climate and biodiversity objectives, my ESG integration approach might be right for you. I offer the following services:
- ESG Integration Strategy Roadmap – If you are in the early stages of designing a new investment strategy, with this roadmap you will get an actionable plan to integrate risk-reducing, benefit-creating and value-generating ESG into your strategy.
- ESG Integration Workshops – If you are making the transition from a conventional forest or land-based investment strategy to one that integrates ESG objectives, or you are new to forest and land-based investments, these workshops will help your team get up to speed on the opportunities, and address concerns with ESG integration, and get your whole team co-creating an ESG-integrated investment strategy you will all stand behind.
- Customized ESG Management Framework Development – If you are ready to build the bridge between ESG integrated strategy and implementation, but lack the resources to build the systems yourself, I can support to build your ESG Framework customized to your strategy.
- ESG Integration Advisory – If you have the horsepower to build up your integrated ESG strategy and management framework in house, but would like advisory support to discuss ideas, solutions, and opportunities – this customized service will help you efficiently and confidently move your strategy into action.
This approach is also applied to forest and land-based companies, looking for a straightforward approach to meet investors’ ESG requirements.
Please reach out if you are an investor, investment manager or forest/land-based company interested to see how my integrated ESG approach could best serve your needs.
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