INTERVIEW: Search for biodiversity metric gold standard holds risks for some

Published 17:23 on December 13, 2022  /  Last updated at 18:43 on December 13, 2022  /  Biodiversity  /  No Comments

Reaching consensus on which metrics can most accurately quantify biodiversity impact is considered crucial to support streamlined government and corporate reporting, and could underpin the emergence of a voluntary biodiversity credit market, but it could also come at a great cost for some.

Reaching consensus on which metrics can most accurately quantify biodiversity impact is considered crucial to support streamlined government and corporate reporting, and could underpin the emergence of a voluntary biodiversity credit market, but it could also come at a great cost for some.

Finding a universally acknowledged biodiversity metric – similar to a tonne of CO2 equivalent for GHG pollution – is considered by many essential to overcome significant obstacles on biodiversity, be it for governments or corporations.

With that metric in place, delegates at COP15 could more easily have translated the overall 30×30 target to a numeric goal for the world and for individual nations to track their progress in coming years.

It would also likely have formed the foundation for mandatory biodiversity reporting from large companies and financials in the future – like many at the COP are pushing for – as well as supported the development of an easily workable voluntary global biodiversity market to help attract more funding for nature protection and restoration projects.

But while that metric – or set of metrics – might emerge to many’s delight, that data and the mandatory disclosure of it can be a double-edged sword for certain stakeholders, warned Marianne Haahr, nature-related finance lead at UK non-profit Global Canopy, and sector guidance lead with the Taskforce on Nature-related Financial Disclosures (TNFD) secretariat.

There is quite a lot of fear, especially from developing countries, that disclosure along with monitoring and review, could be used as a “shaming mechanism”, she told Carbon Pulse in an interview.

“I think there’s a lot at stake … it’s not only about some countries not willing to share where they are, their state of nature going forward, and how they progress on the targets in the [Global Biodiversity Framework – GBF], but also that they are just afraid what are going to be the consequences,” she said.

THE PRICE OF DISCLOSURE

One element is that the costs involved with measuring macroeconomic stability risks from biodiversity loss, as well as quantifying dependencies on natural assets and ecosystems in itself can be prohibitive for developing nations.

But even more pressing, according to Haahr, is that some governments hesitate to illustrate that their national economies are very dependent on natural ecosystems because they worry about impacts on their sovereign credit rating if they are found to not adequately address biodiversity loss.

“Is [the] sovereign credit going to be rated with higher risk for these countries … so [the] cost of capital will increase?” she said.

Haahr serves on the board of Swiss advocacy NatureFinance that published a report six months ago, entitled “Nature Loss and Sovereign Credit Ratings”, which found that more than half of the 26 nations studied would face downgrades if parts of the world see a “partial ecosystems collapse” of fisheries, tropical timber production, and wild pollination – as simulated by the World Bank.

That risk – and hesitation – is not just limited to governments, but affects a wide range of businesses and financial institutions as well.

The Dutch central bank DNB issued a report a few years ago titled “Indebted to Nature” that explored biodiversity risks for the Dutch financial sector.

Of investments by Dutch financial institutions, for 36% of the portfolio of more than €1,400 billion, “the loss of ecosystem services would lead to substantial disruption of business processes and financial losses”, the report concluded.

In a similar assessment that the French central bank, Banque de France released last year entitled “A Silent Spring for the Financial System?”, 42% of the value of securities held by French financial institutions was seen to originate from “issuers that are highly or very highly dependent on one or more ecosystem services … with the accumulated terrestrial biodiversity footprint of these securities comparable to the loss of at least 130,000 sq. km of ‘pristine’ nature”.

Malaysia and BCB, Brazil’s central bank, have conducted similar macroeconomic stability risk analyses from biodiversity loss and translated to balance sheet risks for banks and national economies.

MOULDING METRICS

The fact that global experts have yet to find a set of metrics to agree does not mean there haven’t been attempts. In fact, experts have been toying with a number of approaches and different metrics to best describe and measure biodiversity loss.

Haahr outlined a few:

  • The Mean Species Abundance (MSA) metric measures the percentage of species left in an area after a company has conducted its activities, meaning the higher the score, the better.
  • The Potentially Disappearing Fraction (PDF) quantifies the percentage of what’s destroyed after a company completes activity in an area, meaning a higher score is relatively worse.
  • Swiss University ETH Zurich created the world’s first assessment of biological complexity – the biocomplexity index (BCI) to quantify the full extent of genetic, species, and ecosystem diversity, and their variation through time. With geocoordinates for an area of interest, or asset, any organization can create a multidimensional biocomplexity assessment. An assessment value close to 1 indicates natural levels of biocomplexity for a given ecoregion, while an assessment closer to zero suggests that the area is being managed in a way that reduces biodiversity.
  • The International Union for Conservation of Nature’s (IUCN) Species Threat Abatement and Restoration (STAR) metric measures the contribution that investments can make to reduce species’ extinction risk.

“The PDF, MSA, and the species complexity index are basically risk metrics, but the STAR metric is a metric that tells you where can you get [the] most species restoration impact. So basically, in which assets and which areas can you get best returns in terms of restoration,” Haahr explained.

The challenge is getting the underlying data used in pressure impact models input into lifecycle assessment databases that would calculate these metrics to measure a company’s biodiversity footprint.

Large corporations would have to carry the burden and subsidise costs for small and medium-sized enterprises, supporting their own value chain as part of “new contractual requirements” in procurement processes.

Haahr concluded that consolidation was the challenge for innovation, whether in frameworks or products, given the level of confusion reached in the nature-related measurement space.

“I think everybody is looking to Montreal to give us one gold standard for Target 15,” she said, referring to the proposed GBF target that includes mandatory corporate reporting.

BIRTHING A MARKET

Amid all this uncertainty, interest in creating a voluntary biodiversity credit market is growing, with many businesses and influential organisations backing that as a way to raise much-needed finance for nature protection and restoration activities.

The Association for Financial Markets in Europe (AFME) and consultants EY last month called for a “global currency for nature” to be established to help such a market scale.

Haahr referenced the United Nations Development Programme’s (UNDP) attempts to “catalyse and curate” a global biodiversity credit authority – a certification body tasked with designing a framework for global biodiversity credits.

With regulation on financial services institutions (FIS) far advanced in this field compared to corporates, Haahr believes FIS would model MSA-style footprints referenced above on listed companies rather than wait for corporations to figure out their impacts dependencies and start to disclose it to the market.

The Finance for Biodiversity soft pledge in the Netherlands, for example, has asset managers, asset owners, and banks pledging to look at ways to transition to nature positive. Every year the group outlines the best, or most adopted, six to eight tools or biodiversity measurement approaches used in biodiversity finance.

In Haahr’s view, buyers of biodiversity credits would initially stem from infrastructure, real estate, farming, food, and agriculture. Mining would also be another big buyer.

While the vast majority of prospective market participants stress that the emerging biodiversity credit market should not be an offset market – biodiversity offsets are mostly used for compliance purposes in very local schemes – comparisons with the carbon market come easy when discussing what the biodiversity market might end up looking like.

Haahr said that companies buying biodiversity credits should focus on doing that from ecosystems similar to the ones their own activities have an impact on, hence making the emerging market far less global than carbon.

“It needs to be in in similar biomes or in the biomes where you do the damage that you will also need to buy the credit,” she said.

“The supply and demand side are going to be much more complicated as a market infrastructure to build, and there will definitely be liquidity issues,” Haahr cautioned.

The TNFD technical lead expects the demand side to be more challenged with less fungible, less tradable biodiversity credits that are not necessarily built on financial market logic of onward selling where there is no connection with the underlying asset.

This would make the biodiversity credit less attractive as a speculative asset.

“An uplift credit is for specifically this area, specifically for this harmful activity that I’m buying this, and I actually know where it is, and I’m not necessarily going to onward sell it right now. I think some of it is actually going to be more healthy,” Haahr concluded.

By Joan Pinto – joan@carbon-pulse.com

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