A global trading firm with a special interest in environmental markets is in the process of negotiating its first voluntary biodiversity credit transaction, as it seeks to play a part in developing the emerging market.

Cayman Islands-registered Dorr Asset Management is positioning itself as an early mover in the trade of biodiversity credits, putting out an ad in late January that announced: “We are bringing biodiversity credits to capital markets.”

The company is currently negotiating terms with an undisclosed project developer for its first trade in the market and hopes to have an announcement to make within the next month, co-founder and managing principal David Dorr told Carbon Pulse.

“I think this market is really important and I am optimistic it will be a success,” said Dorr, adding the company is hoping to contribute to biodiversity credit trading kicking off properly.

Announcements of actual trades at the current stage have the potential to add to market momentum and provide confidence for sellers as well as buyers.

While interest in voluntary biodiversity credits is growing rapidly, it is very early days for the market and as of yet there’s hardly been any reports of real deals, although project developer rePlanet has said it has secured financial commitments for the development of 5 million credits from various projects around the world.

That includes an agreement with pharmaceutical firm GSK, which will purchase all biodiversity credits generated over the next 12 years from a project in the Cusuco National Park in Honduras for $5 each.

“We see a lot of corporate interest, but it is very cautious,” Dorr said.

While many companies are considering making biodiversity credit commitments, they are holding back for various reasons, he said.

One of those is the controversy surrounding the carbon market, with media in recent weeks running a series of stories questioning the quality and integrity of REDD+ projects.

With only a handful of biodiversity credit types fully formulated as well as the increasing public focus on greenwashing, taking the plunge is a major step for many.

In addition, the responsibility for whether or not to buy biodiversity credits largely rests with ESG directors, which according to Dorr adds to the time needed for companies to get involved.

The situation was similar when carbon credits emerged in the mid/late 2000s, but changed when that responsibility eventually was transferred to the CFO, which he said will likely happen with biodiversity credits within the next two years.

As well, the lack of pricing references is a challenge for anyone looking to get involved, and is an issue in Dorr’s ongoing negotiations as well.

“It’s one part math, one part sticking your finger in the air, and one part witchcraft,” he said.

“You can look at the price for blue carbon credits [as a place to start]. I think biodiversity credits should trade at a premium to blue carbon. But then again, others think it should be [worth] less than carbon,” he added, admitting the challenge in determining a fair price at this stage.

BUILDING INFRASTRUCTURE

Much of the current efforts in the biodiversity market space is focused on determining what exactly a biodiversity credit should represent and how to ensure that the generated credits are high-quality.

Plan Vivo Foundation and Fauna & Flora International last month became the latest to contribute to that debate when they released a set of high-quality principles for the market, followed by the unveiling of Plan Vivo’s draft biodiversity credit protocol.

While those are absolutely crucial processes to ensure the future health of the market, Dorr said there is also a need to develop a solid market infrastructure to support the projects and credits.

“If you create an instrument, the only reason to do so is to facilitate financing. And if you have a market-based instrument, you also need the infrastructure, and you need market participants,” he said.

Helping create that is the main reason why Dorr Asset Management is stepping in to the market at this early stage.

First off, that means the biodiversity market must have prices, Dorr said, and ones that are transparent rather than siloed away behind paywalls.

“If you are at the airport and have to do a currency exchange, you don’t pay money first to find out the exchange rate,” he said.

“In the carbon market, some data providers charge outrageous prices for price data, and often they are not even accurate.”

In contrast, biodiversity credit prices should be freely available, according to Dorr.

He also argued that the market should deploy open source registries, as the infrastructure must be underpinned by transparency to ensure market integrity, that credits aren’t double counted, that projects are credible, Indigenous peoples and local communities are treated fairly, and so on.

Beyond that, the market also needs a lot of trader-specific infrastructure, such as clearing and settlement procedures and centralised trading books.

Despite the conservative approach from many potential buyers, Dorr was optimistic that significant progress in building the biodiversity market would be made over the next 18 months.

“The market will need policy, instrument design, and market infrastructure. The policy machine is rolling, with TNFD and other initiatives. There are wildly different views on the instrument, but we are starting to build the infrastructure now.”

TO TRADE OR NOT TO TRADE

Dorr Asset Management is a principal trading company, buying and selling for profit, a type of market participant not everybody will be thrilled to see.

While some consider trading firms essential to provide sufficient liquidity in environmental markets, others have argued there should be no room for trading firms in the biodiversity space – often referring to the carbon market, where some intermediaries have been seen making huge profits from the resale of credits with little or none of the profits going back to the developer.

The Australian government, which is in the process of setting up a nature repair market, is planning to only issue a single credit to each project regardless of their length or scope, an approach that does not lend itself to the development of a secondary market.

Meanwhile, Colombian developer Terrasos, one of the few organisations currently offering biodiversity credits, only allows its units to be sold once. That is in order to avoid double counting, but in practice also rules out involvement from trading houses.

Dorr said restrictions originate in environmental markets’ lack of familiarity with principal trading firms, and argued that trading companies trade on their own accounts and put their own money at stake, rather than skimming off others’ hard work, like some intermediaries have been accused of.

“There is no rational explanation for it. It’s a lack of market understanding and a misperception,” he said,

“We are like the grey wolves of Yellowstone, you don’t know how important we are until we are gone,” he added.

By Stian Reklev – stian@carbon-pulse.com

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