Independent ratings could drive higher-quality biodiversity credits and contribute to greater transparency in the fledgling market, carbon credit ratings agency BeZero said in a research note.

The London-headquartered firm is one of several that have emerged over the past two or three years providing rating services for the fast-growing voluntary carbon market.

In a research note released Thursday, BeZero said the emerging global voluntary biodiversity credit market could similarly benefit from ratings services.

“Just as ratings bring greater transparency to carbon projects through independent scrutiny, they can potentially do the same for biodiversity credits,” the note said.

“The additional layer of information will enable credit purchasers to discriminate between projects on the basis of their likelihood of success.”

A handful of organisations are in the early stages of developing standards and project methodologies for biodiversity, but much effort is still being spent considering various options for metrics use that could help the market reconcile with the fact that biodiversity does not have a single, universally-accepted unit, such as the tonne of CO2 equivalent in carbon.

Even so, BeZero noted that all the risk factors it takes into account when rating carbon projects – additionality, over-crediting, leakage, non-permanence, policy, and perverse incentives – would equally apply to biodiversity projects.

Biodiversity market participants, including standards and developers, face tough challenges in formulating rules and guidelines around these issues in a transparent and credible way, and credible units are likely to require significant investments in monitoring, reporting, and verification, according to BeZero.

For example, biodiversity projects will face the same risks as nature-based carbon projects in over-issuing due to factors such as unrepresentative baseline assumptions.

“This risk may be even greater due to the complexity of measuring biodiversity,” the agency said.

“As biodiversity credits can be measured using different metrics, the coverage would need to be defined and limits set for what can and can’t be measured.”

Likewise, non-permanence through natural risks like fires will be a feature in the biodiversity market, and BeZero recommended a buffer pool be considered, where a percentage of all credits issued be set aside to compensate for project area loss from natural disasters.

ADDITIONALITY

The issues of additionality and policy risk will also play a key role in project approval and credit issuances, as almost 200 nations in December signed up to the Kunming-Montreal Global Biodiversity Framework, pledging to protect 30% of their land and oceans by the end of the decade.

“Many governments are implementing their own measures to limit loss of biodiversity within their own territories. Over 100 countries now have enacted legislation to protect natural ecosystems from further damage and to encourage restoration,” BeZero said.

“While these moves by governments should be welcomed as supportive of global objectives to protect nature, they have the potential to make the case for additionality of individual projects harder to demonstrate. Just as additionality is a key concept in the VCM, it will also be necessary to demonstrate any biodiversity uplift is more than business as usual.”

Similarly, a policy environment supportive of conservation efforts might make it tougher for developers to demonstrate additionality, even though such friendly policies don’t necessarily translate to finance for activities on the ground, BeZero noted.

“Project developers might need to place the focus on the financial viability of projects with and without access to biodiversity credits,” the note said.

Additionality is a subject that is causing headaches in the biodiversity space, with some observers arguing it shouldn’t be implemented in the same fashion as for carbon projects, at least not for financial additionality criteria.

That’s partly because a conservation project won’t have access to commercial finance in the absence of crediting in the same way for example a windmill might, and denied entry to a market might instead be forced to rely on government support or philanthropy.

There is also the issue of many government-designated protected areas lacking funding from governments to carry out adequate enforcement, and how to deal with applications from some of those seeking access to a future biodiversity credit market is one of a large number of questions that needs an answer before the market can get properly off the ground.

Whatever those answers may be, there is a need in the fledgling market for organisations like BeZero, according to the ratings agency, though the firm did not say outright it plans to eventually offer biodiversity services.

“Successful implementation of biodiversity credits and the markets that support them requires transparency,” BeZero said.

“Following industry-standard methodologies is only part of the solution: the independent assessment of project claims, set against factors common to the [voluntary carbon market] such as additionality, permanence and leakage, will be essential for investors seeking to create genuine, persistent, and positive change for nature.”

By Stian Reklev – stian@carbon-pulse.com

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