Bank says govt regulations needed to ensure well-functioning voluntary biodiversity credit market

Published 12:31 on March 22, 2023  /  Last updated at 12:31 on March 22, 2023  / Stian Reklev /  Biodiversity

The voluntary market for biodiversity credits is emerging on the back of increased pressure on corporations to report on their impact on nature and set their own targets, but government regulations can help drive demand and ensure a well-functioning market that buyers can trust, according to the Commonwealth Bank.

The voluntary market for biodiversity credits is emerging on the back of increased pressure on corporations to report on their impact on nature and set their own targets, but government regulations can help drive demand and ensure a well-functioning market that buyers can trust, according to the Commonwealth Bank.

As the world of biodiversity-related markets moves from local offset-based schemes seeking to ensure certain projects cause no harm to nature, to a broader approach where the ambition is to achieve nature positive outcomes, experts globally are engaged with drawing up fundamental principles on which to build that market.

The question of where sufficient demand will come from to support a biodiversity market big enough to actually have an impact without reverting to controversial and unpopular offsetting requirements is one taking up a lot of time for early market participants, though a solid and widely-agreed upon answer has yet to emerge.

In a note released Wednesday looking at nature markets in general and the Australian government’s proposed nature repair market in particular, CommBank identified three main drivers of biodiversity credit demand:

  • TNFD – the Taskforce for nature-related disclosure of impacts and dependencies
  • SBTN – Science-based targets for nature
  • Carbon projects with co-benefits

CommBank noted that while only a small part, TNFD and SBTN both have provisions under which companies can make use of voluntary biodiversity credits.

The TNFD’s four-part voluntary guidance on LEAP – locate, evaluate, assess, and prepare – includes guidance on how businesses can evaluate the positive and negative impacts they have on nature, and engaging in markets can be one way to have a positive impact.

“However, the LEAP is not mandatory and businesses do not need to disclose results from the LEAP approach. But businesses can disclose if they choose,” CommBank wrote.

“We judge it will be difficult for businesses to disclose their dependencies and impact without also delivering a plan to mitigate impact.”

Corporations can of course choose to ignore nature-related disclosure entirely, but the bank warned that the framework, while voluntary at the moment, may become compulsory in time.

A related disclosure framework for climate, TCFD, started out voluntary, but has become mandatory in countries like Canada, Japan, New Zealand, Singapore, and the UK.

“The TCFD is likely to become mandatory in Australia. TNFD may follow a similar trajectory to TCFD,” CommBank stated.

Meanwhile, the note also pointed out that while science-based climate targets are also voluntary, they have become widespread, with over 1,000 companies from over 60 countries across nearly 50 sectors have set targets of their own.

The science-based targets for nature are still being developed, with the first three only released in draft version last month.

The first two targets, covering no conversion of natural ecosystems and land footprint reduction, are intended to mitigate impacts from supply chains. But the third – landscape engagement – is to “improve conditions in the landscape as a whole”, CommBank noted, an objective that easily lends itself to investment in biodiversity or nature credits.

In carbon markets, credits with co-benefits – including biodiversity gains – are becoming increasingly popular.

Australia, the only nation so far drawing up regulations for a voluntary nature market, is planning to allow the same plot of land host both carbon and biodiversity projects, seen as a boon to the nature repair market, though it remains to be seen whether other countries will replicate that approach.

OVERSIGHT

Carbon offset markets have been subject to a raft of criticisms over the past year, both the unregulated voluntary market as well as Australia’s government-run domestic scheme for Australian Carbon Credit Units (ACCUs).

Over-crediting, perverse incentives, and lack of proper regulations are just some of the accusations that have been made, resulting in low-quality or even entirely worthless credits.

To avoid the same for biodiversity markets, CommBank identified a number of regulatory moves needed to be put in place:

  • Methodologies must be overseen by an independent body in order to ensure good-quality credits, and not, for example, organisations that have financial or other motivations to approve as many methodologies as possible
  • The entity that issues the biodiversity certificates must be separate from the market regulator, to avoid a conflict of interest
  • Credit providers must be strongly regulated
  • Methodologies must be guided by the environmental scientific community

“Given nature’s unique characteristics, scientists and conservation practitioners can provide useful input in creating biodiversity credits that achieve a nature positive income. Input can include identifying regions and advising on project activities for successful restoration,” the note said.

The final look of Australia’s nature repair market remains uncertain, with public consultation potentially stretching into next year, though however it ends up it’s likely to provide important lessons for governments elsewhere that may wish to take the same path.

Australia is emerging as an early global leader in biodiversity credits, with at least four companies already involved in creating their own credits – GreenCollar, Terrain NRM, South Pole, and Wilderlands – with more to come.

“A nature repair market that can facilitate participation of the various providers under a common market place will drive an efficient market for both buyers and sellers,” CommBank said.

According to its market proposal, the Australian government plans to issue just a single credit to any registered project, regardless of size, scale, or time aspect.

That one credit would contain all available information on the project’s achievements, but no two credits would have a similar value.

The credit issuers mentioned above, on the other hand, issue many credits based on a variety of measurement units, allowing a number of different buyers to acquire them.

Credits from each issuer will still have differing values, but the approach paves the way for greater participation, according to the note.

“In our view, the nature repair market could benefit from … incorporating existing credit providers and their unit of measurement in the market [and] providing guidance on units of measurement and third-party standards used by credit providers,” CommBank said.

By Stian Reklev – stian@carbon-pulse.com

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