The way nature and biodiversity appear in global financial markets is on the edge of a revolution but they will be treated in a fundamentally different way to carbon, according to a senior member of the Taskforce on Nature-related Financial Disclosures (TNFD), speaking at an event in the UK on Monday.

Simon Zadek, an executive director at NatureFinance and senior advisor to the taskforce, told City Week in London that he saw real momentum behind financing nature via market mechanisms.

“We are on the cusp of a revolution in the way nature appears within markets,” he said.

After a “very long history” of not valuing nature, there has now been an “extraordinary pivot” towards looking to put a price on biodiversity, he continued.

CARBON COPY

But he stressed that the way nature would be valued would not be in the same way as has been the case for CO2.

“Biodiversity crediting markets are not a carbon copy for all sorts of different reasons,” he said, acknowledging the play on words.

“This is partly because nature is productive, whereas in the main, carbon is not productive … and a litre of water in Amsterdam is not equivalent to a litre of water in northern Kenya,” he added, referring to the highly localised nature of biodiversity, meaning global standardisation would not be possible in the same way that a tonne of carbon is treated as such in current carbon market mechanisms.

A recent report highlighted the need to separate biodiversity credits from offsets in light of this fact.

A company, for example, could not offset an activity which has an impact on nature in the Netherlands, by purchasing a unit from Kenya, to continue Zadek’s example.

“Most credits will not be offsetting at all,” he said.

SOVEREIGN FOCUS

There is likely to be a very different type of approach due to these fundamental differences between how biodiversity is measured compared to climate impact, with countries likely to need to take a more central role in the measurement with a very different approach to verification, the conference heard.

“It will be not purely be driven through a top-down [approach] but more through automatic and one-way, sovereign certification models,” Zadek continued.

Some pieces of integrating nature into markets will also move faster than others, mainly as some will be more complex to measure, and others will be much slower to regulate on the policy side.

HARDER THAN CARBON

But despite the idea of a “revolution” imminent, other speakers cautioned over the challenges ahead, namely with the difficulties relating to measurement and the difficulties with finding standardisation.

“Nature and biodiversity are going to be harder than climate in some ways, because, at least in climate, we can measure carbon and greenhouse gases,” said Laura Mason, CEO of Legal & General Capital.

“There are going to be many more dimensions in [to factor into] biodiversity and nature,” she added, pointing to the key role of technologies in driving greater accuracy on measurement and verification of impact.

For example one solution being considered by the investor uses DNA sampling.

“You have to take small samples but can get quite a lot of information, quite rapidly.”

She, as did many other speakers at the event on Monday, welcomed the work of the TNFD in forcing firms to come to terms with their impact on nature.

The cross-stakeholder taskforce released its long-awaited draft at the end of March as it aims to steer the private sector towards greater reporting and disclosure of risks and impacts on nature and biodiversity.

“As soon as you really start thinking about how your business impacts nature, all the better to think about how you start measuring it,” said Mason.

A LACK OF UNDERSTANDING

While the interest from the financial sector in biodiversity has been striking, particularly in the wake of the historic Global Biodiversity Framework (GBF) agreement in December at COP15 in Montreal, the understanding of how finance should interact with nature is not yet there for some.

According to Rick Lacaille, global head of ESG at investor State Street, mainstream investors particularly need to better comprehend nature markets.

“Where it’s weak – and where it really matters – is in the mainstream of investors, both asset managers and asset owners. [Their understanding] is weak and I think it needs to be addressed,” he told the event.

They understand the macro issues to do with nature and biodiversity loss, but they don’t really understand how that translates into individual investment decisions, he continued, nor the materiality of those investment decisions when it comes to risks and opportunities.

In contrast, sustainability specialists within the sector do understand this, Lacaille suggested.

“Many mainstream investors don’t understand how, for example, [UN biodiversity agreement] COP15 might begin to impinge on the corporate sector and begin to change corporate behaviour, corporate risks, and opportunities,” he said.

“It’s because this is slow-moving for many and not a very visible story.”

FINANCE THE GAP

Overall, the private sector will be key to channelling finance to close the current gap in nature protection and restoration, cited by one panellist at $500 billion per year needed by 2030 in nature-based solutions, roughly four times the current level.

“The window in which we can still bridge the gap is still open … just,” said UK lawmaker Richard Benyon, a member of the House of Lords upper legislative chamber.

By Roy Manuell – roy@carbon-pulse.com

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