Potential investors in biodiversity credits must engage effectively with Indigenous peoples or risk sub-par returns, as the wider financial sector moves towards building nature into their decision-making, according to the co-lead of a UN finance initiative.
Eighty percent of the world’s biodiversity resides in territories that are occupied or controlled by Indigenous peoples, according to the World Bank. This presents practical challenges for the financial sector, which is looking to take advantage of the emerging asset class of biodiversity credits.
Recent announcements at New York Climate Week show that voluntary biodiversity credit markets are getting off the ground from Kenya to Kent, as are global standards to define them.
“I’ve never seen anything, outside of AI, move at the pace of biodiversity credits,” Jessica Smith, co-lead of Nature at UNEP Financial Initiative (UNEP FI), told Carbon Pulse in an interview.
UNEP FI has more than 500 members that span financial industries including banking and insurance, and cover half of the world’s banking assets.
Smith sits in the secretariat of the Biodiversity Credit Alliance (BCA), which aims to define and set the principles of biodiversity credits. The alliance is led by UNEP FI, UNDP, and Sida.
The BCA hopes to avoid the pitfalls of the carbon market, according to its website, with which similarities are often drawn to both excite and caution potential market actors.
In this regard, the BCA will release a paper on Thursday that contends engaging with Indigenous Peoples and Local Communities (IPLCs) is the only way that investors can effectively manage and mitigate their environmental, social, and financial risks of future voluntary biodiversity credit markets.
CARBON CONCERNS
Some estimate that the biodiversity credit market could be four times larger than the voluntary carbon market, so there may be a sizeable opportunity for nature-based investors to get an attractive return on investment.
While the voluntary carbon market does finance nature-based activities, VCM projects can also include renewable energy and engineering projects, meaning that the need to consider IPLCs from the outset was not a mechanism priority. Most biodiversity credits, on the other hand, will require IPLCs to be involved due to their location in the project areas.
Key players, like UNEP FI, who are informing the early biodiversity credit market, caution against avoiding the sheer drops that the carbon market has fallen into.
“I’m encouraged by project proponents and players in the [biodiversity] market to learn lessons from carbon,” Smith said.
“We need to make sure the biodiversity space doesn’t follow the same path.”
She contended that well-known issues from the sustainable development approaches, such as addressing elite capture, grievance mechanisms, land rights etc., were not effectively translated into carbon markets as they formed.
“If the financial sector wants to get into the biodiversity credit market, the reality is 80% of biodiversity is managed by IPLCs, so we’re very unlikely to have a sustainable, robust market without them.”
As the market for biodiversity develops, the BCA has a pivotal role in shaping what its infrastructure will look like, and its new paper aims to set the foundation on the right footing.
DISCUSSION OPEN
It’s logical to assume that for a new market, the first point of its development would be to define that which is being traded.
However, the BCA decided to first ensure there are fundamental operating approaches and principles to be discussed by market players rather than start with defining what a biodiversity credit represents, due to the practical need of the market to work with IPLCs.
“[The paper] is the first output of the Biodiversity Credit Alliance, ahead of our definition of a voluntary biodiversity unit and integrity framework, which aims to foreground the rights of Indigenous peoples,” Smith told Carbon Pulse.
“Unlike carbon, biodiversity can never be restored in a measurable, predictable way. We need to focus on protecting that and conserving it, by rewarding groups like Indigenous peoples and local communities who have stewarded nature.”
The paper’s recommendations say that investors should see IPLCs not as people who need to be empowered, but as champions of the natural world.
Smith contended that if investors want to de-risk their investments in nature markets, they need to step up to understand the rights and needs of IPLCs.
The BCA’s discussion paper points investors to several recommendations for strengthening the rights of IPLCs in the biodiversity credits market of which investors should be cognizant.
The recommendations include using “maintenance of biodiversity” in the biodiversity credit definition, verifying free, prior, and informed consent (FPIC) as a de-risking tool, and using contractual agreements to carry insurance for risks to communities as well as insurers to avoid potential harm.
The role of IPLCs is also highlighted as it recommended that these groups could provide accreditation of nature certificates and that data sovereignty should be maintained, while considering that time and resource constraints may need to be adjusted to effectively scale to ensure IPLCs participation is meaningful.
An effective grievance and redress mechanism should be independent, accessible, equitable, predictable, transparent, human rights-compatible, and designed and implemented with IPs and LCs, the paper said.
The BCA calls to move beyond traditional safeguarding approaches into a harmonised risk framework for investors in nature markets, that outlines the role of IPLCs for the investor community.
Many of the recommendations mentioned are not necessarily new issues, investors may have already contended with several of them.
Smith told Carbon Pulse that many sectors, such as energy, mining, and agriculture have examples of FPIC processes that could be built upon for biodiversity credit mechanisms. Many of these mechanisms operate in jurisdictions where systematic engagement of IPLCs is not enshrined in law.
CREDIT-ABILITY
The BCA aims to build in community voices from the outset of the market’s development, particularly as the organisation goes on to define what biodiversity is and where it can be applied.
The organisation set up a community advisory panel (CAP) to bring the concerns and priorities of “nature stewards” directly into the market’s definition, not just at the project level.
“We can’t have a biodiversity credit market without the stewards of nature, it’s simply unjust and unsustainable to have it that way,” said Smith.
“Indigenous peoples that have been fighting to preserve biodiversity need a [credit] definition that includes ‘maintaining biodiversity’ is more favourable than one that only counts the uplift, which favours areas that have already been degraded.”
Smith said that these are the kinds of insights gained from working with the range of voices coming forward through the CAP.
The BCA proposes a grievance mechanism that reaches directly from the community to the investor.
According to Smith, this contrasts with traditional grievance mechanisms in the VCM, which operate between communities and proponents, but do little to provide visibility of the financial risk to investors.
“There’s a business case for investors to have these tools like grievance mechanisms in the market, which bring transparency.”
However, investors and IPLCs are two groups that have historically had limited direct interaction. Smith was aware of the challenge of balancing sometimes conflicting interests but proposed that it is possible for the groups to speak the same language on biodiversity credits.
“We need to get a lot more comfortable bridging these conversations, and there’s a lot of fantastic governance infrastructure that’s already there, and a lot of people that play a useful intermediary role with expertise in finance, indigenous rights, and biodiversity,” she said.
“There may be differences in the world view but we shouldn’t caricature the gap, people can bridge the gap. It also goes beyond the project level, ensuring we create an enabling environment with policies, grievance mechanisms, and facilitation in place.”
Smith pointed to the use of the Equator Principles as a risk management framework that could guide financial institutions in the environmental and social risks in project finance.
Often the conversation about biodiversity credits focuses on the opportunity they provide, and what portion of the $200 billionn a year Global Biodiversity Framework Target 19 it might make up.
“Some Indigenous peoples may not agree with market-based mechanisms,” emphasised Smith, highlighting that that’s why engagement directly with investors and IPLCs can de-risk investments and ensure biodiversity credits are done with communities not to them.
De-risking investments is not just a focus on biodiversity credits markets but speaks to the wider nature-related trends that the financial sector is now facing.
NATURAL CAPITAL-ISTS
Beyond the BCA, UNEP FI looks at how to bridge international commitments like the Global Biodiversity Fund, to the mainstream financial sector. The organisation was a founding member of the Taskforce on Nature-related Financial Disclosures, which launched its recommended disclosure framework as part of New Climate Week on Monday.
Smith said actors within the financial sector are broadly at different stages, and interface with nature in different ways.
“The investment sector has seen a lot of leaders who have signed the Finance for Biodiversity pledge, particularly asset managers and there are a growing number of asset managers able to position themselves as leaders on nature,” she said.
“The banking sector is much closer to the financing of nature-related negative impacts, the focus of mentioning nature in banking, particularly because banking dominates in the global south. There are more threats to nature and governance may not address them,” she added. “If we look at where nature is in the world, we need to protect what’s there as a priority, so banking needs to be high on the priority list for our efforts.”
Even so, the regulatory framework in which banks operate – and how they approach nature – varies vastly between regions.
“Banks that are in markets that don’t have any regulation or legislation in this area are facing different circumstances. For EU banks, with the green asset ratio and nature restoration law, nature is becoming more of a compliance issue. For emerging market banks there has to be more focus on opportunities and product development, where can product innovation make it an attractive area for the bank,” she said.
Smith told Carbon Pulse that a piece of the problem is a lack of options for banks in the global south to work away from negative impact activities.
“If we’re going to have a working financial sector that underpins most of our real economy in emerging markets, they need to be able to diversify what they finance and right now there’s not a pipeline of nature-positive investments or nature-positive companies they could invest in,” she said.
UNEP FI recently began a project to place natural capital advisors into banks in emerging markets in Peru, Colombia, South Africa, and Indonesia to better account for natural capital within their financial decisions. Smith said the project aims to enable banks to address nature from a private-sector banking perspective, but that banking isn’t the only sector where more capacity is needed.
“There’s also a lot of financial opportunity for insurers. They are experts in pricing risk, but governments need to be on top of it to ensure that insurers don’t just exit from high-risk areas and don’t leave people without insurance in areas where nature-related issues are happening.”
Smith contended that insurance has a vital role to play but that it should operate with better alignment to our society. Recently, prominent insurance companies have decided to refuse home insurance in California and Florida as natural disasters such as heatwaves and wildfires have an outsized risk to their decision-making.
“The insurance industry is super at pricing risk, but if it says ‘we don’t want to insure half the world that for our models is too risky’ that fails to deliver on society’s needs. It would be a failure of governance to shake the market to provide the de-risk function we expect from insurance.”
UNEP FI recently released a briefing paper on “nature-positive” practices the insurance sector is adopting, but there is a need to adapt their risk assessment frameworks and mainstream TNFD within the industry.
The fundamental shift that’s needed, according to Smith, is the diversification and rewiring of nature to be an economic opportunity, and countries need to be rewarded for maintaining nature.
By Tom Woolnough – tom@carbon-pulse.com
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