The quality of each biodiversity or carbon project is more important than every initiative being tradable for the market to work, similar to the industry for bottles of wine, French asset manager Mirova has said.
While every market needs liquidity to be efficient, requiring some form of fungibility, it can also have specificity within its sub-categories, Mirova said in position paper Environmental Market Instruments.
“Our perspective is that full fungibility is not required nor is it relevant. Attention must be paid to the specific quality of each underlying project,” Mirova said. An asset is ‘liquid’ if it can be exchanged for money easily, while it is ‘fungible’ if it can be interchanged for an equivalent unit of the same good.”
Mirova used a wine market analogy to explain its considerations in the paper, which focused on its position on voluntary biodiversity credits/certificates and carbon credits.
“Renowned wines and lower quality wines are not traded in the same way. Instead, there are a myriad of sub-markets within the global market, each distinctly shaped by the quality of its products, with room for specific price quotation related to such aspects as territory, grape variety, vintage, etc.,” said Mirova, an affiliate of Natixis Investment Managers.
“The existence of a wine market was therefore not linked to the setting of a single price for wine, and the market is not fully fungible as prices differ depending on wine quality.”
The fungibility question around biodiversity credits has been said to be one of the key challenges in establishing a market, as the local essence of nature makes it difficult to compare one area with another.
Out of eight biodiversity credit schemes assessed by BloombergNEF last year, none had credits that were considered fungible.
Mirova is one of the more active financial institutions in biodiversity credits, with its CEO Philippe Zaouati among the 21 members of a UK-France panel aiming to galvanise international markets around them.
In December, Mirova invested $6.5 million in Terrasos, an early mover in the biodiversity market that generates credits through a series of habitat banks.
LEVERAGE VCMS FOR BIODIVERSITY
Biodiversity credits or certificates could play a “pivotal role” in contributing to a nature-positive economy, although they should not be considered to be “silver bullets” for nature financing, Mirova said.
However, “creating a biodiversity certificate market can only succeed if the voluntary carbon markets are improved”, it said.
“Improvement is happening already, as seen by the recent developments at COP28. Voluntary biodiversity markets can leverage such work, and replicate what works.”
Common criticisms of carbon markets include doubts about their effectiveness in reducing emissions, concerns about their complexity, risks of market manipulation, and uneven profit distribution. Experts have frequently highlighted the need for biodiversity markets to learn from carbon.
In addition, biodiversity and carbon credit markets share “many similarities” with the green bond market, and “could follow a similar path”, Mirova predicted.
Sustainability bonds have increasingly tackled biodiversity conservation in their use of proceeds, with about 16% of green, social, and sustainability bonds issued including the topic in 2023 up to October – up from just 5% throughout 2020, according to Sustainable Fitch.
Despite the “fog” around innovative financing instruments – leading to the risk of greenwashing – Mirova will “scout new investment territories, test-and-learn and share best practices for environmental market instruments such as carbon and biodiversity credits”, it said.
By Thomas Cox – t.cox@carbon-pulse.com
*** Click here to sign up to our twice-weekly biodiversity newsletter ***
