A high-level expert group on sustainable finance (HLEG) has advised the EU Commission to scale up the biodiversity credit market as a means to boost investments towards low and middle-income countries (LMICs).
The EU Commission group’s final recommendations, released last week, said biodiversity credits have the potential to encourage investments in natural capital, especially in biodiversity-rich LMICs.
Gathering 20 expert members, HLEG met in Brussels in 2022 with the aim of exploring challenges and opportunities of sustainable finance in a bid to scale up funding from the private sector.
According to the document, in many countries carbon markets may not be a viable option for directing sustainable finance flows towards biodiversity protection and conservation.
While carbon markets in LMICs are expanding in Asia and Latin America, these mechanisms tend to be voluntary. To date, only a very limited number of LMICs have adopted compliance carbon markets similar to the EU Emissions Trading System, the expert group underlined.
“Concerns about quality and greenwashing, as a result of a lack of strong regulation, transparency, high integrity, and accountability, have recently slowed the progress of voluntary carbon markets,” the document said.
In light of that, HLEG noted that “the growing area of biodiversity finance can offer the needed alternative financing mechanisms for biodiversity-beneficial projects”.
Although the EU Commission supported the recommendations, they do not represent an official position or confirm any commitments.
The Sustainable Finance Coalition’s Biodiversity Credits Incubator (BCI), an initiative launched in 2023 to investigate opportunities and risks related to the development of the biodiversity credits market within Africa, said last week that the market could reliably channel private funding towards the continent.
However, one of the BCI’s early members, Marios Michaelides, told Carbon Pulse that European companies are not keen yet to invest in biodiversity credit initiatives outside their territories, as they prefer to invest where their supply chain has an impact.
MEDIUM-TERM SOLUTION
In its document, HLEG also acknowledged several challenges related to the development of the market, including the need to establish methodologies for internationally recognised biodiversity units, set up pricing mechanisms, and adopt regulatory and integrity safeguards, including those related to additionality.
Moreover, creating a functioning market will require additional policy measures, such as setting mandatory disclosure targets and compliance schemes.
“It should also be noted that the additionality criterion tends to make some biodiversity projects, such as conservation and preservation activities, ineligible for biodiversity credits markets, thereby requiring other support mechanisms,” HLEG said.
“In short, while carbon and biodiversity credits offer valuable opportunities for financing natural capital in LMICs, they also come with limitations and might only be available as a medium-term solution.”
The group suggested the EU Commission also explores alternative methods, such as the so-called ‘landscape approach’, designed to manage land in a way that considers social and environmental objectives along with economic drivers, thereby providing attractive business opportunities to the private sector.
“In addition, sovereign green bonds covering nature and biodiversity projects offer another innovative avenue for leveraging capital for conservation efforts,” HLEG said.
The high-level expert group’s work follows recent initiatives led by the World Economic Forum (WEF) and the UN-backed body Biodiversity Credits Alliance (BCA).
WEF and consultants McKinsey & Co initiated a Frontrunners Coalition seeking to contribute to shaping the development of and building confidence in the emerging voluntary biodiversity credit market, as Alessandro Valentini, a sustainable finance specialist with WEF, told Carbon Pulse last week.
Furthermore, BCA released an issue paper in April delineating the process of developing a review mechanism for the emerging biodiversity credit market, in a bid to quell concerns over nature risks related to credited projects.
By Giada Ferraglioni – giada@carbon-pulse.com
** Click here to sign up to our twice-weekly biodiversity newsletter **
