The nascent biodiversity credits market can learn from the work of the World Bank’s rhino bond, according to an expert whose organisation worked on the issuance.

In 2022, the World Bank issued the first financial instrument dedicated to protecting a species with a five-year $150 million sustainable development bond, with payments linked to number of rhinos in South African parks.

“The structure was quite complex, but, in some ways, it’s similar to biodiversity credits,” said James Pilkington, senior specialist in sustainable finance at the Zoological Society of London (ZSL), which worked on the rhino bond.

“We often use carbon market when we think about how to design a lot of other credit models, but I want to look at another asset class,” Pilkington said during an Ecology Calling biodiversity credits event in London on Wednesday.

Like the concept of biodiversity credits, the rhino bond quantifies nature outcomes. Biodiversity credits are usually defined as units generated from conservation projects representing general nature uplift.

The rhino transaction does not have the ecological granularity of credits, but it does have payments dependent on boosting nature, Pilkington said.

If the black rhino project is successful in the Addo Elephant National Park and the Great Fish River Nature Reserve, verified by ZSL, investors will receive a success payment in 2027 in addition to the amount they invested in the bond.

“What lessons can we learn from this experience? It was actually pretty torturous. I wasn’t there for the whole period, but it took six years from concept to launch.”

COMMUNICATION

The first lesson was that someone must be willing to fund the success payment to investors.

“We spent years trying to find people that were willing to pay for an increase in rhino abundance.” Eventually, international fund the Global Environment Facility agreed to pay.

“Secondly, I think this is really important for biodiversity credits, we need to be really able to clearly communicate to buyers what they’re buying.”

“There’s the challenge for us and biodiversity credits – we see all these different factors trying to create this comprehensive view of ecosystem health, but it’s hard to communicate what they really pay.” The solution for the bond was the simple growth rate of rhinos.

Another way to simplify biodiversity credits would be to measure the pressures on nature in an area, rather than trying to quantify the quality of ecosystems, said Nick Atkinson, biodiversity strategist at carbon credit ratings agency BeZero, during the event in London.

“Is it more appropriate to be measuring the pressure on a landscape and the alleviation of that pressure? And is it more simple to do that than it is to be trying to measure biodiversity itself? I think it probably is,” said Atkinson.

In a research note released in March, BeZero said the emerging global voluntary biodiversity credit market could benefit from ratings services.

RETURNS

The rhino bond justified the complex financial concept for investors as the outcome payment offers the opportunity to make money, Pilkington said. Biodiversity credits also have the potential to offer returns, distinct from grants.

“People get really hung up on the financing mechanism, but when you look at the projects on the ground, it isn’t actually very different from a biodiversity conservation project.”

Biodiversity credits should not underestimate the time and cost of the development phase, he said. Getting the design, metrics, and interventions right can take years of significant funding.

By Thomas Cox – t.cox@carbon-pulse.com

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