Since the agreement of the Global Biodiversity Framework (GBF) in 2022, investors are increasingly focused on mechanisms to finance biodiversity and nature protection. To facilitate market development, Swedish retail bank Swedbank (ST:SWED) has purchased the first Swedish biodiversity credits from Orsa Besparingsskog.
- The GBF includes the aim that 30% of terrestrial, inland water, and coastal and marine ecosystems will be restored and conserved by 2030.
- An estimated $900 billion is needed annually to address nature and biodiversity and no more than half will be forthcoming from the public sector, meaning the private sector must step up.
- With half of the world’s GDP, equating to $44 trillion, moderately or highly dependent on nature, biodiversity credits are a new tool to help drive finance towards nature protection.
The bank sees the credits as an innovative way for forest owners to receive compensation for preserving and promoting high natural values, and at the same time give companies the opportunity to invest in nature conservation and biodiversity.
Ulf Möller, head of forestry and agriculture at Swedbank, said: “Preserving biodiversity and restoring ecosystems is crucial. As a bank, we can be involved in developing innovative financial solutions and methods to promote biodiversity, and see that the system of biodiversity credits is a way forward.”
Voluntary frameworks for reporting on nature impact are accelerating
The Science Based Targets Network (SBTN) has launched the world’s first science-based targets (SBTs) for nature, to help companies take integrated action across freshwater, land, ocean, biodiversity, and climate challenges. They are encouraging action through the lens of avoid, reduce, restore and regenerate and transform. The Taskforce for Nature-related Financial Disclosure (TNFD) is expected to release its final guidelines later in 2023, with the goal of enabling companies to assess, disclose and manage nature-related financial impacts and dependencies.
The level of finance required for effective action on nature and biodiversity protection is such that every actor within the economy will need to play a role.
Swedbank’s involvement in the pilot project
The biodiversity credits purchased by Swedbank have been developed within the framework of a research project at the Swedish University of Agricultural Sciences, and are geographically located within Orsa Savings Forest’s land.
“Biodiversity credits create economic incentives for forest owners to preserve and develop forests with high natural values. They can act as an alternative source of income for forest owners, where they receive yields from the forest without harvesting it or managing the forest using other methods compared to conventional forestry. They could also be bought and sold by companies and organisations that want to invest in nature conservation and thus promote biodiversity,” added Möller.
A total of 91 credits have been located using a conservation inventory of an area of 13 hectares. The agreement runs for more than 20 years and every five years an independent third party will carry out a follow-up conservation inventory to evaluate the development of the area’s wildlife.
Through the project, Swedbank said it hopes to contribute to increased knowledge and understanding of how financial institutions, together with other players, can develop incentives to preserve and develop biodiversity.
The pro’s and con’s of biodiversity credits
The carbon markets have proved a successful mechanism to direct capital towards projects that mitigate the impact of climate change. Part of their success however is due to the fact that most greenhouse gas emissions have a single point source and global impact, meaning that wherever the investment is made, it has an overall beneficial impact.
The challenge with biodiversity and nature is that, by definition, it has a local impact – one that can be difficult to quantify in terms that address investor needs. If a rainforest is lost by deforestation, it doesn’t matter how many trees you plant elsewhere, the damage to the ecosystem is done.
Biodiversity sustains the quality of our air, provides pollination, reduces the impact of natural hazards and underpins the world’s food supply. In fact, the IPBES predicts that more than 75% of the world’s food supply relies on animal pollination, which makes finding new ways to finance action.
The World Economic Forum (WEF) describes a biodiversity credit as “an economic instrument used to finance activities that deliver net positive biodiversity gains. Unlike carbon or biodiversity offsets, which are payments made by a business to compensate for its damaging impacts on location-specific ecosystems, biodiversity credits allow companies to support nature-positive action, funding long-term conservation and restoration of nature, a higher order contribution than simply offsetting negative impact”.
There is little doubt that this is a laudable goal, but the complexity of nature and biodiversity interactions and impact is such that it can be difficult to set prices in a reasonable way. The carbon markets themselves, a rapidly evolving market that hit $2 billion in 2022, have been dogged by controversy. Methodologies have changed as the science becomes clearer, and measurement becomes more robust, but the market remains volatile. Credibility issues, such as hitting standard setter and certifier Verra earlier in 2023 make investors nervous.
It is widely understood that there is a lot of work to be done in terms of developing biodiversity credit markets, and other approaches such as debt for nature swamps, landscape finance, philanthropy and public finance will play significant roles in addressing the challenge. While the number of credits that Swedbank has purchased remains small, it is however indicative of an approach which is attempting to find new ways of channelling necessary finance towards nature.