One of the biggest challenges in the area of sustainability – alongside the fight against climate change – is the preservation of biodiversity, the diversity of all species and ecosystems. There is a huge funding gap of around 700 billion US dollars that would be needed each year, and much more than before would need to come from the private sector. Will systems such as biodiversity credits become the ultimate solution?
Sustainability is more than just CO₂ reduction. And yet the economic discourse has revolved very much around just that in recent years. Companies have concentrated on NetZero certificates. New business models based around the carbon footprint and offsetting have sprung up like mushrooms.
Biodiversity, however, is a topic that has received little attention to date. It comprises three key aspects: genetic diversity, species diversity and the diversity of ecosystems as well as the structures within and between life forms. Biodiversity ensures stable ecosystems that provide us with essential goods and services such as food, clean water and wood. It regulates the climate, water quality, natural pest control and much more. There is even a collective term for the various contributions that ecosystems make to human well-being: ecosystem services.
In short: We could not survive without biodiversity. In addition, the loss of biodiversity is one of the most relevant financial risks for many companies, since more than half of global value creation is moderately or heavily dependent on ecosystem services, which corresponds to around 44 trillion US dollars per year.
In order to understand the importance of systems such as biodiversity credits for the conservation of nature, it is important to first realize that even a partial loss of ecosystem services would have fatal consequences, i.e. massive losses for sectors such as agriculture, construction and the food industry. The World Bank estimates that this could lead to a global GDP loss of 2.3 percent – or in absolute figures: around 2.7 trillion US dollars by 2030.
Find out more about biodiversity and its importance for the world and the economy in this keynote speech by Dr. Tobias Raffel from our Between the Towers event.
The preservation of biodiversity is associated with high costs. The most recent figures on spending on biodiversity conservation date back to 2019, when around 133 billion US dollars were invested worldwide according to figures from the US Paulson Institute. It can be assumed that a lot has happened since then. After all, the annual investment in the 2019 survey was already 68 percent higher than the average for the years 2015 to 2017. In other words: things are already moving.
The question is whether these 133 billion are enough, considering that at the same time, subsidies amounting to 542 billion US dollars are flowing into practices that are harmful to biodiversity.
The Paulson Institute provides the answer: much more is needed. The financing gap – i.e. the difference between the current investments and those actually required – is somewhere between 598 and 824 billion US dollars per year, as the latest figures from the Paulson Institute from 2019 show. The United Nations also puts the amount needed at around 700 billion annually.
The financial sector can play a crucial role in closing this financing gap. In order to fulfill it, a profound transformation of existing approaches is required. Governments would need to reduce harmful subsidies while creating regulatory instruments to mobilize more private capital. Currently, almost 90 percent of financing comes from government funds – this type of funding usually moves slowly. The world’s governments cannot save biodiversity on their own in the little time left to act.
Innovative financing models are needed to avert the collapse of biodiversity. I would like to present three of them below.
As part of my bachelor’s thesis at neosfer, I analyzed three alternative ways of financing biodiversity. After a deep dive lasting several months, I would now like to share my assessment of the following approaches:
Regulatory biodiversity offsets are used to compensate for interventions in nature. A compensation measure for an intervention must therefore replace precisely those components of biodiversity that have been damaged by said intervention. This system exists worldwide in different versions in around 45 countries and regions.
In Germany, it is laid down in the Nature Conservation Act and implemented via so-called eco-points: different types of land are assigned different value points by law. These eco-points can be generated and freely traded by third parties by upgrading or changing the use of land. A company or municipality can therefore buy local certificates to compensate for their impact on nature, provided they do not carry out their own compensatory measures, such as unsealing land.
However, accreditation and handling vary enormously depending on the federal state. There are major shortcomings in the implementation and maintenance of compensation areas and in ongoing monitoring by the authorities. Municipalities are increasingly creating or purchasing eco-points in order to be more attractive for potential construction projects. The reason for this is that suitable compensation areas are often already required the application process for a permit. Eco-points that have not yet been allocated to an intervention are subject to a fixed interest rate of 4% over ten years.
Nature conservation organizations have doubted the actual added value of this system for years. There are massive shortcomings both in the regulatory system and in the implementation of compensation measures. For example, the awarding of value points, which is purely normative and not scientifically based, is criticized. I do not consider the eco-point system to be truly sustainable. It has been in place for more than 40 years, is enormously flawed and prone to greenwashing. Biodiversity offsets are often mentioned in the same context as biodiversity credits, but these are fundamentally different instruments. I consider the latter to be much more innovative and possibly more promising for the future.
The Global Biodiversity Framework (GBF) – which is something like the Paris Climate Agreement, but for biodiversity – explicitly mentions biodiversity credits as an innovative instrument to close the funding gap.
Unlike offsets, biodiversity credits are currently based on the voluntary market. Companies are therefore not obliged to use them, but can use them to promote biodiversity beyond their own actions. It is not about offsetting individual local measures, but about projects to restore, promote and protect entire ecosystems.
However, the problem is that there are currently no standardized measurement methods, issuing units or verification systems. The current market maturity is comparable to the early phase of the voluntary carbon certificate market. Many of the current measurement methods for biodiversity are based on enormously complex modeling systems that, for example, evaluate satellite images and combine them with video recordings, DNA and acoustic measurements in order to assess the state of nature and track the impact of projects.
Even though more and more biodiversity credit systems and providers are emerging, the market is still very small. The eight largest biodiversity credit systems have so far only received around eight million US dollars in investments for credits.
As an alternative to the new biodiversity credits, carbon credit systems with so-called co-benefits for biodiversity are becoming increasingly important on the market. The principle of carbon credits is already established and successful. Here, CO₂ is compensated for by reforesting or renaturalizing areas, for example. If particular emphasis is placed on biodiversity, this is referred to as a co-benefit. Primarily, sequestered CO₂ is accounted for, but there are positive side effects.
Carbon credit projects can also have a positive impact on biodiversity, for example if a renaturation project explicitly promotes and protects existing species in a holistic manner. Incidentally, such carbon credits with co-benefits are traded more frequently and are more valuable than other carbon credits. Demand is even increasing faster than the available supply.
Essentially, both credit systems are about companies carrying out projects and tokenizing their results. One major difference at the moment is the lack of measurability of the results. While CO₂ certificates are always measured in terms of tons of CO₂ equivalent, this has not yet been standardized for biodiversity credits.
Which of these three options will be relevant in the future, and in what combination? First of all, in my view, regulatory biodiversity offsets will remain relevant, but they offer limited potential to close the financing gap quickly. Biodiversity credits are nowhere near market ready, though. A United Nations report estimates that it could take up to three years before large companies are ready to trade them.
The United Nations Biodiversity Credit Alliance is currently working on possible use cases. Depending on the possible use case, the World Economic Forum predicts variable degrees of success, as shown in the graphic. The market could grow extremely quickly according to the prognosis – especially if the use of biodiversity credits to compensate for unavoidable impacts is permitted.
The big questions remain: Will there be a standardized measurement of biodiversity? How long will it take until then? Which system is most likely to persuade companies to compensate for their impact on biodiversity or will contextual assessments establish themselves? How can we ensure that an in-depth evaluation and reduction of the impact on nature takes place before compensation? How will regulation be adapted in the future?
In the near future, there are signs that supply chain-oriented offsets and credits could undergo strong development. A market infrastructure is still being formed and guidelines are constantly being updated. It remains to be seen to what extent credit stacking, i.e. the generation of various credits (biodiversity, CO2 etc.) through one project, will become established. In particular, the reduction of harmful subsidies is a relevant lever for reducing the financing gap. In addition to the instruments mentioned here, there are of course numerous other options for financing biodiversity, such as green bonds. One thing is clear: a variety of financing types are necessary in order to quickly raise more capital for effective nature conservation and thus the preservation of biodiversity.
