Nature markets are still in their infancy, but the Kunming-Montreal Global Biodiversity Framework agreed by almost 200 nations at COP15 in Montreal in December 2022 was a signal to investors that these could become billion-dollar markets in the coming years.
The final text of the Global Biodiversity Framework explicitly endorsed the creation of voluntary biodiversity credit markets, and dozens of standards are being developed with a view to issuing biodiversity credits, certificates and tokens over the next few years.
Moreover, an increasing number of businesses are making pledges to be 'nature positive,' mindful that the Taskforce on Nature-related Financial Disclosures (TFND) will publish its final guidelines in September 2023 with the aim of steering global financial flows into nature-positive outcomes through disclosure frameworks. The blueprint for financial institutions to declare their impact and dependencies on nature is likely to be made mandatory in some countries.
New biodiversity voluntary credit and offset markets are being legislated for in the UK, Australia and New Zealand, while the EU's parliament has approved the Nature Restoration Law, which aims to restore 20% of the bloc's sea and land territories by 2030.
OPIS editor Humberto J. Rocha interviewed Paul Jepson, founder and head of innovation at CreditNature, who is designing nature tokens that the company will sell to investors interested in achieving nature positive outcomes. Unlike biodiversity offsets, the nature tokens are an investment in the restoration of an ecosystem and its underlying foundations, not an offsetting of damage done elsewhere by a company.
CreditNature is currently in talks about creating tokens with four different projects based in Scotland and Yorkshire, according to Jepson. The company is also in early-stage discussions with organizations in Africa, Central America and Indonesia about potentially applying its framework to other projects.
With a career spanning 40 years and a background in conservation research, biodiversity consultancy and policy, Jepson works with a team seeking to connect landholders with investors to scale up nature recovery projects and demonstrate that investments can improve biodiversity resiliency.
OPIS: What is the goal of a nature market? Why are we currently seeing more interest in these markets?
Jepson: Our goal is to unlock investment, be it corporate investment or institutional investment in the recovery of ecosystems as assets or ecosystems as infrastructure.
If we're looking at where the nature market is at the moment, there's a lot of interest in generating biodiversity credits, which are a little bit like carbon credits. Some of these are biodiversity offset credits, which offset the harm done by housing development, and then there's a new category starting to emerge which are [voluntary] biodiversity credits, and this brings the financing either to protect or restore biodiversity.
Where we at CreditNature are maybe slightly different [and] trying to expand the market is that rather than investing in biodiversity as a resource, we need to invest in the underlying integrity of ecosystems, the structure and function and the ecosystem processes that give rise to ecosystem services or biodiversity resources.
OPIS: Why are nature markets forming now? What has led to this moment and what can we expect in the coming years?
Jepson: I think it's happening now because of climate science and the rise of ecosystem science created this realization at very high [policy-making] levels that the climate and nature emergencies were linked and that we need to restore nature to help us navigate or mitigate climate change.
We've got this new global aspiration...that is both net zero and nature positive...This was embedded in the recent Kunming-Montreal Global Biodiversity Framework [in December 2022] and that has foregrounded investing in ecosystem integrity...Nature and ecosystems and the response to climate change are not separate.
Within this international framework there is Target 19 [which aims] to mobilize $100 billion a year from private and public investment in the restoration and protection of ecosystems. That is now cascading down into the TNFD guidelines which are putting new guidelines on company sustainability reporting and we've got new legislation in the European Union...The policy cascade...is now creating both an opportunity and imperative for markets in nature.
OPIS: You mention there are things like biodiversity offsets and there are carbon credits. What is the fundamental difference for nature tokens, which CreditNature is offering?
Jepson: For all of these mechanisms, the fundamental asset is a certain certificate or a unit of change. For carbon credits it's certification of a unit of a ton of carbon avoided or sequestered; for a biodiversity offset it's a hectare of land, which has been restored; and for a token, in the same way, it's a certificate.
We use the word token, though, because that certificate is built on a distributed ledger technology and the token has a utility, which is a reporting utility. We're just using the word token to distinguish it from a traditional credit.
The process of generating that credit is that it's registered on a registry, whereas ours is on a digital registry, and then the smart contracts, computational smart contracts, the standards and the data are minted into the asset so it's something which is, on one level, it's less tangible, but on another level, it's really tangible, because everything is recorded on the distributed ledger technology. That gives it high integrity, high immutability, high searchability and gives greater access to the information present in that token.
So, a token is a certificate, but a certificate with a lot more features and attributes than the classic credit.
OPIS: This leads us to the question of what methodology will be used to create these nature tokens?
Jepson: There's a number of metrics for biodiversity around but there wasn't really any metric for ecosystem integrity. CreditNature has developed some metrics for ecosystem integrity - we call it our NARIA (Natural Asset Recovery Investment Analytics) framework. This is fundamentally a set of processes that give rise to the structure of functioning, the integrity of an ecosystem. And
if we can identify those processes - and we've identified four processes from the science - then we can measure [them] and that creates a composite index, which we call our Ecosystem Integrity Index. The improvement in that index is the units that underpin our nature impact token.
So, just like we measure carbon, there are different methodologies for measuring the carbon in, for instance, a woody vegetation [ecosystem], and then that ton of carbon is the unit that is the certificate.
We measure ecosystem integrity using our index and the improvements in the score of that index then become the nature impact unit, which is tokenized. The nature impact token is a certificate of investment in the ecosystem recovery of an area that 'yields' nature impact units. A nature impact unit is issued when a one-point uplift on the ecosystem integrity index is confirmed. The ecosystem integrity index measures for key processes of ecosystems that generate ecosystem services and resilience.
OPIS: What would make a nature token decrease or increase in value?
Jepson: This is a very open question at the moment: to what extent will this new category of nature impact token, and indeed nature positive biodiversity credits, be tradeable within markets? It's more like buying a utility asset which gives you the right to then report the tokens. The asset may be transferable in markets and may be transferable for a finite amount of money in markets, but it won't be tradeable in the same way that carbon can be traded as a commodity. It will be a different type of asset, an asset which companies invest in because it generates all other forms of value: the reporting value which feeds into the reputational value of the company, or the compliance value of a company, and so forth.
So, they are different instruments [compared] to traditional carbon sets of certificates or credits, which are fungible basically, can be traded and speculated on as with other commodities.
OPIS: The nature market is in its early stages: what needs to happen to kick off nature markets? There's talk about these markets becoming larger than the voluntary carbon markets.
Jepson: Two things have to happen. [Firstly,] on methodology, I think there's a lot of uncertainty out there about how you measure biodiversity. How do you measure ecosystems and is it good? Is this credible? Could we be accused of greenwashing or that [our tokens] aren't valuable? So one of the things we're very keen on - we're doing this with our NARIA methodology - is that it's
independently scientifically certified so the market has confidence that those underlying metrics and the units are scientifically valid and third-party approved. I think that's one thing that the market needs at the moment: confidence over metrics to get the market going.
[Secondly,] we need pioneer buyers. We need the companies who have got that attitude of wanting to shape and be part of building a market as well as acting beyond their short-term business interests.
We've got to create almost a new ecosystem of organizational actors, each playing a different role in those markets. It's starting to arrive, but...the markets need to be co-designed with different organizations coming together and saying 'you know what, we've learned something from carbon markets. They have done good, but they weren't as good as they could have been.'
With that knowledge, how can we design new nature markets, which will actually not only serve our own vested interest, but shape a future which is better for humanity and better for the planet? I think there is something about how all the different actors can work beyond their own immediate interest to create a system which is bigger than the whole.