For all the attention around the nature-based carbon credit markets in the past few years, one thing’s for sure: it’s received its fair share of criticism. ​

Not least on the list of criticisms is the view that, despite their name, certain types of nature-based carbon projects may actually be harmful to nature; Monoculture timber plantations might be great at sequestering carbon efficiently, for example, but they are also often detrimental to native and migratory species populations that rely on biodiverse habitats or wildlife corridors to thrive.

That’s where nature credits – also known as biodiversity credits – come in. Promoted by prominent players including the World Economic Forum, these have recently gained momentum not just as an alternative to carbon financing, but also as a means to attain some of the Global Biodiversity Framework targets set out at COP15 last year; Target 19, which requires governments to increase the level of biodiversity-related private and public funding to $200 Billion annually by 2030, explicitly names biodiversity offsets and credits as key areas of development.

In this article, I provide a brief summary of the history and emerging trends of this exciting and complex market.

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1. While public interest around nature credits has increased exponentially in the past year, the concept of such financing instruments is not new: Mentions of payments for ecosystems date back to the 1972 Ramsar Convention, and today, biodiversity-compensation market instruments (taking many names) already make up a $6 Billion annual market.

• “Payment for Ecosystem Services”, “Conservation Bank Credits”, “Habitat Banks”, “Nature-Repair Credits”, and “Eco-Credits” are just some of the terms being used globally to refer to market instruments with similar characteristics.
• Some instruments are direct, such as the US’ wetland mitigation bank system established in the 1970s by the Clean Water Act and Rivers & Harbour Act, in which infrastructure developers looking to construct over wetlands and navigable waters must either directly carry out mitigation works themselves (known as “permittee-responsible mitigation”), or purchase offsets from third-party project developers who are protecting wetlands in acceptable proximity.
• Other instruments are indirect, such as in Costa Rica, where the government mediates payments from corporates paying a consumption tax on fuels to landowners who are engaging in eligible practices, such as agroforestry or native species reforestation.
• Regulatory and direct payment offset instruments dominate the market, with the US mitigation bank markets alone generating an estimated almost $3 billion annually. Other countries with strong regulatory frameworks for offsets include Colombia, with IDB-backed project developers such as Terrasos leading the way.

2. The market is moving from a “no-net-loss” to a “net-gain” framework for biodiversity and nature.

• As is the case with the aforementioned US and Colombia examples, many of the more established nature credit markets are designed to hold developers accountable to “compensate” for the environmental harms they have caused (as a last-resort after they have done all they can to first avoid and minimize said harm). By buying offsets, they can therefore attempt to reach a “neutral” state for the environment: Otherwise known as “No-net-loss”.
• However, there are increasing calls for the industry to raise the bar and mandate that developers contribute to the next step in what is known as the mitigation hierarchy, and create a nature-positive impact to achieve biodiversity “net-gain”; this can be seen in both regulatory contexts, such as in with the UK’s Biodiversity Net Gain laws, and voluntary contexts, such as with Verra and PlanVivo.

3. The means and methods of determining what constitutes a nature offset or credit are continuing to evolve, with a number of outcome-based methodologies emerging.

• Historically, the adoption of sustainable practices (rather than measured outcomes) was a common prerequisite to generate payments in ecosystem markets, given the relative ease of validation. Alternatively, some crediting systems were also designed around having a wide variety of highly-localized methodologies involving watershed-based metrics or single endangered species, such as for Bog Turtles in Pennsylvania, or Red-legged Frogs in California.
• Habitat-based analyses (usually based on shrubland, grassland, and various forest types) are common in regulatory frameworks, such as in the UK’s Biodiversity Metric, given that satellite imagery is the most easily accessible at scale, and governments are increasingly coming under mandates to accelerate the development of the market today.
• With the emergence of new data collection technologies such as environmental DNA analysis (“eDNA”), bioacoustic monitoring, and improving satellite-based remote sensing capabilities, many are looking to create credits based on measured outcomes, with more standardized metrics.
• In the voluntary markets, players are looking to use AI not only to integrate ground-truthed data with satellite data, but also to create meta-indices which aggregate multiple metrics perceived to be of higher quality, and more representative of “ecosystem integrity”. Examples of players pursuing this approach include Operation Wallcea (which is working to pilot its “basket of metrics” methodology with Plan Vivo), and CreditNature (which aggregates established metrics such as ecosystem connectivity to deliver a single score.)
• Across both regulatory and voluntary contexts, many schemes employ a “like-for-like-or-more” concept, meaning that developers must purchase credits from the same ecosystem type they are affecting, at a pre-determined ratio based on that habitat’s rarity. In Colombia, for example, dry tropical forests have a 1:10 development to conservation requirement, meaning for every hectare of dry tropical forest developed, 10 must be protected.

4. Despite the myriad of players innovating in the nature credit markets, efforts are being made to create a more unified, consistent market. Industry dialogues are also driving the market to become more transparent, inclusive, and easily understood, learning from the challenges of the carbon sector.

• Through forums such as the Biodiversity Credit Alliance, a growing global coalition of industry stakeholders including landscape project managers, technology enablers, marketplaces, investors, community leaders, and more are coming together to align on how to best co-design the market.
• Through a number of working groups made up by members of the BCA, industry professionals are working to co-create reports and papers reflecting best practices for their industry, such as a peer-review mechanism against the global principals.
• Other objectives of the BCA include the establishment of a model set of Digital Standards that can be adopted into Distributed Ledger Technologies (DLT) to create a transparent, easily auditable and scalable ecosystem for biodiversity credits, moving away from the highly individualised, fragmented set of registries that exist today.
• The alliance is also consulting with a Communities Advisory Panel made up of nature-dependent Indigenous Peoples and Local Communities (IPLCs) to design and develop the BCA’s principles and products, and respect their rights.

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Despite having been discussed in the public policy arena for about the same amount of time as the carbon markets, progress on payments for nature has lagged far behind – not due entirely to a lack of interest, but also in the huge challenges to even design a well-functioning market that is able to make sense of nature’s inherent complexity. How do we measure ecosystem functioning to determine “equivalency”, when ecosystems are made up of trees, and birds, and spiders, and rocks, and water, and pollen, and everything in between? Can nature even be “compensated”? Are we making a mistake by “privatizing nature”? Are such interventions even effective at protecting nature in a temporally and spatially appropriate way?

To be sure, these are all valid questions to raise. Fortunately, however, there is some empirical data from existing markets to show that there are regulatory responses that can be made to de-risk potential negative ecological impacts, and technology is in a better state than ever to help us measure and make sense of nature transparently.

What is clear is that we must continue to focus on holding corporates and developers accountable for their impacts on nature, and provide them with the mechanism to do so.

If we want the private sector to invest more than the meagre 17% of all financing to nature-based solutions that they do today and work towards closing the $520B annual financing gap for nature, we must spend our energy participating and evolving these markets for the better. We cannot afford to sit back while biodiversity continues to be lost at rates never seen before. The nature credit markets will be one to watch.