Climate change and biodiversity loss are intrinsically linked – and this is often referred to as the climate-biodiversity nexus. Human-induced environmental changes such as deforestation or pollution, the root cause of both, are now so severe that feedback loops accelerate species loss and extreme climate events.[i] As an example, climate change-induced warming threatens marine biodiversity, reducing the carbon-absorption capacity of oceans, which threatens spiralling global warming and biodiversity loss.[ii]
Nature provides significant climate change mitigation, acting as a carbon sink. Land and oceans have absorbed more than half of all anthropogenic CO2 emissions in the last decade. [iii] Investing in Nature-based Solutions (NBS) could achieve up to a third of the short- to medium-term emissions reductions needed to limit warming to 1.5°C.[iv]
The scope of NBS is very wide, and includes the conservation and restoration of forests, mangroves and natural grasslands, regenerative agricultural practices that increase carbon storage in soils, and enhancement and protection of marine ecosystems. Successful NBS projects increase natural carbon capture and storage and enhance biodiversity. Biodiverse ecosystems are more stable and resilient to change, generally storing more carbon as well as providing other ecosystem services, such as soil stability and water supply.
Environmental stewardship is a core contributor to sustainable economic development. More than half of global GDP is estimated to be nature dependent.[v] As with climate risk, severe financial losses could result from environmental degradation and biodiversity loss. These could result from reduced crop yields with loss of pollinators, or could be a large economy-wide shock from another pandemic, as seen during COVID-19. A major risk arising from biodiversity loss, and climate change, is the emergence of new pandemics, as humans and livestock are brought into closer proximity with wildlife.[vi]
Biodiversity and biomass is being lost at an unprecedented rate and immediate action is required. More than a million species are at threat of extinction, including a third of the world’s 60,000 species of trees.[vii] The climate-biodiversity nexus means that biodiversity loss undermines climate mitigation, destabilising carbon sinks, and releasing long-stored carbon into the atmosphere.
Recognise the value of nature to climate mitigation and adaptation goals and to economic development
Nature can fulfil a bridging role delivering cost-effective and immediate carbon reductions while the capital and technology for widespread decarbonisation comes on stream. By supporting the vital role of nature, policymakers can help achieve NDC commitments and limit the economic impacts of climate change. Strong ecosystems support natural climate resilience, e.g., mangroves provide coastal flood protection, reducing the need for engineered infrastructural solutions. NBS provide many other economic benefits, especially in rural areas where investment will strengthen livelihoods and create new jobs.
By valuing nature, policymakers can be incentivised to fund its protection. For example, Ministries of Finance should recognise that reducing carbon emissions by conserving forest has greater overall value in achieving climate targets than the short-term benefits of deforestation.
In fact, he majority of NDCs include carbon reduction contributions from improved land management, and ongoing degradation of forests and other ecosystems undermines the contributions of other low-carbon transition initiatives .[viii] Visibility on progress that countries are making towards their NDCs are likely to impact countries’ credit ratings, see Rating agencies’ impacts on risk perception is critical above. A credit rating downgrade would increase the cost of capital and disincentivise investment. This provides a clear incentive to policymakers to recognise the impact of conservation on meeting their NDC and take action to support it.
The value of natural ecosystem services is frequently ignored by the market and, as a consequence, their economic contribution is overlooked in financial assessments. This issue is being addressed by the Taskforce on Nature-related Financial Disclosures (TNFD), which is producing a framework that provides transparency on nature-related risks and opportunities. [ix] This initiative will facilitate better capital allocation towards nature-positive solutions, opportunities and business models. Governments and FIs can also use TNFD disclosures to facilitate decision-making. Open-source data hubs can provide FIs with ecosystem data to facilitate asset-level assessments, similar to those that are being established for climate data.[x]
Enforce conservation laws to prevent loss of carbon sinks and biodiversity
There are mounting calls to speed up environmental protection, with The Inevitable Policy Response’s Required Policy Scenario calling for an end to deforestation before 2030 and the UN Convention on Biological Diversity (UN CBD) targeting the conservation of 30% of land and sea areas by 2030.[xi] Alongside these urgent goals, governments should prioritise the protection of existing conservation areas through enforcing environmental laws. Illegal logging and resource extraction must be controlled, as they undermine climate mitigation efforts and undercut sustainable activities in this sector.[xii] The consequences of lack of enforcement of laws is clearly demonstrated by the accelerated deforestation seen in Brazil since 2019.[xiii]
Alongside enforcement, securing community support for conservation is crucial. Indigenous peoples have extensive knowledge of sustainable extraction practices that can inform wider land use practices. A key feature of successful sustainable land use management programmes is the respect for indigenous land rights, and the support of local livelihoods and economic development.
Leverage natural capital to drive investment flows from developed to emerging markets
Biodiversity is often most concentrated in tropical countries, many of which are underdeveloped economies. Countries with abundant natural capital have a competitive advantage in delivering NBS, but few are taking advantage of the economic opportunities that this presents. By encouraging investment into natural capital, many developing countries could meet their NDCs more easily and attract investment flows from industrialised nations that seek NBS as an interim step towards decarbonisation.
Governments can fund conservation efforts and protect carbon sinks with labelled sovereign issuance – see Fiscal policy – reorient flows above. This has already been demonstrated on a modest scale in the case of blue bonds that were issued to fund ocean conservation in Seychelles and Belize, with the Belize bond funding a debt-for-nature swap.[xiv] These act in the same way as green bonds, providing investors with security that they are funding environmental protection.
Sustainability-linked bonds could be used to fund much wider conservation efforts. While most SLBs are linked to emissions reductions, these can also be linked to biodiversity metrics. This is similar to the sustainable land bond proposed in 2018 by Climate Bonds, with interest offsetting against land use emissions reductions.[xv] The Finance for Biodiversity Initiative has proposed nature performance bonds to invite dedicated investment into conservation and restoration activities.[xvi] The first US muni SLB, issued by the Arizona Industrial Development Authority funds forest restoration efforts, and its coupon step-up is linked to KPIs of restoring 36,000 acres of forest and increasing proportion of logs sourced from restored woodland.[xvii]
Government agreements on the export of carbon credits through Article 6 of the Paris Agreement will enable capital to flow from developed to emerging markets.[xviii] These can also be accompanied by other agreements, such as trade deals to lower the cost of importing renewable energy technologies, enabling developing tropical countries to play to their strengths in delivering NBS in exchange for low-carbon technologies from industrialised nations.
Reform carbon credit markets to deliver conservation and mitigation
Carbon credits can be used to fund conservation efforts, particularly in developing countries which may lack funds to protect conservation areas or currently rely on revenue from ecosystem resource extraction. The Paris Agreement Article 6 rulebook establishes rules for international cooperation through carbon markets and was agreed at COP26 in 2021. This includes important requirements such as the use of corresponding adjustments to avoid double-counting from country-to-country or project-level trades. The ‘overall mitigation of global emissions tax’ discounts the volume of credit going to the buyer by 2%. This is intended to ensure net additional reduction in emissions, rather than just offsetting CO2 released in one country with savings elsewhere.
The review of the Article 6 rulebook, to establish whether to apply additional safeguards or limits to the use of carbon credits is scheduled for 2028.[xix] However, safeguards and limits need urgent implementation to ensure carbon credits best facilitate net zero. Increasing the credit discount could discourage offset use which delays abatement.
Voluntary carbon market (VCM) reform is underway to ensure credits focus on protecting high-carbon and high-biodiversity stocks. The Integrity Council for the Voluntary Carbon Market (ICVCM) is developing guidelines for the supply side of the market. These guidelines include an assessment framework to establish whether the project meets its Core Carbon Principles, including additionality, permanence, and positive sustainable development impacts.[xx]
Differentiating certain carbon credits for preferential treatment could ensure credits focus on protecting high-carbon and high-biodiversity stocks. For example, credit discounts could be tiered according to the biodiversity impact of the credit, with the lowest discount applied to highly biodiverse credits.
Buy-side reform can ensure credits are only used to offset residual emissions. These are the GHG emissions that will remain from some economic activities, even after implementation of decarbonisation technologies. For example, current CCS technologies only capture up to 90% of emissions, while aviation does not currently have a clear emissions pathway[xxi]. Currently there are no limitations on who is qualified to buy carbon offsets from the market. However, producers can choose not to sell to certain buyers – awareness of the reputational risk of selling to fossil fuel companies and possibly facilitating greenwashing efforts.[xxii] However, these concerns may be swayed if fossil fuel companies offer high enough prices for offsets. Market reform is key to safeguard integrity.
The Voluntary Carbon Markets Integrity Initiative (VCMI) was established in 2021 to provide guidance on the use of carbon credits. For example, users must set science-based interim emissions reduction targets.[xxiii] Market reform could prohibit certain sectors from participating in the VCM or establish certain requirements for participation. This could limit the use of carbon offsets s to only hard-to-abate sectors.
Requiring carbon credit buyers to have 1.5°C-aligned transition plans alongside robust transition plan requirements can ensure offsets do not replace or delay carbon abatement action. For example, the Climate Bonds Credible Transition Principle requires that transition plan emissions reduction pathways do not include emissions reductions generated through offsets, see Figure 8.[xxiv] See Supervisors and regulators for further details on transition plan regulation.
The VCM is set to grow and is gaining international support on both sides of the market. For example, Japan will launch its GX League in April 2023, and companies will participate in voluntarily emissions offsetting through a national carbon credit market.[xxv]
These actions and others by policymakers will regulate the VCM and ensure that offsets fund conservation and do not hinder progress on abatement.
Payments for ecosystem services could create income streams for resilience investments
Payments for ecosystem services (PES), including for example watershed services (PWS) provide incentives for environment-focused management of natural resources. In a PWS system, a downstream service buyer (e.g., local water authority) compensates upstream resource users (e.g., a farmer using nitrate fertilisers) for changing their land use patterns so as to improve water supply. As an example, New York City adopted an integrated water resource management approach to protect the Catskill/Delaware watershed, incentivising improved land management to maintain clean water supply. This cost about USD1bn, providing significant savings when compared with the cos of installing water treatment facility, estimated at USD4-6bn.[xxvi]
Costa Rica provides an excellent example of how PES can incentivise the protection and restoration of forests. Since introducing a PES scheme in 1996, in response to decades of deforestation, forest cover has doubled and per capita income has tripled. The National Forestry Financing Fund compensates forest owners who adhere to approved management plans for protecting fresh water and biodiversity and providing carbon storage. PES are funded by beneficiaries such as water and hydroelectric companies.[xxvii]
PES schemes can ensure resilient ecosystem restoration and conservation. But basing payments solely on carbon sequestration targets can incentivise participants to plant the fastest growing plant species – which might be non-native and not conducive to biodiversity – for the quickest results. The best NBS projects encompass multiple objectives alongside carbon sequestration, including positive biodiversity and social outcomes. PES projects can be explicitly designed to meet the needs and ambitions of local communities. The San Ignacio lagoon in Mexico, for example, serves as a calving ground for grey whales, and a 340,000-acre area has successfully been protected by annually paying communal landholders USD25,000 per year to limit development in the surrounding area.[xxviii]