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Nature conservation is not typically recognised as being a priority for investors. In fact, financial services and nature conservation have often been at odds, with economic incentives traditionally driving the exploitation of nature.

Restoring nature and biodiversity is essential for sustaining fundamental ecosystem services that businesses often take for granted, such as air purification, food production and water cycles. These services are vital to preserve societal well-being and economic stability for future generations. Biodiversity restoration also serves as a powerful tool in mitigating the climate crisis as functioning ecosystems can enhance carbon storage potential and bolster natural buffers against the impacts of climate change.

Investors are becoming increasingly aware of this, due mainly to the sheer scale of the crisis of nature and biodiversity loss the world is facing and the risks this may pose to their portfolios. It’s driving a recalibration of the way our economy values natural capital, expanding the potential for financial instruments to incentivise conservation. Nature-based Solutions, that are supported by carbon markets, are one example of this expansion. Beyond putting a financial value on carbon sequestration, Nature-based Solutions offer opportunities to invest in projects that drive the regeneration of biodiversity (for example native species promotion and high-value habitat restoration) into their core impact outcomes while earning investment returns.

This investment approach not only holds the potential to contribute to mitigation efforts against the effects of climate change, but also broadens the lens of how we consider the impacts of our investment decisions on the environment, ecosystem services, local communities, and broader societal change.

We’ve overshot our planet’s key biodiversity boundaries

Biodiversity represents the rich variety of all living things on our planet.  Its innate complexity is the driver of nature’s adaptability and resilience. Human evolution and industrial growth are eroding this diversity, and the demands of a rapidly growing population are driving the extraction of natural resources far beyond what the world can sustainably provide. We’ve overshot 6 of the 9 planetary boundaries[1] and deforestation in Australia is worse than in any other developed country[2].

At a time when it is most needed, we have damaged and continue to damage the world’s natural buffer against climate change by reducing its capability to drawdown and store atmospheric carbon. To maintain our societal wellbeing and economic stability for future generations, it is vital that we find ways to redesign our systems and processes away from extraction, and integrate solutions that can heal and reverse the damage to nature and biodiversity already caused.

Carbon Markets Can Shift Economic Incentives Towards Regeneration

While financial markets have proven slow to value nature, and further to internalise the risks that flow from a dependence on nature, the Australian carbon market can be utilised as a powerful economic signal to incentivise environmental renewal.

By ‘pricing in’ nature loss and pollution as a cost of doing business, it incentivises regeneration rather than extraction.

Carbon markets were developed to reduce carbon emissions through a range of channels. They are an important component in the transition to a net zero economy, providing a mechanism for polluting companies and individuals to quantify carbon emissions.  The extension of which is a mechanism to pay for carbon draw-down and storage. It’s a form of compensation, but pricing carbon also acts as an incentive to actively reduce emissions, as offsets increase the cost of ‘business as usual’.

On the ground this shifts the way a natural asset is valued, increasing the value of conserving it in its original state, as opposed to clearing it for traditional industrial output, like agriculture or commercial forestry.

Carbon markets are an important transition mechanism to enable  investment in critical nature and biodiversity restoration programs that are vital to the achievement of net zero goals. Commercialising solutions can make these conservation projects more sustainable over the long-term so they aren’t at the whim of philanthropic or government funding. It also gives impact aware investors an opportunity to allocate capital into structures that offer the potential for attractive returns as well as a measurable positive impact.

Carbon Offsetting Should Be Used Appropriately

The ‘value’ of a carbon credit can be used to offset emissions released somewhere else.  While this process is intended to be at least net-neutral in terms of emissions reduction, there is an expectation (by net zero frameworks like Science-based Targets[3]) that offsets should only be used for emissions that are unavoidable. These are the residual emissions that remain after a company or organisation makes concerted abatement efforts within its own operations and supply chain.

Without a market for carbon avoidance and removal, these emissions would still be released, but society would have lost an opportunity to fund regeneration and sequestration activities.

While it will require ambitious and evolving regulatory support to ensure that genuine emissions reductions are prioritised, it’s encouraging to see data emerging[4] showing that companies using carbon offsets are also more likely to be reducing their core emissions.

As the carbon market evolves, it’s up to investors and carbon project managers to manage the use of credits, and the parties that are permitted to purchase their credits.

A set of principles are emerging, such as the Oxford Principles for Net Zero Aligned Carbon Offsetting[5], that would only allow companies to use offsets if they meet a stringent set of criteria related to their own emission reduction and abatement progress and pathways.

How to Identify ‘High Integrity’ Projects, and Avoid Carbon Credit Risks

Carbon credits are essentially a token representing the avoidance or removal of carbon emissions: where one credit equals one tonne of carbon dioxide equivalent emissions. While this might seem like a simple metric, there are a wide range of accepted carbon removal methodologies to generate a carbon credit.  This diversity means those investing in carbon credits have to do their homework to ensure they are in fact additional in nature, correctly used, and generating positive outcomes for ecosystems more broadly.

There are a few key factors to consider:

Integrity – this relates to factors such as the additionality, verifiability and permanence of the outcomes that a carbon credit promises. All projects are unique and require specific due diligence.

Use-case – for those producing and selling nature-based solutions like carbon offsets, it’s important to also consider how the buyer (offtaker) of these credits is intending to use them. Is it to offset unavoidable emissions? Or is there risk it will be used in place of genuine emission reduction action?

Impacts – the positive impacts of nature-based solutions are not only the number of carbon credits produced, but also their social and/or environmental co-benefits. Projects should seek to maximise these social and ecological benefits while carefully assessing and mitigating any potential social or environmental harms that could arise from the project. There is now an exciting opportunity to look deeper and explore a broader suite of nature-based solutions that address not only climate change but also biodiversity loss and impacts on vulnerable communities.

Designing Carbon Credit Projects for Biodiversity Outcomes

There is an emerging category of carbon credit methodologies that is specifically designed to sequester carbon in a way that also restores and protects native ecosystems, while engaging with local communities.

This represents an evolution of carbon markets, towards a broader appreciation for the need to integrate the protection and regeneration of biodiversity. These carbon credits can be identified through environmental co-benefit designations such as ‘biodiversity’.

Impact Capital is Driving the Shift to a Nature Positive Economy

Slowing climate change and reversing the crisis of biodiversity loss will take concerted effort from disparate groups across our economy.  It will require determined systems-change. Many actors and sectors are needed to re-engineer the economy towards adequately valuing nature.

Recognising that carbon credit markets are just one component of the work needed to transition the economy from fossil fuel usage, it’s Sentient’s view that carbon credits will play an important role in the economy’s transition to becoming nature-positive; and that policy and regulation is needed to ensure they’re used correctly, and not in place of genuine emission reductions.

Transparency, education and regulation is needed to ensure the carbon credits produced are additional and have environmental and social co-benefits. Without market-based incentives, of which carbon credits are an example, the price of polluting will stay low, allowing the status-quo to continue with potentially catastrophic climate and environmental consequences.

Carbon credits are already playing an important role in this transition to net zero, and emerging carbon projects are integrating biodiversity outcomes that deliver a broader set of positive impacts to ecosystems, society and the economy.  Such projects, provide impact investors the opportunity to allocate capital into structures that demonstrate the potential for attractive returns alongside measurable positive impact. Carbon markets can help to mainstream investment in nature into the broader investment market – the ultimate result that impact investing seeks.