Biodiversity Credits: Opportunities and Challenges for Financial Institutions

Coauthored by Nagadarsan Suresh and Ian Trim

Biodiversity is an increasingly prominent topic for organizations, driven in part by a range of regulations and reporting frameworks that require businesses and financial institutions (FIs) to disclose the impact of their activities on biodiversity, such as the European Commission’s Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation.

The Role of Biodiversity Credits

In this context, biodiversity credits have emerged as a tool for organizations to address their biodiversity impacts. These credits are economic instruments allowing private companies to finance activities aimed at delivering positive biodiversity outcomes. Credits are generated by project developers that deliver a net-positive impact on nature and biodiversity, such as companies focused on conserving or restoring land and species. Credits may represent a certain amount of land or habitat conserved or restored over a specific period of time—for example, one biodiversity credit could be valued as 50 m² of land restored for 30 years. Organizations might purchase credits to compensate for negative impacts on biodiversity in one location by funding an equivalent positive impact on biodiversity in another area.

FIs could use biodiversity credits to help them meet regulatory or voluntary biodiversity-related commitments, but they must be cautious in incorporating them into their regulatory disclosures. Just as with carbon, a strict mitigation hierarchy should be followed for biodiversity-related impacts. The primary focus should be on reducing direct impacts. Biodiversity credits should serve as a complement to these efforts, ensuring that any claims of compensation are transparent, credible, and aligned with regulatory expectations.

A strong biodiversity credit market should facilitate the financial flows required to achieve the targets of the Global Biodiversity Framework. Target 19 of this framework sets out to substantially increase financial resources for biodiversity and close the biodiversity financing gap.

The Global Biodiversity Framework’s Financial Targets

(Source: Guidehouse/Secretariat of the Convention on Biological Diversity)

Biodiversity Credits vs. Carbon Credits

Although often compared, biodiversity credits and carbon credits have some fundamental differences in how they are measured and used:

• Carbon credits aim to reduce or remove greenhouse gas emissions to combat climate change, whereas biodiversity credits aim to preserve and enhance biodiversity.
• Carbon credits are purchased primarily to offset emissions. Biodiversity credits focus on net contributions, as nature is inherently unique, and restoring one habitat cannot offset the destruction of another.
• Carbon measurement is relatively straightforward—one ton of CO₂ saved should (in theory) have the same value regardless of location—whereas the value of biodiversity is variable and location-dependent. Unlike with carbon, there are no universally agreed-upon “biodiversity pools”; instead, biodiversity is assessed through proxy indicators that are highly influenced by local factors (e.g., species diversity). This means that biodiversity credit metrics and units will likely be highly diverse, making them less tradeable.

Criticism of Biodiversity Credits

As a market-based tool for environmental protection, biodiversity credits are likely to face similar headwinds as the carbon credit market. As with carbon credits, biodiversity credits must demonstrate that they are additional (i.e., gains would not have occurred otherwise), that biodiversity gains are permanent (i.e., they remain after the project is completed), and that there is no leakage (i.e., the biodiversity gains due to the project do not cause biodiversity losses elsewhere). Further, like carbon credits, biodiversity credits face issues such as double counting and false claims of benefits, which must be addressed to ensure a viable market. A key lesson from the carbon market is that a lack of transparency and integrity could undermine trust and hinder market growth.

Additional challenges for biodiversity credits include the absence of standardized metrics for impact measurement and the difficulty of establishing effective monitoring, reporting, and verification mechanisms, due to the complexity and localized nature of biodiversity. A further challenge is the complexity of establishing a baseline against which biodiversity gains are measured. Creating the wrong baseline could inadvertently incentivize scenarios where biodiversity is intentionally destroyed prior to monitoring in order to inflate the monitored biodiversity “gain.” A number of institutions and verifiers—including Verra, Plan Vivo, and the World Economic Forum—are developing methodologies and integrity principles for the biodiversity credit market that will enable assessment, verification, and certification of biodiversity benefits. Addressing these issues is essential for building a credible and trusted biodiversity credit market.

Key Considerations for Financial Institutions

Biodiversity credits present several challenges for FIs. Accurately evaluating the impact of investments in biodiversity credits is complex, and investing in flawed biodiversity credit schemes may cause unintentional harm to ecosystems, thereby risking reputational damage.

Another concern is the uncertainty around claiming biodiversity credits. The lack of a well-established, globally recognized biodiversity credit scheme leaves investors unsure about the type of claims they can make with these credits.

Furthermore, pricing issues complicate investments. With no global reference price and significant price variability due to the localized and diverse nature of biodiversity projects, the price of biodiversity credits is expected to vary. In addition, biodiversity credit purchases are highly localized, often resulting in high prices. The UK government has enabled statutory biodiversity credits as a last-resort path to meeting the requirements of its biodiversity net gain regulation. These credits range in price from £42,000 ($55,000) to £650,000 ($844,000) per unit, depending on the level of distinctiveness of the habitat in question.

Ultimately, while biodiversity credits offer potential for positive impact, their success will depend on developing standardized frameworks, reliable verification processes, and transparent practices that ensure real, measurable biodiversity gains.