Challenge 8.6: How can biodiversity credits be designed in a way that provides simplicity for projects and buyers, and enables investment in Scotland’s nature?

Challenge summary

Biodiversity credits are an economic instrument that can be used to finance actions that result in measurable nature positive outcomes for biodiversity and the environment. They directly address the need for investment in natural capital, beyond nature’s role in managing the carbon cycle.

Biodiversity credits differ to biodiversity offsets - they can be part of a company’s nature-positive journey, an investment in nature’s recovery, rather than an offset for damage.

The development of biodiversity credit markets has the potential to help address the £20 Billion finance gap for nature in Scotland by leveraging responsible private investment into nature recovery, in line with the Scottish Government’s Biodiversity Strategy and Natural Environment Bill and the Interim Principles for Responsible Investment in Natural Capital.

This Challenge is one of the first being launched as part of the Innovate for Nature strategy, and falls under Mission 2 — More Than Carbon.

Key information for applicants

Please note: you must apply for this Challenge via Public Contracts Scotland

Launch date
Wednesday 9 November 2022

Closing date
Midday, Wednesday 30 November

Exploration Stage interviews
Tuesday 13 December 2022

Exploration Stage
9 to 27 January 2023

Accelerator interviews
Wednesday 1 February 2023

Accelerator Stage
27 February to 9 June 2023

Maximum contract value
£650,000

What does this mean?

Q&A session

A live Q&A session was held with the Challenge Sponsor team on Tuesday 15th November 2022. A recording of the session can be viewed here:

Supporting documentation discussed during the Q&A:

Funding for Biodiversity PDF

During the Q&A the Challenge Sponsors shared these links in the WebEx chat:

https://www3.weforum.org/docs/WEF_Biodiversity_Credit_Market_2022.pdf

https://public.3.basecamp.com/p/v1W1VSf72S9JKJ8MxP3LTTvN

Why does this Challenge need to be solved?

In Scotland there is a £20 billion funding gap for Nature Restoration, with no functioning mechanism for direct private investment in biodiversity.
Projects need to be aggregable at a sufficient scale to be attractive to corporate investment and ESG buyers, as well as enabling new funding mechanisms, via regulated exchanges, that could attract retail investment.
There is a lack of a common commercial mechanism for landowners to join up to, for landscape-scale restoration that fully takes into account the benefits to Nature, which is needed for both investors and to achieve the desired outcomes for nature – i.e. ecosystem intactness and integrity.
There is an insufficient financial incentive for landowners and managers to arrive at common agreement on land use and management across a landscape.
While a current lack of ’NBS Project Pipeline’ is cited to be holding back private investment, the reason for the scarcity of projects, is that carbon financing (currently the only established mechanism of private financing available to nature restoration projects) is often insufficient to make the project viable, compounded by a natural reluctance by landowners to sell their carbon credits, in case they would require them in the future to offset their own emissions.
Scaled up carbon financing opportunities are also constrained, by the fact the established Carbon Codes for Woodland and Peatland constrain purchases to UK only buyers. This is necessary, as the international regulations of the Voluntary Carbon Markets (VCM) determine UK credits sold internationally cannot be used towards achieving the UK's Nationally Determined Contribution (NDC) to the UNFCCC under the Paris Agreement, in response to the Glasgow Climate Pact.

How will we know the Challenge has been solved?

Biodiversity credits designed in a way that provides:

simplicity for developers of nature-based projects and buyers,

robust methodologies to ensure nature positive for biodiversity (linked into related work like the parallel biodiversity metrics project – see below),

join up with a UK-wide market approach, linked into the work of DEFRA,

join up with the International ESG markets, linked into the work of the TFND,

and an equitable share of benefits for local communities.

A trusted platform in Scotland, formed around a class of technically viable Biodiversity Credits, for pairing up Investors with Projects, is in operation and enabling the first wave of major Biodiversity Credit based transactions.

Highlighting and rewarding good practice, in line with published protocols and standards.

Access only available to investors/buyers passing a level of independent scrutiny with regards to ethical standards and the risks of greenwashing.
Ability to scale across UK, and ideally Internationally.

Who are the end users of the solution likely to be?

Buyers of Ecosystem Services (operational / for supply chain risk management purposes, ESG and CSR reasons)
Market places, brokers and Exchanges
Developers of nature-based projects and eNGOs
High integrity investors
Community groups and Local Businesses
Land Use Partnerships
Land-owners / managers, including Forestry and Agriculture and eNGOs
Scottish Government and other UK public bodies

Has the Challenge Sponsor attempted to solve this problem before?

A separate procurement for consultancy on Biodiversity Metrics in Scotland is being issued in parallel to this Challenge, designed to be complementary activity.
This workstream would add value to the existing National Strategy for Economic Transformation (NSET) Programme, where there are a range of market development initiatives taking place, but nothing specifically focussed on Voluntary Biodiversity Credits (VBCs).

Are there any interdependencies or blockers?

ScotGov/NatureScot are commissioning new research into Biodiversity Metrics in Scotland, that will be completed by March 2023. There is an expectation that the commissioned research teams will interface with both this challenge programme and the wider Scottish Nature Finance Pioneers community.
This challenge will be delivered in line with the Scottish Government’s Interim Principles for Responsible Investment in Natural Capital, and has the potential to shape these Principles, that were developed before full consideration of the Biodiversity Credit market could be discussed with stakeholders.
The viability of launching a Biodiversity Credit in Scotland is dependent upon the existence of a basket of proposed nature restoration programmes.
NatureScot’s Investment Ready Nature Scotland (IRNS - https://www.nature.scot/funding-and-projects/irns) funded projects will be delivered over an 18-month timescale, with a key milestone stage by March 2023.
Alignment (where relevant) with emerging UKG and SG ecosystem market frameworks and land strategies, e.g. in relation to policy on stacking and bundling. Including the DEFRA Ecosystem policy framework, to be published November 2023.
Alignment with the UK Carbon credit system.
Alignment with the work of the Taskforce on Nature-related Financial Disclosures (TNFD) and the UN Development Programme.
Awareness of and where necessary alignment with the principles and goals of the Scottish Biodiversity Strategy and relevant international obligations for Scotland, in particular the emerging UN CBD Global Biodiversity Framework, Goals and Targets.

Will a solution need to integrate with any existing systems or equipment?

Carbon credit registries and Voluntary Carbon Market frameworks.

Any technologies or features the Challenge Sponsor wishes to explore or avoid?

This challenge is based upon a Voluntary Biodiversity Credit, as proposed by the World Economic Forum in their recent whitepaper (see Policy Background section).

As this field is emerging, there are no official definitions of a Voluntary Biodiversity Credit (VBC), however the following are the basis of our understanding and interest:

A tradeable unit representing a biodiversity claim defined using a scientific methodology. This is in contrast to a regulated Biodiversity Offset credit used for compliance purposes which in most cases would presuppose the existence of “equivalence” (i.e. like for like replacement of lost habitat).
VBC is generated for purposes of a corporate’s own nature-positive commitments without necessarily being used for compliance; hence does not require “equivalence”.
Access to a Biodiversity Credit Methodology - as a scientific peer-reviewed technique to robustly document biodiversity claims.
Project Standard - complete set of principles and actions towards generating certified Biodiversity Credits through a project or jurisdictional approach.
The Project Standard would mandate use of a certain BD Credit Methodology and identify a set of endorsed methods.
Validation and verification of claims – process which engages a qualified organization in confirmed validity of VBCs and thus confirming legitimacy of their issuance.

While recognising potential future market activity on Biodiversity Offsets, in line with the call to action by the World Economic Forum (see Policy Background section), we’re constraining this challenge to be focussed on the definition of a Voluntary Biodiversity Credit that does not encompass strict “like-for-like” offsetting and compliance-based markets.

We are seeking to support and work with business model innovators, with technology innovation welcome.

The following solutions are within scope, while not an exhaustive list, with favour given to concepts that would have strong alignment with VBC market opportunities, and works towards addressing ‘blockers’ to establishing a Nature Finance Market in Scotland (from research by the Scottish Nature Finance Pioneers)- see figure below:

Nature restoration methods.
Land Use Partnership and Community-Driven models.
Techniques for supporting baseline and monitoring requirements.
VBC Credit Methodologies.
Marketplaces and brokerage platforms.

What is the commercial opportunity beyond a CivTech contract?

The initial aim of this challenge is to help build a robust biodiversity credits market for Scotland the rest of the UK. Beyond that though, there is potential for scaling in other regions internationally, to serve the global ESG market’s demand for nature restoration projects.

Who are the stakeholders?

Local Authorities
Community groups
Land-owners
Enterprise Agencies
Scottish Government and other public bodies
Existing Codes e.g. Woodland Code, Peatland Code, Wilder Carbon and Soil Association
Scottish Water and SSE have good experience with biodiversity metrics to share

Who’s in the Challenge Sponsor team?

The Challenge lead will be Simon Herko, Network Lead of the Scottish Nature Finance Pioneers, closely supported by Scottish Government’s Private Investment in Natural Capital Programme.

For more information about the Scottish Nature Finance Pioneers, please see link:

https://www.nature.scot/doc/scottish-nature-finance-pioneers-grow-restore-prosper

Additional support will come from the Scottish Nature Finance Pioneers network of 330 professionals and scientists, including a community of project developers (c 80 individuals). A reference group will also be established, with representatives from the Nature Finance eco-system. There will also be support from NatureScot and Scottish Government’s Environment and Forestry Directorate.

What is the policy background to the Challenge?

Our Biodiversity Strategy and Natural Environment Bill will set targets to demonstrate progress towards our globally leading ambition to halt the loss of nature by 2030 and make significant progress to restoring our natural environment by 2045, including in particular high-level existing commitments to expand protected areas to 30% of Scotland and to establish Nature Networks across Scotland. The design of a post-CAP scheme for supporting land managers is also potentially relevant.

Within a global context, the current Biodiversity Credits market has originated from two decades of practice across a range of different approaches. One lesson learned from this experimentation is the essential need for clarity on the difference between Biodiversity Offsets and Biodiversity Credits. There is no functioning Biodiversity Credit market in operation in Scotland (nor an offset market, though the focus of this challenge is on the former).

Biodiversity Offsets are designed to compensate for significant residual adverse biodiversity impacts arising from project development after appropriate prevention and mitigation measures have been taken. The need for equivalent ecosystems helps explain why biodiversity offsetting schemes are entirely local.

Biodiversity Credits are an economic instrument that can be used to finance actions that result in measurable positive outcomes for biodiversity (e.g. species, ecosystems, natural habitats) through the creation and sale of Biodiversity Units. Applicants should note that the Scottish Government uses the following definition of biodiversity: “biodiversity is the variety of all living things and ecosystems. It includes plants, animals, fungi and micro-organisms including terrestrial, marine and other aquatic ecosystems and the ecological complexes they are part of; this includes diversity within species, between species and of ecosystems”.

While Biodiversity Offsets and Credits may look similar in design, what distinguishes them from each other is the intention of the purchase and the claims that are made around that purchase. The purpose of the World Economic Forum’s initiative is to design Biodiversity Credits that are part of a company’s nature-positive journey – an investment in nature’s recovery, rather than an Offset for damage.

Since Offsets require “like-for-like” and biodiversity is not fungible at the global scale, the World Economic Forum suggest that Biodiversity Credits serve as an additional or parallel step in the mitigation hierarchy, articulated by the Science Based Targets Network (SBTN) as “Avoid, Reduce, Restore & Regenerate, Transform.”

For more background please see WEF Biodiversity Credits: Unlocking Financial Markets for Nature Positive Outcomes – link below: