COP16, taking place in Cali, Colombia, will focus the attention of governments, companies and investors on the struggle facing nature. The sobering background to the “biodiversity COP” is that the world lost 16% of humid primary forest cover over the last 20 years,[1] and wildlife populations declined by 73% between 1970 and 2020.[2]
For investors, the challenge is equally complex. Beyond identifying risks and mitigating negative impacts, they must identify opportunities to restore and conserve nature. The Global Biodiversity Framework (GBF) highlights the need for private finance as part of its goal to mobilize USD 200 billion per year for biodiversity.[3]
The role of the voluntary carbon market
The good news is that the private sector is increasingly acknowledging the risks of nature loss and the part they have to play. Over 450 organizations have committed to nature-related disclosures through the Taskforce on Nature-related Financial Disclosures (TNFD) and 150 companies have pledged to set targets based on guidance from the Science-Based Targets for Nature, which provides an action framework for addressing nature loss.
Private finance for nature has increased more than tenfold in the last four years, totaling just over USD 100 billion as of June 2024, according to research from the United Nations Environment Programme Finance Initiative.[4] Sources of private capital include equity, debt, green bonds and philanthropy. The VCM is a growing source of private capital, with nature-based projects making up 80% of the USD 18 billion raised between 2021 and mid-2023. In these projects, nature is central to the reduction or removal of CO2 emissions. For instance, reforestation removes CO2 from the atmosphere, while protecting tropical forests reduces CO2 emissions by preventing deforestation.
Major deals in the VCM include advanced market commitments from companies like Meta Platforms Inc. and Microsoft Corp. Both have signed long-term offtake agreements for afforestation and reforestation (ARR) credits, with Meta committing to 1.3 million credits and Microsoft securing 8 million credits.[5]
The quality of nature-based carbon projects and the provision of ecosystem benefits beyond reducing carbon emissions can vary significantly. Nature-based projects do, however, make up more than half of VCM projects achieving an MSCI Carbon Markets quality rating of AA or higher.
Measuring biodiversity benefits
While supporting nature and capturing carbon seems like a win-win, quantifying the scale of the ecosystem benefits requires extra work, as each project differs in terms of location, topography, choice of tree species and composition and management practices.
Potential biodiversity benefits of ARR projects
For example, some 66% of 670 ARR projects globally have potential for biodiversity uplift, with 10% having high potential, as shown in the exhibit.[6] Biodiversity impacts are complex and a function of several factors associated with the geography of the project area. Geospatial analysis by MSCI Carbon Markets assesses global forest carbon projects using various geographical factors to determine their biodiversity potential. For reforestation projects, this includes not only the project in its current state, but also incorporates the potential positive impact on biodiversity from a fully-planted forest and resulting reduction in forest fragmentation, or biodiversity uplift.
Nature-based carbon projects — a potential USD 100 billion market
Nature-based assets create a potential win-win-win solution to climate change: capturing carbon from the atmosphere, providing significant biodiversity benefits and requiring relatively modest cost.
The global carbon-credit market could be the answer to the ongoing challenge of funding this approach. The market could be worth USD 5-24 billion in 2030, USD 20-70 billion by 2040 and USD 30-200 billion by 2050, according to projections by MSCI Carbon Markets. We also estimate that nearly half of this demand could be for nature-based solutions, creating a potential source of capital for these projects of up to USD 12 billion in 2030 and USD 100 billion by 2050. Much of the potential for nature-based projects could be delivered at under USD 75/t CO2e.
