From carbon markets to nature markets: are we ready?

Demand signals a move beyond carbon as climate and nature become a dual challenge

Sustainability professionals from the most well-known UK and global organisations gathered for one of the most prestigious events in the calendar in March – Edie24. Delegates attend to: 

• Learn about the changing landscapes of sustainability frameworks, policies, standards, and instruments required to implement best practices.

• Seek direction from trailblazing leaders setting precedence through innovative thinking. 

• Network and drive collaborative action. 

• Explore how best to navigate and manage the opportunities and risks of sustainable economic growth, honing in on areas such as social responsibility, governance, and climate and nature.

As a solutions provider enabling organisations to take meaningful and deliverable action to restore our natural ecosystems, we found ourselves immersed in conversations around investing in climate and nature.

From these conversations, one thing was evident: the focus has moved beyond solely carbon (TFCD) reporting, with organisations seeking ways to report, disclose and invest in the combined challenge of climate, nature (TNFD) and community.

Having been instrumental in setting up the UK’s voluntary carbon market, Forest Carbon knows firsthand what is involved in creating new metrics and a new market. This article explores why we find ourselves at a crossroads, the role the carbon market might play in successfully setting up nature markets, and the responsibilities of organisations in the meantime.

Why the ‘move beyond carbon’? A recap

Most businesses now recognize the connection between climate, ecosystems, and communities and are beginning to look for ways to address all three together, rather than in isolation. This shows that our understanding and approach to nature is maturing.

Additionally, in the wake of negative media coverage regarding questionable methodologies, claims and human rights issues, many are fearful of the reputational risk of investing in carbon (or carbon dioxide equivalent, which accounts for all greenhouse gases) schemes.

As a result, expected growth in demand across the voluntary carbon market stalled in early 2023. Focus (and funding) was redirected into developing much-needed infrastructure and initiatives to improve integrity, transparency, and quality. This shift aimed at restoring buyer confidence, thereby facilitating the true scaling of the market.

In the meantime, many that did still choose to engage in carbon markets started either ‘greenhushing’ (not publishing their involvement with the public) or adapting language away from absolute compensation to more contribution-focused impact.

An underutilized VCM, and 'not yet' on nature markets

The ‘scaling of the carbon market through heightened integrity’ hasn’t happened quite yet. Demand suggests organisations are still holding out for unquestionable and unequivocal carbon claims to allow them to invest (or shout about investing) without reputational risk. They may also be distracted by the pending holistic nature market on the horizon, furthering their ‘sit and wait’ mentality.

VCM authorities, including ourselves at Forest Carbon, can see why this strategy is being adopted but are concerned about what this means for immediate climate action and (by extension) nature.

“If the VCM remains underutilized, the world will miss an opportunity to funnel potentially billions of dollars into climate action… Waiting passively for the perfect solution is not an option – corporations have no choice but to navigate the uncertainty and learn in the open.” WEF, 2023

We fear nature markets will face the very same obstacles, exposures and challenges that the VCM has, which would mean a turbulent pattern in corporate demand, pricing and project development.

Whilst some are taking the early plunge into murky waters of funding positive nature impact, the resounding answer from those at Edie24 was… “not yet, but we desperately want to!” 

What the private and public sectors need to resume voluntary nature investment

Taskforce for Nature-Related Financial Disclosure (TNFD)’s reporting framework leads the way in supporting organisations to understand and disclose nature-related risks. Despite this, uncertainty prevails for public and private organisations around the best way forward. Their repeated (and all too familiar) plea calls for:

1. Simple, clear frameworks and direction, endorsed by recognised high-quality standards and/or governments, to begin their dual climate and nature programme.
   
   At Edie, a sense of confusion still prevailed, with question marks around: which standards and frameworks they should use. Why are there so many? Which aligns with the integrity initiatives? How well-equipped are they for certain sectors/industries? Does it bring climate and nature into one neat, packaged solution? And, how can they begin implementing these solutions across their business?
   
   
2. Robust and rigorous processes; tools and approaches that are appropriately sectorial-focused; highly accurate measurement, verification and reporting procedures; and finally high-quality deliverables.

Forest Carbon’s thoughts on this…

This leaves us with a lot of questions…

• The timing gap - How far are we from being able to deliver on the above?
• The funding gap - Is it going to be affordable and who pays for it? Where does the responsibility lie?
• One market or many - Do we create new voluntary markets for biodiversity and other nature/social impacts (water quality, community benefits, etc.) to sit independently of one another? Or, do we look to converge and build upon the somewhat established carbon market and transition it into an all-in-one ‘nature market’? 

Knowing the scrutiny that carbon – a single and comparatively easy metric to measure – has come under, what hope does the MRV of highly complex biodiversity metrics have of being ready and unquestionable within the next few years? And this is without delving into the complicated world of locality and pitting species against one another.

We know carbon markets aren’t a ready-to-go solution, but we favour the option of building upon what we have. Otherwise, we may risk duplication of efforts and stretching of people resources - slowing down the pace of impact.

Getting the balance right…

We’re proud that our sector is built out of science and academia, but we’re struggling to find the sweet spot where science is upheld but the market is practical enough to attract commercial attention. We need to overcome restrictive barriers to support much-needed capital flow into the market.

As one of the pioneers in the UK VCM, we have firsthand experience of what actions are necessary to catalyze the creation of a market. It’s a catch-22. It requires earlier movers to take a leap of faith to begin generating demand, in turn stimulating further investment.

However, to attract investment and further scale, it also has to be built upon solid foundations and offer high returns (in this case – high-quality projects in a highly transparent, functioning market) – which requires confidence in the demand.

The two work in a fine balance alongside one another, and risk collapse should one waiver. This means a high level of risk somewhere in that mix! Do you see the pattern emerging here?

Therefore, despite the voluntary carbon market being a potentially unfavourable, ‘wobbly’ stepping stone for some, we see it as a critical position and example to stand upon to reach the next step(ing stone) for nature markets.

With global targets looming, corporates again will need to take the plunge and further open themselves up to risk. To be willing to enter and invest in an imperfect market and transparently communicate their action in line with current best practices at that time. 

The alternative solution is to wait for the infrastructure (standards, metrics, verification procedures) to catch up, which won’t happen without some optimism of commercial returns in the future.

Perhaps, as the public becomes more nature and climate-literate, they will also become more forgiving of early movers, recognising that moving now using an imperfect market (with a heightened risk of getting it wrong) is better than not moving at all. Furthermore, it's necessary if a nature market is going to develop at all.

We can’t afford to wait

The voluntary carbon market is an imperfect solution. However, it is an established, semi-regulated solution that we can use now while nature reporting develops.

Remember that while the VCM trades in carbon, there are very few – if any –  of our projects that only deliver carbon as a benefit. For example, our woodland and peatland schemes typically reduce flood risk, uplift biodiversity, create habitat corridors, improve air quality and provide access to green spaces for locals, alongside carbon capture.  

Both globally and in the UK, we welcome the innovation that will allow us to quantify our co-benefits through new nature metrics and frameworks. This thinking will help us understand how we view ecosystems holistically and develop stacking and bundling options to help monetise the value of nature and ecosystem services. 

A few organisations leading in this innovation are:

• DEFRA Biodiversity metrics

• FIRNS

• NFCA independent industry-led working groups. 

• Nature Metric 

• WCC and PC developing stacked biodiversity impact measurements. 

We are hopeful that these initiatives will allow voluntary private sector actors to plug the funding and timing gap needed for nature restoration. However, we recognise that we’re not going to have a perfect solution in the immediate future. Therefore we call for organisations not to abandon carbon funding whilst the nature market develops and the co-benefits of our projects remain qualitative.