Globally there is a significant funding gap for nature, estimated at more than USD700 billion per year [1]. This is the gap between how much is currently spent and how much is needed if biodiversity decline is to be reversed. Nature markets are emerging internationally as part of the response to the global decline in biodiversity caused by this significant underinvestment in nature [2].

In previous articles, we’ve explored the concept of nature-positive infrastructure (NPI) and how New Zealand's regulatory reform and policy direction could create opportunities for NPI to help restore and regenerate New Zealand’s unique biodiversity. For this article we expand on the potential role of nature markets, such as the biodiversity credit system consulted on in 2023 [3], in creating the conditions to support a transition to NPI.

Funding gap for nature 

All businesses depend directly or indirectly on natural capital (i.e. geology, soil, air, water and living things) and ecosystem services (the benefits derived from natural capital which make life possible). For example, a wetland is a natural capital asset which supports biodiversity and provides ecosystem services such as natural water filtration and regulation of water flow. It is estimated that more than half of the world’s total GDP is moderately or highly dependent on nature and its services, and therefore exposed to risks from nature loss [4].

Nature’s worth to society – the true value of the various goods and services it provides – is not reflected in market prices because much of it is open to all at no monetary charge [5]. This has led us to invest more in other assets, such as produced capital (e.g. road, buildings, and factories), and underinvest in natural assets. The effects of business impacts on nature can be hard to trace and often go unaccounted for, further adding to the challenge and giving rise to widespread negative ‘externalities’ – consequences of an activity that are not reflected in the cost of the activity. 

There is a need to find efficient and effective ways to share the cost of restoring and enhancing natural capital assets and provide businesses, landowners, and custodians of land with the incentives and resources to positively integrate nature with new infrastructure and other land uses.

Nature markets

Nature markets make the services nature provides more visible and enable those who benefit from those services to help pay for them. Nature markets encourage private investment in nature by creating a revenue stream for nature-restoration activities such as reforestation, wetland creation, and peatland conservation. These revenues come from the sale of credits or certificates for the ecosystem services the activities generate.

• Nature certificates typically represent the rights to some or all of the benefits of a specific nature-based activity, such as a reforestation project. Australia’s Nature Repair Market is an example where certificates will be issued for verified nature-based activities.
• Nature credits are market instruments that represent a standardised and verified quantity of one or more biodiversity and ecosystem services delivered by nature-based activities. Nature credits can be bought by individuals or organisations to enable them to meet their business interests, voluntary commitments, or regulated obligations to protect and improve the environment. For example, in the UK ‘Biodiversity Units’ are a form of nature credit used by developers to meet biodiversity net gain obligations [6].

Nature credits can take different forms (depending on the particular market):

• Ecosystem credit which is a single credit that represents a quantity of a whole ecosystem including the biodiversity and ecosystem services it delivers. 
• Biodiversity credit which is a single credit that represents a standard quantity of improvement in the stock of biodiversity from a nature-based activity. 
• Ecosystem service credit which is a single credit that represents a standard quantity of improvement in an ecosystem service from a nature-based activity.

Nature credit markets can provide an important mechanism to support the delivery of NPI where nature and biodiversity net gain are incorporated either directly into infrastructure project design, or by alternative ecological restoration and enhancement. Infrastructure projects can be both suppliers and buyers of nature credits.

Infrastructure projects as suppliers of nature credits

In New Zealand, major infrastructure projects typically seek to avoid, remedy, or minimise their negative impact on the environment, consistent with their obligations under the Resource Management Act 1991. However, well designed infrastructure can also make a positive contribution to restoring and potentially enhancing the natural environment and ecosystem services.

Planning infrastructure projects to deliver net improvements in biodiversity and ecosystem services, i.e., NPI, creates the potential to generate and sell nature credits that can help fund activities.

Infrastructure projects as buyers of nature credits

Some infrastructure by virtue of its type or location, may not be able to incorporate sufficient nature restoration activities to enable the infrastructure on its own to be nature-positive. In this situation, nature markets provide an opportunity to acquire nature credits to make up any shortfall.

Nature credits can be obtained for:

• offsetting direct impacts of the infrastructure where impacts have been avoided and minimised to the full extent that is possible; and 
• compensating for the indirect impacts of the infrastructure from the supply of materials, e.g., steel, concrete etc.

Nature credits are inherently geographically specific. For example, loss of New Zealand biodiversity cannot be compensated by improvements in Australian biodiversity. Nonetheless, efforts are being made to develop standardised approaches to creating biodiversity credits that can be purchased from different locations [7].

Different types of nature credits will typically be required to mitigate direct and indirect impacts. Credits for direct impacts will need to be obtained from markets in the biogeographical area where the infrastructure is located. Credits for indirect impacts will need to be supplied from markets in the locations where the materials are produced.

Addressing indirect nature impacts therefore requires working with resource and material suppliers who are themselves actively assessing their nature impacts and willing to work collaboratively and transparently with developers to deliver infrastructure.

Nature markets that are well regulated and governed can supply verified nature credits to address direct and indirect impacts of infrastructure.

Nature market governance

Poorly designed, regulated, and governed markets can lead to negative outcomes for the environment, as has been illustrated in some voluntary carbon markets. There are a range of national and international initiatives that aim to ensure that nature market development is based on integrity.

In the UK, the Financing Nature Recovery UK initiative [8] set out a framework for high integrity nature markets. The Framework provides a strategic overview of the key elements required to scale-up high-integrity markets for nature with a focus on market design, market governance, and market operation.

Investment framework for high-integrity environmental markets

Source: The State of UK Nature Markets October 2023 [9]

The purpose of a market framework is to create the market conditions required to ensure ‘high-integrity’. An indicative set of market supply and demand side conditions and the conditions for market operators are set out in the tables at the end of the article.

Oversight is critical for effective market governance, to build and maintain trust and confidence amongst buyers and suppliers, regulators, and the public in the efficacy of nature markets.

Two examples of emerging market governance mechanisms are:

• Environmental Markets Board (UK) [10]; and
• EcoMarkets Australia (Australia) [11].

Governance framework for participating Environmental Markets in the UK

Source: Environmental Markets Board

Nature markets in New Zealand

As discussed previously, the Ministry for the Environment and the Department of Conservation consulted late last year on a biodiversity credit system intended to incentivise protection and restoration of native wildlife in New Zealand. The proposed biodiversity credit system sets out to conserve habitats and species by enabling landowners, who protect and restore native wildlife, to earn credits for their actions. The consultation discussion document recognises that to properly protect nature, much greater funding is needed to support the efforts of both public and private landholders [12]. Although not focused on infrastructure, if implemented, the biodiversity credit system aims to attract investment to close the biodiversity funding gap and protect, maintain, and restore biodiversity, to deliver nature-positive outcomes.

Nature markets could also assist New Zealand companies to manage nature risk. The Task Force on Nature-related Financial Disclosures (TNFD) released its final framework for nature-related disclosures in 2023. This framework provides guidance to companies and financial institutions for assessing, disclosing, and managing nature-related risks and impacts. A nature market could provide a delivery mechanism by which New Zealand companies can manage their nature risk by acquiring nature credits that provide verification of their efforts to restore and regenerate New Zealand’s biodiversity.

Conclusion

Nature markets are a tool governments and businesses may use to facilitate investment in nature-based activities that can be paid for through the sale of credits for the biodiversity and ecosystem services that they provide. Nature markets have the potential to help restore and regenerate New Zealand’s unique biodiversity either via encouraging NPI or by providing nature credits where NPI is not possible. With effective market governance and oversight, a New Zealand biodiversity credit system could enable proponents of infrastructure projects to be both suppliers and buyers of nature credits and create the conditions to support a transition to NPI.

Conditions

Footnotes

1. Deutz, A., et al, J. 2020. Financing Nature: Closing the Global Biodiversity Financing Gap. 
2. United Nations Environment Programme (2023), State of Finance for Nature – The Big Nature Turnaround Repurposing $7 trillion to combat nature loss. Nairobi. 
3. Biodiversity-credit-system-discussion-document.pdf (environment.govt.nz).
4. World Economic Forum (WEF), “Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy,” World Economic Forum, Geneva, 2020.
5. Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review. (London: HM Treasury).
6. See The UK Environment Act: A new era for Biodiversity Net Gain? (minterellison.co.nz).
7. See for example the International Advisory Panel on Biodiversity Credits: https://www.iapbiocredits.org.
8. Young, D., Aboobakar, A., Curtis, T., Draisey, Z., Fitton, R., Grundmann, L., Higgs, R., Howard, B., Macedo, C., McAleese, L., Pinkerton, V., Shah, R., Tremolet, S., and Twining, S., (2022) Financing Nature Recovery UK: Scaling Up High-Integrity Environmental Markets Across the UK. London, United Kingdom.
9. Broadway Initiative, 2023, The State of UK Nature Markets October 2023: Broadway Initiative releases State of UK Nature Markets Report 
10. Environmental Markets Board.
11. Eco-Markets Australia - Nature Market Administrator https://eco-markets.org.au/.
12. Ministry for the Environment, Helping nature and people thrive – Exploring a biodiversity credit system for Aotearoa New Zealand, Discussion document.