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22/2/2023

Venture into biodiversity; a comparison with carbon markets

Written by Sven Meyer

Humans make up around a third of the world’s mammal biomass, yet the reach of human influence goes far beyond and impacts even the most remote corners of this planet, disrupting the integrity of natural ecosystems that have evolved over millions of years.

While many things we collectively considered ‘innovative’ have contributed to these negative impacts, there are a growing number of truly innovative startups working on reversing those. They solve complex information and coordination problems to make the world a better place. These are the startups that we call ‘digital tech4good’ startups, that we at 4impact capital invest in, and passionately support on their growth path.

Source: Bar-On et al. (2018).

For humanity to thrive, natural ecosystems need to thrive; and their health relies on biodiversity, i.e. the related variety of flora and fauna present. While we know of the importance of biodiversity, human activity continues to negatively affect biodiversity. Accurately valuing biodiversity is therefore a critical step in improving our relationship with nature. We have previously explored this theme from a carbon dioxide perspective and invested in Carbonfuture, a company critical to scaling carbon dioxide removal (CDR) markets. 

Just like CDR, biodiversity provides tangible benefits to society because it acts as the lifeblood of healthy ecosystems that sequester carbon dioxide, ensure clean water supply, or prevent the spread of disease. Yet, biodiversity is at risk across the globe.

In light of some of the early successes of carbon markets in removing carbon dioxide from our atmosphere, can a similar model function for protecting and enhancing biodiversity?

Butterfly effects: biodiversity’s key differences to carbon dioxide removal

Measurement of impact.

To know what to improve, you need to measure. How can we accurately quantify the costs and benefits of biodiversity impacts? Biodiversity is not just one metric. Symptomatic of this complication: the biodiversity-focused COP15 in December of 2022 yielded no specific quantified biodiversity targets. This is a result of the sheer volume of metrics available.

With CDR markets, there is one simple metric which largely determines the value of a CDR-backed credit. Even if we agreed on a single metric for biodiversity, there are further complications to consider, outlined in the following.

Linearity of impact.

Unlike CDR, solving the biodiversity crisis is not as easy as ‘we need significantly more of it’. Natural ecosystems rely on a delicate balance within them. While restoring decimated animal populations is ostensibly good, the benefits of doing so do not increase linearly. Re-introducing 100 times the original butterfly population will not improve the ecosystem 100-fold. Too much biodiversity may cause just as many issues as too little!

While at scale we have too little biodiversity, the non-linearity of biodiversity impact complicates a market structure around it.

‍Multiplicity of impact.

Interdependencies between different parts of ecosystems further contribute to this predicament. Increasing one presumed positive metric may still have negative effects on another. For instance, planting non-native tree species in cities may contribute to decreased flood risk, while at the same time introducing pests that decimate local insect populations. As a result, measurements of dependencies between different biodiversity metrics are significantly less developed than individual metrics themselves, as per the Taskforce on Nature-related Financial Disclosures (TNFD).

‍Transferability of impact.

While CDR is mostly geographically agnostic (i.e. the net benefits of removing a ton of CO2 from the atmosphere in Kenya or Argentina are virtually the same), biodiversity is not. The decimation of butterfly populations in Tennessee cannot be undone by introducing butterflies in Poland. It would probably even be counterproductive as a complex chain of dependencies is disrupted. See here, for instance, how the North American red-tailed hawk depends on butterfly populations to survive.

‍Digital tech4good startups and biodiversity

So where does that leave us? In line with the major challenges of building a market around biodiversity, the highest volume of potential solutions we see are concerned with measurement, reporting, and verification (MRV) of biodiversity. MRV is a major topic in carbon markets, and is likely to increase in importance in biodiversity as well. 

‍MRV in biodiversity.

Within MRV, satellite technology features prominently. The scalability of many of these technologies lends itself to large-scale applications. The biodiversity crisis is a global problem after all!

This does not mean that we can do away with on-the-ground verification when measuring biodiversity. Accuracy is critical to building trust in a new market structure, a problem that has hit forestry-based carbon offsets particularly hard. In providing this accuracy to the ‘M’ of the MRV component, we observe different approaches.

‍Satellite technology-based approaches to MRV.

As arguably the most scalable solution to monitoring natural ecosystems, satellite technology allows for a variety of data sources to be captured. Optical, radar, infrared, and multi- or hyperspectral analysis offer ways of triangulating data on natural ecosystems:

Optical analysis: high-resolution images that provide insight into e.g. tree coverage, wetland health, coastlines, etc. The quality of the data is dependent on weather and solar illumination, however.

  • Radar: used to map surfaces of a terrain. Radar provides information on e.g. slope and height of different terrains, from which we can build an impression of a habitat’s topography and infer livability for different species. Not limited by weather or solar illumination.
  • Thermal infrared: used to detect temperature and temperature-related phenomena. This can be helpful in tracking changes in surface temperature over short periods of time e.g. for studying microclimates.
  • Multi- and hyperspectral imaging: used to capture a light spectrum across many wavelengths allowing us to detect precise distinguishing biochemical attributes of observed phenomena. This technology is used to detect e.g. carbon dioxide leakage from plants and trees, which can be indicative of their health.

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Source: ESRI (2016).

Our portfolio company Satelligence is a global leader in the optical- and radar-based nature monitoring space. The company uses this nature data in a unique combination with supply chain data to facilitate assessment and improvement of environmental impacts in commodity supply chains.

In addition to Satelligence, we see a variety of startups using satellite technology to monitor biodiversity:

‍Other technological approaches to MRV.

Given the complexities of biodiversity, there are numerous other ways of capturing it that do not rely on satellite technology, including:

Other approaches to protecting, restoring, enhancing, or managing biodiversity:

Overall, the growing abundance of MRV solutions points to the urgent need for a data- and technology-driven approach to scaling market efforts around biodiversity.

‍What are the opportunities and challenges?

As seen in carbon markets, those who drive the development of the biodiversity market through customer education, brand building, and – most importantly – a solid value proposition in MRV can put themselves in a leading position if and when it goes mainstream. Another parallel is that growth must be driven both by regulatory and voluntary action.

The challenges are mainly around the aforementioned complexity. Initial market participants (i.e. those who buy biodiversity credits) may be price-sensitive and an early market may be flooded with low-quality credits. Similar to carbon markets, the urgency associated with climate action may incentivise participants to go for the low-hanging fruit and easy wins that deliver ‘green’ benefits, i.e. low-quality biodiversity action veiled by a vague claim.

This puts price pressure on high-quality biodiversity action; in the long run however, quality will prevail! 

‍Are markets moving in the right direction?

On a high level, biodiversity markets are developing similarly to carbon markets in two ways: first, we are continuously beginning to understand, value, and quantify biodiversity. This is the inaugural step to understanding the damage done to biodiversity and the consequences thereof. Second, we ought to do everything we can to mitigate those by developing structures that discourage damaging biodiversity and incentivize its protection, restoration, and enhancement.

As our understanding evolves, market participants will derisk their exposure by shifting from a do-no-harm approach to a doing-good approach, similar to the development carbon markets have undergone in the decades since their inception and spending in the sector is increasing. Around half of all private sector finance (~$7B) in biodiversity flowed to offsets specifically; note that this is only 2016 data (the most recent comprehensive analysis available).

This derisking is not always or necessarily additional from an impact perspective (similar to e.g. carbon credits based on avoided emissions), yet is relatively common because it is achievable and scalable, and biodiversity labels are rewarded by governments and consumers in the form of avoided punishments or improved marketability respectively. Yet, most Fortune 500 companies are still underappreciating biodiversity with regards to acknowledgement and target setting, as compared to other impact factors.  

Source: McKinsey (2022).

‍Where would we invest?

We look for digital solutions that inextricably combine business and technology with impact. Technology- and data-backed MRV allows more market participants to take the leap of faith and participate in biodiversity markets. While in carbon accounting it was not necessarily technology that made the difference, but product, user experience, branding, and network effects, the relative complexity around biodiversity will make a technological edge of MRV propositions weigh more heavily on the path to market leadership.

Those who position themselves as beacons of quality and truth in the market have the best odds of survival. Those who do not, run the risk of disqualifying themselves from the market in the mid- to long term. 

The development of this market is a matter of time, and likely – and hopefully – will not take as many decades as carbon markets have. Despite all the ambition, there remain complexities and challenges to solve before a biodiversity market can scale. As an impact investor, we are eager to support the startups that contribute to solving these challenges!

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