Scaling biodiversity finance with ITMOs

As the 16th Conference of the Parties to the Convention on Biological Diversity (COP 16) will take place in Cali, Colombia, this week, finance will be a key focus. Global leaders will meet to discuss the COP15 Kunming-Montreal Global Biodiversity Framework (GBF) of mobilising at least USD 200 billion annually from both public and private sources for biodiversity funding by 2030. This paper explains that there is currently only one globally-compliant Sovereign financial instrument that exists that can be scaled today to meet this goal and at the same time, the UNFCCC Paris Agreement: Biodiversity-Linked Sovereign Carbon Credit ITMOs.

Mind the biodiversity finance gap

Although the Kunming-Montreal COP15 witnessed an increased engagement from representatives of the financial sector across various forums, and that biodiversity finance increased 11x since mid-2020 to about $120bn, the financial gap for protecting and restoring biodiversity is currently still immense. Here are some insightful statistics:

• $7tn: Environmentally harmful subsidies per year are undermining all good efforts to reach the goals and targets of the GBF.
• $15tn: the amount of Assets Under Management (AUM) from the 200 financial institutions have agreed to set nature-related portfolio targets. Out of this total AUM only a mere 0.3% is invested in Biodiversity.
• $600-800bn: current biodiversity finance gap per year to meet the GBF Goals by 2030.

Biodiversity financial instrument options

In 2020 the Paulson Institute wrote a seminal report on Biodiversity Finance "Financing Nature-Closing the Global Biodiversity Financing Gap." In it the report outlines a set of nine financial and policy mechanisms that, if scaled through appropriate public policies and private sector action, have the potential to collectively make a substantial contribution to closing the global biodiversity financing gap over the next decade:

1. Harmful subsidy reform: (agriculture, fisheries, and forestry sectors) Subsidies deemed harmful to biodiversity are those that induce production or consumption activities that exacerbate biodiversity loss.
2. Biodiversity offsets: Biodiversity offsets are the last option in the mitigation hierarchy (avoid, minimize, restore, and offset), and is a biodiversity protection policy mandated by governments to compensate for unavoidable damage to biodiversity by a development project when the cause of damage proves difficult or impossible to eliminate.
3. Domestic budgets and tax policy: special taxes, fees, levies, and other innovative fiscal measures that both national and subnational governments can impose to either increase revenue to fund biodiversity protection or to incentivize or disincentivize activities that benefit or degrade biodiversity.
4. Natural infrastructure: natural infrastructure investments maintains healthy ecosystems for the long term; and delivers ecosystem services to human populations, supporting livelihoods and communities.
5. Green financial products: Green financial products are a collection of financial instruments, primarily debt and equity, that facilitate the flow of investment capital into companies and projects that can have a positive impact on biodiversity.
6. Nature-based solutions and carbon markets: The protection and restoration of forests and other biodiversity-rich ecosystems in what are called Nature-Based Solutions (NBS) and Natural Climate Solutions (NCS) and the active trading of carbon credits (which are issued in metric tons of carbon dioxide equivalent [tCO2e]).
7. Official development assistance (ODA): Official development assistance (ODA) is broadly defined as aid, either disbursed by countries directly or through multilateral institutions, designed to support and promote the economic development and welfare of developing countries.
8. Sustainable supply chains: Supply chain sustainability relates to the management of environmental, social, and governance aspects of the movement of goods and services along supply chains, from producers to consumers.
9. Philanthropy and conservation NGOs: philanthropic money for the conservation, and restoration of biodiversity through non-profits.

What are sovereign ITMOs?

ITMOs (Internationally Transferred Mitigation Outcomes) are a new globally-compliant sovereign asset class (carbon credit) that are issued by a country under the global compliance of the UNFCCC Paris Agreement-Article 6 to incentivise both, country and all 196 parties to reach their respective national biodiversity and global net-zero targets by 2030 and 2050. In the above set of various instruments, it falls under option 6: Nature-based solutions and carbon market.

How are ITMOs issued?

To be able to issue ITMOs, a country has to go through two UNFCCC Paris Agreement processes: National (e.g. Article 5.2-Forests) and International (i.e. Article 6.2). The Article 5.2 Process includes:

1. National Plan: Develop a National UNFCCC REDD+ strategy or action plan.
2. National MRV: Establish a UNFCCC National Forest Monitoring system of Measurement, Reporting and Verification (MRV) for all of the country’s forests.
3. National Safeguards: Establish a UNFCCC National Safeguards Information System for its sovereign Biodiversity, Sustainable Development Goals (SDGs), and Local and Indigenous Peoples Rights.
4. First Review: Submit a FREL/FRL for technical assessment under the UNFCCC.
5. Nationally Determined Contribution (NDC): Implement policies and measures for climate mitigation in line with the country’s climate plan or NDC.
6. MRV Implementation: Monitor emissions & removals, estimate REDD+ results against the FREL/FRL.
7. Second Review: Submit a BTR with a Technical Annex including REDD+ results to the UNFCCC for verification.
8. Results: REDD+ Results are posted on the UNFCCC Lima Information Hub.

Once a country has submitted its results to the UNFCCC and it has been verified and accepted, a country can decide to issue ITMOs under Article 6.2.

How do ITMOs fit biodiversity finance policies & instruments?

In order to create economic incentives for businesses and financial institutions to maximise the mobilisation of private finance for our biodiversity, ITMOs address all the economic and policy challenges identified by both the Finance for Biodiversity Foundation and the Paulson Institute report. They help with:

• Action 10: Initiating coordination between ministries to ensure a whole-of-government, economy-wide sectoral approach.
• Action 11: Reorienting sectoral regulation, including tax policies, market mechanisms, and subsidies to incentivise business practices that protect and restore biodiversity.
• Action 12: Developing sovereign green finance instruments by ministries of finance.
• Action 13: Mobilising private sector financing and investment for biodiversity through the use of private-public instruments.

In conclusion

There are many options a private corporation or investor can use to increase Biodiversity Finance globally. All these financial instrument options have been identified by the Paulson Institute report-Financing Nature. But to be able to scale Biodiversity Finance properly, a corporate or investor needs a solution that is currently available and fulfils the global requirements and compliance of existing international agreements such as the UNFCCC Paris Agreement and the UN Convention on Biological Diversity (CBD) goals.

This report showcased how investors, corporations and governments can do so by using globally-compliant and biodiversity-linked Sovereign ITMOs, which falls under the nature-based finance and carbon market option of the Paulson report.

Moreover, we need to create economic incentives for businesses and financial institutions to maximise the mobilisation of private finance for our biodiversity. ITMOs is a great way of doing so as it also answers all the actions identified by the Finance for Biodiversity Foundation and all the challenges identified by the Paulson Institute.