WHOLE OF ENVIRONMENT REPORT #2 There’s money that stands to be made in the nature repair market. Offsets may not be part of the picture but there are other ways to unlock value in nature – whether in land or ocean. Samuel Allam who is one of the authors of this second in our WOE took part in a The Shifting Sands of ESG masterclass on 20 February.
“Offsets” has become a dirty word in the whole of environment (WOE) universe. Once espoused as an essential “conservation” measure to mitigate a project’s adverse impacts on nature, the recent shift in epistemology is difficult to carbon date.
Now criticised for providing false comfort in a pre-federal Environment Protection Authority world, offsets are described by environmental cognoscenti not as a solution to the problem of biodiversity decline, but as part of why that problem persists. A dead canary in the coal mine.
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This recalibration was underway before the pandemic. The almost two decades’ long reign of “ecologically sustainable development” as the prism through which a balance between the economy and the environment was to be judged might’ve contributed to why offsets were perceived as the virtual birthright of new development.
During this time, we’ve seen how the sustainability element of “ecologically sustainable development” can become very subjective, exposing a potentially slippery slope where development is heavily prioritised over ecology.
In the blueing skies of 2024 (think “transitioning away from fossil fuels”, in COP28 speak), there is increasing gravity in Australia’s burgeoning “nature positive” ambitions, where the language of “offsets” is out and “restoration” is in.
These ambitions generally aim to leave the environment in a better state than it was found, thereby avoiding the prospect of our collective future coming to a greater nuisance.
In the past five years, biodiversity offsets have been decried for failing to prevent environmental decline, not compensating habitat loss, not being adequately maintained and not being properly policed by regulators. The most scathing criticisms call offsets ineffectual (the “fantasy of theoreticians”, in the words of one commentator).
It’s axiomatic that the fidelity of any offsets regime – whether for biodiversity or carbon offsets – can be the difference between whether a project’s impacts are acceptable and consequently whether that project should be approved or rejected.
Still, few have been daring enough to publicly lament the declining cachet in offsets.
This is true even though delivering offsets remains essential to the lawfulness and viability of environment and planning approvals for many major projects, including recently approved renewable energy projects. Another paradox.
Looking for a post offsets world
As far as antidotes go, the newly minted nature repair market as laid out by the Commonwealth’s Nature Repair Act 2023 (Cth) (Nature Repair Act) is a kaleidoscope that looks towards a post-offsets world.
Passed by the federal government in December 2023, the Act is said to create a world-first national market directed at restoring biodiversity across Australia on a voluntary basis.
In analysing legislation of this kind, we think the real value is in identifying what it means, not just what it says.
In the words of the NSW Biodiversity Conservation Trust, the nature repair market presents an opportunity to bolster government funding with private sector finance.
Much like other commodities markets (such as the trade in carbon credits) a unit in the form of a “biodiversity certificate” (certificate) will be able to be generated and transferred as a new form of tradable product, thereby constituting the market in nature repair.
Under the legislation, these certificates are directly linked to the biodiversity outcomes that a “biodiversity project” is designed to achieve, with various obligations attaching to projects that meet specified criteria.
Accredited projects under the Nature Repair Act will be characterised by their capacity to chronicle the protection and restoration of natural capital.
But this wasn’t always going to be the case. As originally drafted, the Nature Repair Act had left open the possibility that certificates derived from projects under the Act could be used to offset the impacts of other unrelated development projects.
Put another way, far from effecting a net positive WOE outcome across Australia, the certificates could’ve been used to purportedly neutralise impacts and authorise biodiversity decline by third parties elsewhere. Offsets by another name.
As in the past, while debating the draft legislation and seeking to guard against the nature repair scheme being hijacked for offsetting purposes, there was a risk that green on green tension could have caused the whole scheme to founder.
By virtue of amendments pressed by the federal Greens and a last minute deal with minor parties, the final version of the legislation passed by the Labor government forbids the use of certificates to offset habitat destruction caused by other projects. Yes, forbids (see the very clear and broad language of section 76A).
Unsurprisingly, some of the details of the nature repair market such as standards and guidance frameworks still need to be worked out.
In any event, the federal Minister for the Environment and Water, Tanya Plibersek, has said she is confident the scheme will support landholders to do things such as replanting habitats for native species or regenerating natural ecosystems. This gives rise to an intrinsic value in protecting WOE for WOE’s sake.
The value in the new nature repair market
The money that stands to be made in the nature repair market demonstrates that it is not just an altruistic scheme, as it may initially seem to the untrained eye.
The certificates should be seen as assets that companies and funds can invest in to fortify their green credentials and improve their ecological footprint, which could prove attractive to consumers and translate into brand benefits without risking the corruption of the idea.
The legislation provides a range of parties, from First Nations people to corporates and farmers, with incentives that aim to unlock value in landholdings (including aquatic environments within Australia’s territorial sea) by monetising activities that improve the quality of the environment over and above its current condition.
These activities could be in the form of improving native vegetation, planting native species, protecting sensitive habitats, or promoting biodiversity in authorised ways.
The certificates generated by these activities are intended to be bought and sold under commercial contracts, with the net benefits of the environmental outcomes encouraged and secured by the scheme.
They should be seen as assets that companies and funds can invest in to fortify their green credentials and improve their ecological footprint, which could prove attractive to consumers and translate into brand benefits without risking the corruption of the idea.
Details of the status and ownership of the certificates will be publicly available, making the market transparent and enabling certificate-holders to evidence how they are promoting nature repair.
The legislation thus creates a uniform opportunity for “land” across Australia to be used commercially in non-traditional ways where the dividends can be effectively reinvested instead of being harvested away.
The context
In many respects, the federal government is not so much leading this movement as it is following in the footsteps of state-based schemes that have been operating for some time (for example, since about 2017 in NSW).
The government’s intention is for the nature repair market to form in a vastly different shape and scale to the existing agreements or legislative options (such as nature refuge declarations) that already provide for conservation of land in-perpetuity.
This means there is a need for accreditations to divine a lingua franca between the new federal and existing state schemes.
Management by the Clean Energy Regulator and ACCUs
The nature repair market is due to be administered by the Canberra-based Clean Energy Regulator, which already oversees the established market in Australian Carbon Credit Units (ACCUs).
The ACCUs market has similar foundations to the nature repair market.
However, under the ACCUs regime, a single unit neatly represents one tonne of carbon dioxide equivalent net abatement and has commercial value by reference to the carbon emitting activities that the ACCUs effectively authorise.
That is, ACCUs are typically purchased and retired in order to meet compliance obligations, such as under the Safeguard Mechanism that seeks to reduce net greenhouse gas (GHG) emissions at certain facilities across Australia.
Alternatively, ACCUs can be purchased to meet a company’s own emissions reduction commitments, reduce its pre-existing carbon footprint, or otherwise add to its green credentials.
The nature repair market will function differently to the ACCUs market
Owing to the last gasp amendments to the draft Nature Repair Act discussed above, the nature repair market is expected to function somewhat differently from the ACCUs market.
This is in part because the inherent value of a certificate will not be inexorably tied to its capacity to offset some other activity or impact. Moreover, the maths of biodiversity and biodiversity value isn’t as neat as one tonne of carbon equivalence.
Mandatory disclosure on the way
The federal Labor government has appeared very keen to make progress on WOE matters in the pursuit of election commitments, particularly since the Voice referendum result in October 2023.
Within a month of the Nature Repair Act becoming Commonwealth law, the federal government released draft legislation proposing new mandatory climate-related financial disclosure obligations for some companies on a ratchet basis.
If made into law, companies within the regime’s remit will need to explain their climate impacts in the sustainability report, as part of their annual reports.
According to Treasury, the obligations as proposed would compel entities to provide information about their climate-related risks and opportunities, in line with the accounting standards contemplated by the legislation.
This includes information relating to corporate governance, strategy and risk management, metrics and targets (including scope 1 and scope 2 GHG or greenhouse gas emissions).
In a sign of more onerous expectations that align with recent shareholder activism in Australia, disclosures of scope 3 GHG emissions (being emissions that occur up or down the supply chain and emissions associated with a company’s financing and investment activities) are intended to be required from the second year of mandatory reporting.
The methodology for analysing and reporting on scope 3 GHG emissions really needs to be standardised and enforced so that any disclosed climate information can be used fairly to compare competitor offerings and inform regulatory and investor activity.
Timing is in doubt
The timing of these climate disclosure obligations is still in doubt. The federal government had said that entities which meet the reporting thresholds may be bound from as early as 1 July this year. Nevertheless, it now looks like the first round of disclosure obligations could be potentially deferred to 1 January 2025. The position should be clarified shortly.
This is significant for the purposes of this column because it is a harbinger of the likely nature-related financial disclosure regime (nature-related, not climate-related).
The alternative, and increasingly more attractive option to some investors, is to apply a higher standard and a more rigorous governance framework to the question of whether a project truly aligns with corporate and shareholder values, public perceptions, and the investor’s desired reputation.
All things being equal, we expect the nature-related disclosure regime will impose mandatory reporting requirements on some companies, but we’re conscious that the nature reporting regime hasn’t been drafted yet. Its emergence may motivate further investment in restoring biodiversity under the nature repair market itself.
These signs of progress coincide with the moral riddle that we’re being asked to advise on – should companies be comfortable investing in projects merely because they are approved (or approvable) at law?
The alternative, and increasingly more attractive option to some investors, is to apply a higher standard and a more rigorous governance framework to the question of whether a project truly aligns with corporate and shareholder values, public perceptions, and the investor’s desired reputation.
This explains why there is a growing demand for even greener sustainability standards by which to decide if a project is worthy of the capital allocation.
As alluded to in our previous column, it will be up to private companies to lead the uptake in cleaner investment opportunities, including in the nature repair market. Like many financial products, there is an opening for first movers to be the architects of economic and reputational success by quickly establishing a functional presence in this narrative.
Provided the market is embraced by a spectrum of players, including smart money, it could prove to be a rebuke of the glib criticism that restoring biodiversity is a loss-making or at best zero-sum game. Net gain is to biodiversity as net zero is to carbon. Keen observers may also find occasion to apply a maxim from Aristotelian ethics: this isn’t the swallow (or the canary) that makes the summer.
See WOE report #1 The trade winds of law will reshape the corporate landscape – Whole of Environment Report, part one