The World Economic Forum ranks biodiversity loss and ecosystem collapse as the third-largest global risk over the next ten years (behind extreme weather events and critical change to Earth systems).1 Indeed, although half of global economic activity is highly or moderately dependent on nature and its services, nearly all indicators of ecosystem health have fallen sharply over the past 50 years.2
The international business community is increasingly aware of this reality and is beginning to confront it. But it’s not easy for individual businesses to understand how nature is relevant to their activities, how to manage the risks nature poses and the opportunities it creates, or how to support the protection and restoration of nature. Disclosure frameworks for nature are beginning to emerge, but tools that help companies make a difference in a way that generates demonstrable value for their business are lacking.
Biodiversity credits are generating significant interest as one potential tool to help fill these gaps.3 We recently worked in collaboration with WEF on two reports that capture the current state of the market and provide new information on the key demand drivers and potential uses of the credits by early movers. While the market has yet to converge on a unified definition, biodiversity credits are widely understood as verifiable and quantifiable units of restored or preserved biodiversity over a predetermined time frame. At this stage of market development, what constitutes a “unit” of biodiversity varies across projects.4 It is usually linked to a specific area (one hectare, for example), a measure of improvement (such as 1 percent gain across specific metrics relevant to the health of a local ecosystem), and the length of the contract (say, 30 years). A credit could also include other features, such as specific actions to restore keystone species5 or ensure equitable benefits to indigenous peoples and local communities (see sidebar, “How biodiversity credits can create social benefits for indigenous peoples and local communities”).
With the right safeguards in place, biodiversity credits could deliver benefits for nature and local communities while propelling business value. For example, they could help businesses preserve access to ecosystem services, support market differentiation through positive nature outcomes aligned with consumer preferences, keep pace with regulatory changes, maintain social license to operate, secure access to financing and reduce the cost of capital, support talent acquisition, and increase employee motivation and retention. Below, we explore some of the current use cases for biodiversity credits and how business leaders can take action today.
How can businesses use biodiversity credits?
While the voluntary market today is still in its early stages, new analysis from the World Economic Forum in collaboration with McKinsey finds that, with the right conditions in place for larger companies in major markets, global demand could reach $2 billion in 2030 and $69 billion by 2050.6 Reaching this demand potential, however, likely requires establishing a compelling business case with strong consumer support for action, developing a sufficient pipeline of high-integrity projects, and the market aligning on a clear set of common principles, standards, and methods. In a transformational scenario in which such conditions are established globally and across a wider set of companies—a currently unprecedented circumstance—global demand could reach $7 billion in 2030 and $180 billion in 2050 (Exhibit 1).
Based on a series of interviews with potential buyers, McKinsey research identified four potential use cases for how businesses could use biodiversity credits, as well as a fifth, contested use that is still being debated (Exhibit 2). As market infrastructure develops, more use cases may begin to take shape. It’s important to keep in mind that each use case comes with a risk of greenwashing; well-enforced safeguarding mechanisms, guardrails, and market infrastructure could help ensure the use cases are applied with integrity.
Use case one: Enhance carbon credits for better nature outcomes
Most major companies have already set climate-related targets,7 and for many, achieving these involves engaging in voluntary carbon markets. Purchasing carbon and nature outcomes through nature-based solutions—actions that address societal challenges by protecting, sustainably managing, or restoring natural ecosystems8—can be a starting point for organizations that are beginning their nature journeys. Today, companies may already purchase carbon credits with a biodiversity premium. With further market guidance to ensure additionality requirements are met, in the future, companies might be able to purchase carbon and biodiversity credits from the same project. For example, a company with climate-related targets could buy stacked carbon and biodiversity credits issued from a mangrove restoration project, which could simultaneously sequester and store carbon and serve as habitat for a range of organisms.9 Purchasing these stacked credits would provide the company assurance that it is supporting positive outcomes for nature and climate at the same time, which may be important to its shareholders, customers, or workforce.
Use case two: Access ecosystem services as inputs
Many companies rely on natural capital (the world’s stock of natural assets, which includes soil, air, water, and all living things10) that they do not directly control. They rely on these assets to provide ecosystem services (flows of benefits from the world’s natural capital) that the company directly depends on. Biodiversity credits could allow these companies to fund improvements for the health of the natural capital in their value chain, with the aim of securing or improving access to these critical ecosystem services. For example, a confectionery company that purchases soft fruits directly from a farmer could purchase biodiversity credits that support the protection and restoration of habitats for pollinators in the local landscape, allowing the company to help maintain high local pollinator populations, which are essential to achieving high yields.
Use case three: Contribute to nature recovery beyond own impact
As nature loss rises on the public’s agenda, companies may be interested in making commitments to invest in improving the health of natural ecosystems. This could include contributing to global nature goals set out in the Global Biodiversity Framework that was adopted by 188 governments in December 202211or playing a role in a region’s ecosystem restoration or protection program. Biodiversity credits can help them meet these commitments. For example, to contribute to global biodiversity goals, a car manufacturer may purchase credits to help restore a globally threatened habitat type near its factory operations. Doing so could drive business value by helping them achieve brand differentiation, attract and retain talent, and secure social license to operate.
Use case four: Offer products bundled with nature recovery
Companies may offer products and services that allow consumers to invest in nature improvements (through a biodiversity credit) as an additional product attribute. This product offering would not be linked to a claim about the net impact of that product or company on nature. Instead, the bundled product would offer a way in which the consumer could easily invest in nature restoration and protection. For example, a housewares producer might offer a vase at a premium if its purchase contributes to the restoration of a hectare of wildflower meadow.
Use case five: Take responsibility for unmitigated impacts on nature
In addition to the first four use cases, another potential use case is to take responsibility for a company’s unmitigated and residual direct or indirect biodiversity impacts and do so in a context in which compliance offset schemes do not exist or cover only certain sectors or part of a company’s impact on nature. There is ongoing debate about whether and when voluntary biodiversity credits could be used in this way, although it is currently not broadly accepted as a viable use case. Such use would require additional market infrastructure and strong guardrails to be in place. This could include guidance on how to measure a company’s nature impact nature across its value chain, a clear definition of what “nature positive” could mean at the corporate or product level, and a robust set of standards to establish how a company could reasonably achieve “acceptable equivalence” between the nature impacts generated by biodiversity credits and the company’s unmitigated impacts outside compliance schemes. If these issues were resolved, there may be a role for biodiversity credits in helping businesses take responsibility for unmitigated nature impacts that remain after minimizing and avoiding their impacts and following the mitigation hierarchy.12
How can business leaders take action today?
Different use cases will be relevant for different businesses; the appropriate role for biodiversity credits depends on an organization’s objectives and circumstances. Business leaders can begin to identify how biodiversity credits could create value for their business by taking the following actions:
Identify potential synergies with climate strategies. To identify potential synergies, companies might review their climate-related targets, assess their current use of carbon credits (including whether any are nature-based solutions), review their credit procurement strategy, and initiate discussions with credit suppliers.
Assess customer, employee, and shareholder priorities as they relate to nature. Surveys and other forms of market research can help organizations determine the importance of nature to the people they serve. Which values underpin their feelings about nature, and how do they align with the organization’s values? Based on this understanding, companies can focus efforts where the greatest biodiversity needs are or where the business’s operations may affect species, landscapes, or habitats.
Understand the organization’s existing relationship with nature. The global economic system relies on and affects nature, but it can be difficult for many organizations to identify the discrete ways in which they do so. Existing tools and frameworks (such as the Taskforce on Nature-related Financial Disclosures and Science Based Targets Network guidance) can help businesses navigate the process and get a clear picture of why and how nature is important to their business.
Businesses are already starting to experiment with biodiversity credits and are helping shape the market. Early movers can learn from best practices, potentially contribute to emerging standards, and build strong partnerships. For example, Verra is running a public consultation on a proposed new standard for voluntary biodiversity credits.13 The Biodiversity Credits Alliance convenes working groups to help define and develop concepts to advance the market.14 And the World Economic Forum has begun a Frontrunners Coalition of private sector companies to “signal increasing interest to finance ecosystems while supporting communities and test and learn from early-stage transactions to ensure the market is robust and transparent.”15 McKinsey Sustainability is a founding partner for the coalition, providing convening, research, and analytical support.
With effective support and safeguards, biodiversity credits could play a critical role in companies’ nature-positive journeys. Experiences from the carbon market have shown that first movers have unique potential opportunities to build institutional knowledge, solidify a reputation for leadership, and form crucial partnerships. As nature moves up the public and private sector agendas, businesses that delay action may find themselves having to play catch-up. Businesses that engage early will likely be able to distinguish themselves in the market, help shape a critical instrument for improving nature outcomes, and raise ambition for their sectors as a whole.
Madison Cole is a knowledge specialist in McKinsey’s London office, where Jason Eis is a partner.
1 The global risks report 2024, 19th edition, World Economic Forum, January 2024.
2 Nature risk rising: Why the crisis engulfing nature matter for business and the economy, World Economic Forum, January 2020; Living planet report 2022: Building a nature-positive society, World Wide Fund for Nature, 2022.
3Harnessing biodiversity credits for people and planet, NatureFinance, June 2023.
4 “Biodiversity credits: Unlocking financial markets for nature-positive outcomes,” World Economic Forum, September 2022.
5 According to Oxford Reference, “Keystone species are those species whose importance to an ecosystem’s structure, composition, and function is disproportionately large relative to their abundance.”
6 Biodiversity credits: Demand analysis and market outlook, World Economic Forum, December 2023.
7 “Where the world’s largest companies stand on nature,” McKinsey, September 13, 2022.
8 According to IUCN.
9 “Mangroves,” Smithsonian Ocean, April 2018.
10 “What is natural capital,” World Forum on Natural Capital, accessed March 7, 2024.
11 Claire Brader, “COP15: Global biodiversity framework,” House of Lords Library, January 6, 2023.
12 “A cross-sector guide for implementing the mitigation hierarchy,” Cross Sector Biodiversity Initiative, 2015.
13 For more, see “Nature framework,” Verra, September 18, 2023.
14 For more, see biodiversitycreditalliance.org.
15 For more, see “Frontrunners Coalition,” World Economic Forum, accessed March 8, 2024.