Climate Action

How credit markets are evolving in climate and nature finance

A glacier in the middle of water: Credit markets have expanded to help finance climate and nature goals

Credit markets have expanded to help finance climate and nature goals Image: Shutterstock

Akanksha Khatri
Head, Nature and Biodiversity, World Economic Forum
Alessandro Valentini
Lead, Innovative Finance for Nature, World Economic Forum
This article is part of: World Economic Forum Annual Meeting
  • Like carbon credits, “creditization” has expanded to include other environmental domains such as water, biodiversity, soil health and plastic.
  • International agreements have struggled to meet financing goals, particularly for developing economies; private financing is bridging this gap.
  • Emerging financial instruments focus on ecosystem-wide and landscape-level approaches, integrating multiple metrics to include carbon, biodiversity and water, for example.

Carbon markets have been a useful instrument for mobilizing financial resources for climate and nature projects.

In recent years, the concept of “creditization” has expanded to include other areas, such as water, biodiversity, soil health and more recently, plastic. This trend can be broadly traced back to two main dynamics.

The first is the recognition of more private sector investments in sustainability – within and beyond value chains – given the vast financing gap to meet the goals of environmental conventions.

The second is an increasing convergence of the global sustainability agenda with a better understanding of payment for ecosystem services, which could benefit the environmental and social outcomes of these markets.

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The failure to bridge the finance gap

The Paris Agreement, adopted in 2015 and the Kunming-Montreal Global Biodiversity Framework, adopted in 2022, set clear targets and ambitions for the climate and nature agendas.

Since then, attention has shifted primarily to implementation, focusing on how to finance the objectives laid out in the two plans.

The 29th Conference of the Parties to the UN Framework Convention on Climate Change (UNFCC COP29), held in Baku, Azerbaijan and the 16th Conference of the Parties to the Convention on Biological Diversity (COP16) in Cali, Colombia, were both positioned as finance and implementation COPs.

There were high expectations for government commitments to mobilize resources, particularly for developing and less-developed economies which are the most impacted by climate change and generally the most biodiverse.

However, both failed to deliver important results: COP29 ended with a modest commitment to resource mobilization and COP16 was forced to re-convene for a second round in early 2025 to conclude its discussions, which ended without any agreement.

This is not the first time global commitments on sustainability have fallen short. In 2009, under the Copenhagen Accord, countries committed to mobilize $100 billion per year in climate finance for developing countries by 2020. That target was only met two years later.

Similarly, the Aichi Targets set by the CBD COP in 2010, were also largely missed, with financial resources for developing and emerging countries flowing seven times less than needed.

Acting on nature and climate is now understood as a way to strengthen businesses and their value chain in the face of a changing planet.

—Akanksha Khatri, Head, Nature and Biodiversity, World Economic Forum | Alessandro Valentini, Lead, Innovative Finance for Nature, World Economic Forum

Akanksha Khatri, Head, Nature and Biodiversity, World Economic Forum | Alessandro Valentini, Lead, Innovative Finance for Nature, World Economic Forum

Towards a convergence of climate and nature

Despite these sub-optimal results in mobilizing public capital, the global momentum on climate and nature finance has not slowed. On the contrary, it continues to grow, focusing more on the private sector. This has led to the multiplication of efforts and initiatives, voluntary and regulated, around carbon, water and nature credit markets.

This movement is also part of a broader shift toward recognizing the true value of nature. Environmental assets are fundamental to our economy and society. Without them and the services and contributions they provide – including water cycles, climate regulation and food systems provisioning – our existence would simply not be possible.

Human activities have heavily depleted these assets and services in the past decades. However, the economy has begun transitioning toward business models that better value these global commons.

Acting on nature and climate is now understood as a way to strengthen businesses and their value chain in the face of a changing planet. The risks and costs of inaction far outweigh those of action, as environmentally-related risks have been highlighted for years as the biggest long-term risks in the Global Risk Report.

As a result, a new generation of financial instruments has been emerging. Carbon markets have seen continuous growth in the past two decades regarding the volume of credits traded and emissions covered by the numerous schemes, which have expanded from 7% to 24% of global emissions.

Water markets have existed for decades, focusing on water quality and quantities. Biodiversity credits have captured increasing attention from businesses and investors, promising to offer a vehicle to invest in nature and the communities that protect it.

Looking at the future of sustainability credits

This development is positive news for the environment, as private capital will be crucial in bridging the current sustainability financing gap. However, voluntary initiatives alone won’t be sufficient. The global carbon market is estimated at more than $1 trillion but the voluntary market covers less than $1 billion.

Similarly, while compliance and regulated nature finance investments flow in the billions – such as water trading market and biodiversity offsets – investments in voluntary instruments such as nature credits remain limited to only a few million dollars.

Voluntary action will, therefore, need to be supported by policy regulations and incentives to thrive. Public-private cooperation will be key in defining which regulations benefit the market and its stakeholders, from project developers and Indigenous People and local communities to buyers and investors.

This is already happening in some frontrunners countries, such as Australia, which is setting up a Nature Repair Market; India with its Green Credit Programme and the European Union, where the new commission will be actively exploring the role of nature markets to mobilize investments for the Nature Restoration Law.

The lessons learned from these experiences will be invaluable in ensuring positive outcomes from these markets.

Moreover, projects underpinning these credits are increasingly focusing on landscape, ecosystem, or habitat-level approaches, blending the metrics of success of these outcomes-based instruments.

For example, nature-based carbon credit projects include carbon and biodiversity metrics, while other nature credits use a range of ecosystem health indicators – see for instance the Cusuco National Park project by rePLANET, which stacks carbon and biodiversity.

This holistic approach benefits the integrity of the projects, avoiding, for example, the proliferation of mono-plantation projects common in the carbon market. It also benefits the buyer side, which faces increasingly complex procurement, disclosure and reporting requirements.

Additionally, a holistic approach could strengthen the business case for investing in these projects by merging the varying types and levels of materiality that water, carbon and biodiversity have for different sectors and businesses.

Breaking silos will, therefore, have positive benefits across the spectrum. Multi-stakeholder dialogues and public-private partnerships are needed to create an enabling environment to ensure positive benefits for people and nature.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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