New Global Biodiversity Fund Seeks $1 Billion from Agri, Biotech, Cosmetics, Pharma and AI

New Global Biodiversity Fund Seeks $1 Billion from Agri, Biotech, Cosmetics, Pharma and AI

November 14, 2024, Covington Alert

On November 2, 2024, 196 countries decidedthat businesses that commercially benefit from the digital footprint of Earth's biological diversity should contribute to its preservation. The new "Multilateral Mechanism on Benefit-Sharing (MLM) from Digital Sequence Information (DSI)" is a game-changer. Sectors covered include agriculture, biotech, cosmetics, pharmaceuticals, lab equipment and artificial intelligence. The aim is to "encourage" the private sector to redirect some profit into biodiversity conservation with a cross-sector target of $1 billion per year.

Covington has the world's leading practice on financing biodiversity (known as "access and benefit-sharing"). We have closely followed these negotiations since their inception in 2016. This Client Alert is a top-level briefing for businesses implicated by this new Fund.

The 196 parties to the Convention on Biological Diversity (CBD) convened late October in Cali, Colombia for the 16^th Conference of the Parties ("COP16"). On November 2^nd, COP16 adopted a Decision that companies that "directly or indirectly benefit" commercially from digital sequence information "should" contribute to the "Cali Fund." The Decision currently only targets large entities, defined as those that meet at least two of the following thresholds: total assets of $20 million, sales of $50 million, or profit of $5 million, averaged over the past three years. The Decision also includes "an indicative list of sectors" that are presumed to benefit from DSI, unless they can prove they do not. We reproduce the list verbatim:

• Pharmaceuticals;
• Nutraceuticals (food and health supplements);
• Cosmetics;
• Animal and plant breeding;
• Biotechnology;
• Laboratory equipment associated with the sequencing and use of digital sequence information on genetic resources, including reagents and supplies;
• Information, scientific and technical services related to digital sequence information on genetic resources including artificial intelligence.

The selection of these sectors is, in our view, arbitrary. It is based on a contentious study available here: Summary and Full Study.

Companies that "directly or indirectly benefit" from DSI are expected to make annual contributions calculated as 1% of their profits, or 0,1% of their revenue.

The contribution rates were a major point of debate at COP16. Countries from the Global North strongly opposed setting a rate, arguing it should be delayed until COP17 in 2026, when more data would be available. However, two days before COP16 ended, the chairpersons added rates of 1-2% of profit and 0.1-0.2% of revenue. Opposing countries managed to reduce the rates to "only" 1% of profit or 0.1% of revenue, but couldn't eliminate them entirely. As a compromise, the final COP16 decision includes a plan to commission a study "on contribution rates, including implications for revenue generation and economic competitiveness."

The COP16 Decision does not define "directly or indirectly benefit", there is no definition of "digital sequence information", and no clarity on whether it relates to global profits or revenue of the entire company or only of specific products or services relating to DSI. These open-ended, vague terms are intentional. COP16 countries aimed to broadly encompass any company that commercially benefits, even minimally, from digital biological resources through e.g., genomics, proteomics, or metabolomics. If your company operates in the listed sectors, you should assume it falls under this mechanism.

The COP Decision is not legally binding on companies. In itself it does not trigger any payment obligations. Countries must adopt national legislation to implement the COP Decision. That said, we think that companies will be under indirect legal, as well as reputational pressure to contribute.

First, the (non-)legal binding nature of the Decision was present throughout COP16 negotiations. The Global South governments (e.g., Brazil, India, Egypt, South Sudan) insisted that paying to the Fund is an obligation - regardless of the exact legal status of the COP Decision, insisting on the verb "shall" contribute. In clear opposition, Global North countries (e.g., EU, UK, Switzerland, Canada, Australia) insisted on a softer language insisting that the COP cannot create legally binding obligations so that payment should be "incentivized" and "encouraged". The COP16 Decision reads that companies "should contribute". By way of example, the EU's press release on 5 November reads that "pharmaceutical, cosmetics, agribusiness, nutraceutical, and large technology companies that benefit from genetic data are encouraged to contribute to the Cali Fund."

Second, as flagged in our pre-COP16 Client Alert, we are concerned that the EU's Corporate Sustainability Due Diligence Directive ("CS3D") expressly refers to the Convention on Biological Diversity as one of the instruments companies should demonstrate compliance with. This may comprise payment to the Cali Fund for covered sectors.

Third, India published its new Biodiversity Rules on 25 October 2024, which will enter into force on 25 December 2024. These rules require foreign entities:

"…applying for any intellectual property rights, in or outside India … for any invention based on research or information including digital sequence information on biological resource which is accessed from India, including those deposited in repositories outside India, … shall seek prior approval [of the Indian Biodiversity Authority] before grant of intellectual property rights, by the competent authority in India or elsewhere."

Finally, the industry response is likely to be fractured unless a significant advocacy effort is organized. Some industry sectors appear to consider that it is best to voluntarily pay into the Cali Fund; while other sectors appear more likely to oppose the COP16 Decision. Fueled by press and non-governmental organizations, payments by one are likely to generate reputational pressure across sectors.

DSI payments by companies can be made directly to the global fund, or may be made through a national authority. The COP16 Decision states that "receipts will be issued at the point of contribution to the global fund." Additionally, paragraph 15 reads that

"[f]or each year that users make monetary contributions to the fund in line with the modalities of the MLM, they are considered to have fairly and equitably shared monetary benefits arising from the use of DSI under the MLM and will receive a certificate accordingly. Such a certificate excludes the users from any expectation to share further monetary benefits from the use of DSI within scope of the MLM for that year." (our highlight)

When making payments, companies will need legal certainty that they are free to commercialize products or services that "benefit" from DSI, to avoid overlapping requirements under national access and benefit-sharing laws implementing the Nagoya Protocol, or other global payment schemes such as the WHO Pandemic treaty or the High Seas Treaty. However, concerns remain about the certificate's relevance to companies. Early proposals that payment would "guarantee compliance" with any access and benefit-sharing requirements were replaced by language that the Cali Fund is "without prejudice to national access and benefit-sharing measures." The highlighted language above further makes it unclear what DSI is covered, or who gets to decide, and even suggests that payments are required indefinitely.

COP17 will take place in October 2026 in Armenia. In the next two years, companies should prepare for at least two milestones:

First, early 2025, "relevant organizations" will be "invited to submit views" on the COP16 Decision. We strongly urge readership to prepare a strong position in advance of this invitation. Covington is assisting some of the sectors listed in the COP16 Decision, but there is a real need for a wide, cross-industry response to avoid the worst excesses of the Cali Fund.

Second, in 2025, three studies will be commissioned, including the one on contribution rates, and implications for revenue generation and economic competitiveness. It is critical that companies shape this study. So far, countries have negotiated in a knowledge vacuum, agreeing a system that is likely to damage R&D and innovation.

Late 2025 or early 2026, there will be a meeting of the "Subsidiary Body on Implementation" that will consider the stakeholders' input and the three studies. This meeting will formulate recommendations to further tease out the modalities of the Cali Fund, to be adopted at COP17 in Armenia.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Food, Drug, and Devices practice.

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