Investments in nature still make up only a minor part of the sustainable finance market, though their share of the ESG bond market is increasing and there is growth potential for carbon credits with nature-based co-benefits as well as in the emerging biocredit market, according to new analysis.
World governments are hoping private money will make up a fair bit of the estimated $700-billion annual funding gap required to meet the targets of the Global Biodiversity Framework (GBF), and while investors are increasingly flocking to nature and biodiversity-related opportunities, their total impact remains modest.
However, analysts with Sustainable Fitch found in their State of the Sustainable Finance Market report released this week that Use of Proceeds (UoP) dedicated to terrestrial and aquatic biodiversity featured in 16% of sustainable and green bonds issued in the first eight months of this year, compared to just 5% in 2020.
At the same time, the report noted that bonds with nature UoPs tend to offer broader opportunities for investors.
“These tend to feature more often than biodiversity conservation itself in the UoPs of green and sustainable bonds, pointing to a potentially larger universe of investible assets for investors seeking to build nature-themed portfolios,” the report said.
“About a fifth of GSS bonds feature pollution prevention and control as a UoP with almost a quarter including sustainable water management. Some projects aligned with both of these UoPs can be effective in addressing the overexploitation and degradation of natural capital – a key aim of nature-positive investing,” Sustainable Fitch added.
The analysts were less optimistic though about sustainability-linked bonds (SLBs) and debt-for-nature swaps as instruments that could be scaled up to address the nature and biodiversity crises.
“Biodiversity remains a very niche segment within the SLB market. This partly reflects the practical challenges involved in defining KPIs in a thematic debt market where capacity and expertise is scarce, and methodologies are still nascent,” the analysis said.
“Tracking and reporting necessary KPI data also pose administrative burdens due to their complexity and the fact that biodiversity-related data are often location-specific (such as hectares of forest cover restored in a specific area), and so are costly to collect and report.”
Meanwhile, the analysis found that despite their recent rise in popularity, debt-for-nature swaps are unlikely to scale as they are “inherently complex, costly to arrange, involve specialist expertise, and require coordination across multiple stakeholders”.
CREDITS
A more promising growth area for nature and biodiversity investments would instead be carbon credits generated from nature-based solutions as well as emerging biodiversity credits, according to Sustainable Fitch.
Nature-based carbon credits tend to fetch a premium from buyers and demand is likely to increase as the market matures despite a spate of recent criticisms, the report said.
Biocredits as well have growth potential, the analysts found, though they stressed that the market is still at a very early stage and will likely need time to be properly established.
“The most immediate challenge is that biocredits can encompass a wide variety of projects and geographies. They therefore lack a universal metric that can apply to every project, a challenge that is compounded by the issue of the non-equivalence of ecosystems and species,” said the report.
“The situation contrasts with carbon credits, which represent one tonne of carbon dioxide equivalent. This suggests biocredits may be purchased by entities that are geographically close to the credit’s underlying project, at least in the first stage of a potential voluntary market.”
Sustainable Fitch also noted that like carbon credits, biodiversity credits might go through a challenging period of establishing credibility before they can reach full potential.
By Stian Reklev – stian@carbon-pulse.com
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