Biodiversity is increasingly included as a key performance indicator (KPI) in sustainability-linked bonds (SLBs), as the market is expected to accelerate compared to last year, a UN Development Programme (UNDP) official has said.
SLBs are performance-based instruments that require issuers to achieve predefined ESG targets, giving issuing entities more discretion over spending proceeds than many other green finance instruments.
With green bonds, for example, proceeds are allocated in part or in full to fund specific projects in a number of environmental areas, ranging from renewable energy to biodiversity.
Speaking at a webinar on Tuesday, Tenke Zoltani, senior thematic debt advisor at UNDP and founder of Better Finance, said that while the nature bonds market is still nascent, biodiversity is growingly included among SLB criteria.
“If we look at sales of bonds that mention biodiversity in their frameworks, they reached a record high of $165 billion at the end of August 2023,” she said.
“We don’t have the most recently reported number yet, but we know that it’s been a significant growth,” Zoltani said, adding that the figure could have reached $200 bln so far.
Bonds incorporating biodiversity loss prevention and nature protection now account for almost a third of total ESG labelled debt issued so far this year, up from just 3% in 2015, Zoltani said.
“At this pace, annual issuance of such debt could come close to $300 bln by the end of 2024.”
According to an analysis carried out last year by rating agency Sustainable Fitch, nature is expected to become increasingly mainstream within ESG as the universe of investable assets grows, with a steady rise in the issuance of SLBs featuring biodiversity.
A separate survey by Citi this year revealed that 66% of the 139 investors who responded are either making some progress in integrating biodiversity loss within their investment analysis or planning to do so in the next 12 months.
As for green bonds, while issuances reached a record $630 bln in 2021, only a small portion of those proceeds are invested into biodiversity, Zoltani said.
“Biodiversity has yet to become a mainstream investment in the green bond market, with some 8% of the total raised in the market directly funding nature protection efforts, compared with over 50% in renewable energy infrastructure.”
Nature-related bonds remain a relatively niche part of the issuances market, but they have gained traction in recent years with high-profile announcements of conservation-linked transactions such as the Gabon Blue Bond last August.
Last month, the GEF Council backed the launch of a new blended finance instrument to be issued by the World Bank, dubbed Indonesia coral bond. It will build on the previously funded rhino bond and help connect private capital with urgent conservation needs.
FRAMEWORKS
According to Zoltani, companies are increasing their pledges to be more ‘nature positive’, and new frameworks are being developed to improve market transparency, like the Taskforce on Nature-related Financial Disclosures (TNFD) recommendations.
Moreover, Zoltani said, the newly approved EU Nature Restoration Law will have global and long-standing effects.
“The law is going to have an influencing effect on global and emerging markets, which could lead to increased green and sustainability bonds.”
“If the EU can successfully devise instruments where the bonds are using nature-based cash flows to repay, then that will have a halo effect,” she added.
By Giada Ferraglioni – giada@carbon-pulse.com
*** Click here to sign up to our twice-weekly biodiversity newsletter ***
