Nature is a significant topic for stakeholders in government-related investments, with its risks often overlooked by bond markets, consultants AXA Climate said in a report this week.

Biodiversity loss and nature degradation could have a direct impact on the valuations of sovereign bonds, said AXA Climate in the report co-authored with the London Stock Exchange Group.

“Decreases in production capacity and increased vulnerability to natural disasters will negatively impact economic activity, resulting in changes in current account balances, exchange rates, debt profiles, and tax revenues,” the report said.

“Yet in many cases, these risks are still ignored or mispriced in bond markets. Nature is of major interest for sovereign investment.”

Sovereign bonds are key for governments transitioning to a sustainable economy, it said.

Countries such as Ecuador, Gabon, and Peru have issued debt-for-nature swaps since 2023, redirecting billions of dollars in debt towards conservation efforts to support ecosystems.

However, while biodiversity-focused funds and bonds are growing, they remain limited within the sovereign investment space, the report said.

The three-largest nature-dependent sectors – construction, agriculture, and food and beverage – generate nearly $8 trillion around the world annually, the report said, citing research from the World Economic Forum published in 2020.

Mining, aviation, tourism, and real estate are also highly dependent on nature throughout their supply chains, it said.

“Countries that actively work to halt or reverse the loss of nature could see their creditworthiness improved as natural assets become scarcer and more valuable.”

“Ultimately, they might benefit from improved market access, increased capital inflows, and better financing terms, providing them with better ability to repay their debt.”

This is particularly crucial for less developed and small island states, as nature plays a critical role for the livelihoods of many low-income households. Ecosystem service degradation could threaten global poverty reduction efforts, it said.

Incorporating nature-related factors into financial assessments can provide more accurate measures of economic performance, according to AXA Climate.

“In the context of increasing regulatory frameworks, investors are slowly beginning to include biodiversity in sustainable finance policies and in their investment strategies.”

Sustainability-linked bonds related to nature have increasingly emerged over the last few years as innovative ways of tackling biodiversity loss, with issuances from Chile and Uruguay in 2022. These kinds of instruments could grow in collective value to as much as $400 billion this decade, a report estimated in 2023.

By Thomas Cox – t.cox@carbon-pulse.com

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