Investing in biodiversity is being held back by a lack of financial materiality and policy impetus, though steps forward on an international carbon market could unlock funding for biodiversity, said analysts at a sustainability ratings agency.

The key difficulty with building an investment case for biodiversity is that natural capital has been accessed for free for centuries, so it lacks the financial materiality that investors require, said Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics.

There isn’t the same policy impetus for investing in biodiversity protection as there is for climate, because central banks haven’t identified biodiversity loss as a key economic and macroprudential risk in the same way as they have climate change, Stewart said during a press briefing Tuesday.

He questioned how the work of the Taskforce on Nature-related Financial Disclosures (TNFD) would be translated into the work of the International Sustainability Standards Board (ISSB), seeing as investors are struggling to get to grips with the concept of ‘impact interdependencies’ for biodiversity that the TNFD has put forward.

A key requirement of companies seeking to disclose in accordance with the TNFD is to evaluate their dependencies and impacts on nature, but Stewart said that the financial implications of doing so aren’t clear to investors as natural capital is treated like it’s free.

The ISSB is committed to taking on the work of TNFD and building it into a global baseline standard for investors to use.

The ISSB is part of the International Financial Reporting Standards Foundation (IFRS), an independent organisation that produces accounting rules used in more than 100 countries.

Recently, several financial organisations asked the ISSB to prioritise researching biodiversity over social issues, due to the important role biodiversity plays in responding to the climate crisis.

However, the ISSB has a very clear investment materiality focus, so it’s questionable how much of the TNFD work will survive in the ISSB, said Stewart.

Governments are not yet adopting a preventative thinking approach to natural resource extraction – considering how allowing the exploitation of nature could harm the economy in the long term, he said. This is the kind of approach that would start to put a tangible value on nature, he suggested.

Delegates from nearly 200 countries will gather in Colombia at the end of this month for the COP16 biodiversity summit, marking the first UN biodiversity conference since the Global Biodiversity Framework (GBF) was signed two years ago at COP15 in Montreal, Canada.

For COP16 to be seen as successful, observers are looking for countries to come to the table with nature targets, for a monitoring framework to be put in place, for finance to be mobilised, and to define a mechanism to share benefits derived from the digital sequence information on genetic resources (DSI), said Gayaneh Shahbazian, biodiversity engagement manager at Morningstar Sustainalytics.

NOT BIG ENOUGH

Another issue flagged by analysts was the scale of the biodiversity investing universe, which prevents many investors from being able to participate as biodiversity investment products are simply too small and not numerous enough.

The few biodiversity-focused bonds there are simply aren’t large enough for most asset managers, said Tom Eveson, vice president of corporate solutions at Morningstar Sustainalytics.

“If you look at the JP Morgan emerging market ESG bond index and the three large asset managers that will put a lot of money into these things, the bond size needs to be a minimum of $300 million and to have a pure play focused biodiversity programme that needs $300 mln in debt to fund are going to be few and far between,” he said.

Governments and multilateral banks need to de-risk these products and then we’ll see more opportunities, he said.

He gave the example of the World Bank-issued Rhino Bond and Amazon Reforestation Bond, where both the public and private sectors are involved.

Biodiversity impact is also often hidden and not clearly demarcated, said Eveson.

“There are currently 60 biodiversity-linked, sustainably-linked bonds out there publicly” but there are 700+ bonds that have allocated funds to ecosystem restoration or some kind of biodiversity programme, which is hidden among the documentation, he explained.

Biodiversity is also behind the agenda after climate change.

There are only 34 funds in biodiversity and natural capital globally, all in Europe, representing only $3.7 billion of assets. That is dwarfed by the $530 bln invested in climate funds globally, said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.

“So, climate change really is stealing the show in terms of priority” and the lack of data on biodiversity and single set of metrics for investors to turn to is really holding things back, she said.

ARTICLE 6 IMPACT

Improving the function of international carbon markets could unlock further funding for biodiversity in the National Energy and Climate Plans (NECPs) of EU member states, said Bioy.

She referred to recent progress to advance the Article 6 mechanism and said that she expects to see further progress on developing methodologies at COP29 in Baku, Azerbaijan next month.

“The final recommendations on methodologies and emission removals that we expect to be announced in Baku have the potential to unlock further capital for climate mitigation and adaptation plans, as well as biodiversity,” she said. 

By Bryony Collins – bryony@carbon-pulse.com