This year will prove a “momentous” one for biodiversity finance, after the number of bonds issued incorporating biodiversity loss prevention and nature protection objectives jumped, says Pictet Asset Management.
Biodiversity-focused bonds account for almost a third of total ESG labelled debt issued so far this year, up from just 3% in 2015. At this rate, annual issuance of such debt could reach close to a record $300 billion by the end of 2024.
Pictet Asset Management said for a growing number of investors, biodiversity restoration is seen as a potentially more cost-effective way to tackle global warming and meet net zero goals.
The asset manager said sovereigns and supranational institutions have been spearheading the development of biodiversity-related capital, with borrowers such as the European Union and the World Bank among the first to issue such debt. Together, they account for around two-thirds or all biodiversity-related ESG debt issuance to date.
However, corporate borrowers are entering the picture, against a backdrop of nature-related company regulations and reporting standards, all of which are geared to force firms to consider biodiversity protection as part of their net zero planning.
Pictet Asset Management said the Use of Proceeds bond has grown in popularity in recent years, despite a downturn in other types of ESG debt. Among the most popular UOP nature bonds have been those that fund terrestrial and aquatic conservation objectives. These represented 16% of all new biodiversity bonds issued in 2023, up from 5% in 2020.
Sustainability-linked bonds have also proved popular among corporate issuers. The distinguishing feature of this bond is that they include a mechanism through which their terms and conditions, such as the interest rate or coupons, change depending on the company’s ability to meet its specific performance objectives within a certain timeframe.
Corporate biodiversity bonds have proved particularly popular among issuers based in emerging markets, where they have accounted for nearly two-thirds of all biodiversity-related corporate bond issues. Pictet Asset Management said emerging market corporate borrowers look likely to make greater use of biodiversity bonds, because they are home to the world’s most diverse ecosystems which are more heavily dependent on nature for their wellbeing and prosperity.
According to Pictet Asset Management, growing investor demand for biodiversity bonds may also reflect favourable financial performance of the asset class. The IIF noted that the median return of biodiversity fixed income funds stood at just over 10%, outpacing conventional peers.
Despite this, senior client portfolio manager Sabrina Jacobs and senior investment manager Philipp Buff at Pictet Asset Management, said the market still has some way to go before it becomes mainstream.
“Biodiversity has yet to become a mainstream investment in the green bond market. The use and setting of biodiversity performance targets has significant room to improve as the current framework makes it difficult to quantify and monitor biodiversity gain or loss accurately. A more standardised biodiversity finance architecture should help investors ramp up their capital commitments for companies with nature restoration projects.
“It could be a matter of time before nature-related bonds follow the same path of climate to become a standard environmental feature in the global sustainable fixed income market,” they added.
