The need to transform how we interact with nature creates a major opportunity for the green bond universe, but also presents challenges.
So far, green bond issuers have successfully embraced funding the transition toward carbon neutrality. But far fewer issuers are currently looking at regenerative biodiversity projects or initiatives that seek to protect our ecosystems from loss.
Aside from the value of nature and biodiversity for our everyday existence as human beings, it is also a massive contributor to economic growth. According to PwC, more than half (55%) of the world’s gross domestic product – equivalent to an estimated $58trn – is moderately or highly dependent on nature, rising from $44trn in 2020. And with all economic sectors having a portion of their value chain dependent on nature, the deterioration of natural ecosystems could have far-reaching implications that are often not being favoured in business risk analysis at present.
Xylem – a global water technology provider – is a rare example of how green bond issuers are starting to look beyond merely tackling climate change. The company helps infrastructure providers detect leaks within their network and prevent the wastage of water; moreover, the organisation aims to operate sustainably and evaluate its water footprint throughout its entire value chain. It also works with non-profit partners to protect and restore water-related ecosystems.
As awareness of the biodiversity threat grows, demand will rise from asset owners, especially ESG fixed income strategies that are not exclusively focused on the net-zero transition, and also through evolving regulation – the same forces that first built momentum for climate related green bonds.
At this stage, the early detection of ideas within the biodiversity theme could prove profitable as high demand and limited supply could drive up the ‘greenium’ of these investments.
Furthermore, as fixed income risk mitigation strategies factor in the threat to biodiversity, investors will increasingly seek to avoid those companies that threaten biodiversity or heavily rely on nature in their value chains without implementing replenishment strategies.
Improving biodiversity-related disclosure
Several new initiatives aim to promote voluntary disclosure standards that factor in biodiversity-sensitive areas as well as all scopes of carbon emissions.
So far, the most promising effort has come from the EU, but clearly much work needs to be done in achieving greater transparency in this area. Following on from the success of the Taskforce for Climate-Related Financial Disclosure, a Taskforce for Nature-related Financial Disclosures has been established to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks.
While we can be encouraged that the research expertise to protect biodiversity is growing, and disclosure standards are improving, the missing piece of the puzzle at present is detailed commitment from the corporate sector to protect biodiversity.
Utilities are the only sector that has issued commitments in a significant way, while the rest of the corporate universe has been quiet. And even within utilities, the overall figures are still low.
As we have already seen with net-zero efforts, only time will tell whether companies voluntarily come forward with biodiversity commitments and action, or if a regulatory push will be needed.
In the meantime, investors can play a greater role through engagement initiatives like Nature Action 100 (NA100) . We are pleased to see investors collaborating in an effort to encourage companies to make these commitments and proactively tackle biodiversity risks.
We have already seen how the asset management industry can successfully lead action on climate change and mobilise both investors and companies to engage with this topic. It now needs to expand its sphere of influence and increase collaboration to embrace the biodiversity crisis, efforts like NA100 are a step in the right direction.
Asset managers will have to fine-tune their research efforts relating to the protection of biodiversity, build up reliable databases and support companies with capital by funding genuine projects that seek to restore and replenish our natural world.