Investing in biodiversity: navigating nature-related risks and unlocking opportunities

Conservationists and capitalists rarely see eye to eye. But as the world battles a biodiversity crisis, the two groups are working together like never before, and in increasingly innovative ways.

From the issuance of corporate bonds to protect oyster reefs to the sale of financial securities whose proceeds are used to remove plastic pollution from the sea, the finance industry is looking to play a far bigger role in mitigating nature loss and restoring biodiversity. 

The shift comes as nature-related risks to the corporate bottom line – be they operational, regulatory or reputational – have become too big to ignore. Biodiversity hazards, such as wildfires, heatwaves and the collapse in the number of pollinating bees and marine fisheries, are increasingly weighing on corporate profitability across several industries. Research shows that food companies, retailers, forestry firms and miners are among those most heavily affected by the effects of ecological damage. 

But the major motivation behind the new wave of investment does not appear to be just about risk mitigation. As the World Economic Forum calls on 2025 to be the year of nature-positive finance, companies and their investors increasingly realise that investing in biodiversity can also unlock new business opportunities.

Nature bonds

Nowhere is this trend more apparent than in fixed income markets, where nature has overtaken climate change as the biggest reason for raising capital with green and sustainability bonds. According to the Institute of International Finance (IIF), bonds incorporating biodiversity loss prevention and protection objectives accounted for nearly a quarter of total ESG-labelled debt issued last year, with the annual issuance exceeding USD300 billion – an all-time high and double the level seen in 2020.

Sovereigns and supranational institutions have been spearheading the development of biodiversity-related capital, but corporate borrowers are beginning to enter the fray. That's in response to the implementation of a growing number 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. 

Two types of corporate biodiversity bonds have been in the ascendancy.

The first is the Use of Proceeds (UOP) bond, through which the money raised is earmarked for specified sustainability projects. Interestingly, the issuance of such bonds has grown in the past few years, while sales of other types of ESG debt have flagged because of fears over a lack of transparency.

Among the most popular UOP nature bonds have been those that fund terrestrial and aquatic biodiversity conservation objectives – both recognised as an eligible UOP category by the International Capital Markets Association. These represent some 16% of all new biodiversity bonds issued in 2023, up from 5% in 2020, according to Fitch.

Among the issuers coming to market is Chilean pulp and paper company CMPC. It issued bonds with UOPs in sustainable forest and water management and restoration of native forests.

Finnish forestry company Stora Enso issued a number of green bonds with UOPs earmarked for sustainable forest and water management as well as pollution control, among others.

The second type of biodiversity bond popular among corporate issuers is the sustainability-linked bond (SLB). The distinguishing feature of SLBs 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 pre-defined time frame.

Brazilian pulp and paper company Klabin offers an interesting case study. It recently sold an SLB with sustainable performance targets linked to its nature and biodiversity related goals, with the final maturity of 2030 and with 2025 as the trigger for the pricing of the next interest rate.

The company's 2030 goals include:

• Reintroduce two species that are proven to be extinct in a certain habitat and promote the population reinforcement of four more threatened species. Coupon payment increases by 6.25 basis points if the target is not met.
• Water consumption equal to or below 3.68m3 per ton of production, representing reduction of 16.7% versus 2018. Upward coupon readjustments of 12.5 basis points if the target is not met.

Nature-risks within portfolios

When issuing these bonds, collaboration with conservationists and environmental researchers is crucial in setting science-backed objectives that can deliver real and measurable benefits for nature.

But it isn’t only in the debt markets where natural capital is making its presence felt. Increasingly, stocks are also becoming a source of biodiversity-related investment opportunities.

Research from impact investment consultancy Phenix Capital showed the number of funds focusing on biodiversity more than doubled to over 1,000 since 2018, raising at least EUR200 billion of capital.¹

Separately, index provider MSCI has found that more than 80% of nearly 1,700 firms within its All Country World Index referred to biodiversity and nature-related terms in their annual reports, demonstrating the business world’s improving awareness.²

There is a growing number of large institutional investors who have started to consider nature-related risks and tap into biodiversity opportunities.

Take the Netherlands’ ABP. The country's largest pension fund has become an anchor investor for an inaugural private blue bond placement from Danish renewable energy firm Orsted to finance biodiversity conservation efforts in the ocean.

Norway’s sovereign wealth fund is another example. The fund, the world’s largest with USD1.7 trillion of assets under management, has subjected 96% of its portfolio to natural capital risk assessment. It has also divested from companies which it believes are highly exposed.

“As a globally diversified investor, we have an interest in understanding how the companies we own depend and impact on nature,” its report reads. “Our strategy aims to ensure that the fund’s portfolio is well positioned to handle the associated challenges and capitalise on relevant opportunities.

Biodiversity finance: blossoming

Companies, investors and policymakers are increasing committed to protecting biodiversity as they become more aware of both the material risk of inaction and opportunities for attractive returns.

Such momentum is evident for instance in financial sector initiatives, such as the Finance for Biodiversity pledge.³

Under this framework, nearly 200 financial institutions representing over USD20 trillion in assets are committed to align financial flows with biodiversity goals through public advocacy, collaborative engagement and target setting on different asset classes to gauge positive impact.

As nature finance scales up, biodiversity is poised to gain prominence within sustainable financing in the coming years, featuring alongside climate change as a critical concern for companies and their investors.