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The risk of large-scale biodiversity loss is at all times high, but biodiversity finances are still too nascent to meet the challenge. Humans have already altered 75% of the earth’s land surface and 66% of the ocean, causing biodiversity loss and leaving one mn species facing extinction. The long-run economic damages from biodiversity loss are also estimated at a staggering USD 2 tn to 4.5 tn per year, according to a Sustainable Finance Platform (SFP) report (pdf). To reverse this, annual spending on restoration and protection needs to hit the USD 824 bn mark, the UN’s Biodiversity Finance Initiative (Biofin) estimates.
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Major lenders are going to COP16: Biodiversity financing is on Wall Street’s radar for the first time ahead of COP16 with the world’s biggest lenders — including JPMorgan, Standard Chartered, HSBC, Bank of America, Deutsche Bank, and Citigroup — currently attending the UN’s COP16 biodiversity summit in Columbia for the first time next week, Bloomberg reported.
But involvement is still ambiguous: Banks have not made any official commitments to nature and biodiversity financing just yet, and the world is far off from a global voluntary market similar to carbon markets due to a lack of mature frameworks, said JPMorgan’s head of nature and biodiversity Gwen Yu. JPMorgan, for example, is attending COP16 to see how biodiversity “fits into our book” and if there is client demand, while Standard Chartered needs to look into what the most “bankable, investible opportunities” are, according to head of nature Oliver Withers.
Current financing barely steps up to the challenge: It is estimated that up to USD 824 bn would be needed annually to protect and restore nature by 2030, which is far above the current USD 143 bn annual spend of 2021, according to the UN’s Biodiversity Finance Initiative (Biofin). Although more and more private entities are turning to green investing tools to satisfy climate commitments while turning a profit, investment in targeted biodiversity funds is limited, currently estimated at just USD 4 bn of volume by MorningStar Direct. Banks had previously kept their distance from the uncertainty of the issue but they may be having a change of heart as biodiversity rears financial potential.
The health of biodiversity is linked to the health of economies and societies. Marine and terrestrial ecosystems act as major carbon sinks taking in 60% of global emissions, and biodiversity accounts for USD 235 bn – USD 577 bn in economic output. Ecosystem services as a whole are responsible for USD 125 – 140 tn per year of societal benefits, which is equal to around one and a half times the global GDP in 2020, according to the SPF report.
Financial institutions are also at risk: Financial institutions are also hit with credit and investment risk, market risk, legal risk, or regulatory risk as a result of biodiversity loss, the report states. If natural resources become hard to access, production problems would plague supply chains, harming investment returns. In terms of legal risk, those who incur damages can pursue legal action especially as more and more governments ask banks to disclose their biodiversity impacts.
One emerging biodiversity finance product is public debt-for-nature swaps, in which governments refinance debt to then put it towards conservation, but the tactic remains at a low volume, according to Bloomberg. Only two major agreements involving Ecuador and El Salvador — marked at USD 1.6 bn and USD 1 bn — were reported before, respectively.
They come with scrutiny: Ecuador’s USD 1.6 bn agreement is currently under investigation over whether there were breaches of the Inter-American Development Bank’s environmental and social policies, and some analysts are casting doubt over the possible efficacy of investing in El Salvador.
Biodiversity credits are another option: These credits offer a means for conservationist groups to monetize their biodiversity efforts and sell them as units to corporations looking to support preservation efforts, or meet their own sustainability targets. For biodiversity credits to work, they need to offer an alternative to biodiversity offsets. This alternative should not allow companies to damage nature in one part of the world.
Some argue there’s proof in the pudding: The United Nations Development Programme (UNDP) is backing biodiversity credits to boost conservation efforts, according to the UNDP. The UN Convention on Biological Diversity says the tool, if established correctly, can help plug the USD 700 bn financing gap needed per year to protect nature, according to the UN Global Framework for Managing Nature Through 2030.
While others call foul: Over 100 nonprofit organizations and academics voiced their concern over UN support for bio credits, calling it a “ false solution ” that would enable companies to greenwash their businesses without yielding biodiversity gains. “Yet, just as […] carbon offset markets have been a documented failure, thereby contributing to our failure to mitigate climate change, financialising the destruction of biodiversity would most likely fail to address critical loss of biodiversity,” the organizations state.
Other avenues include grants and bonds: Grants are another option for financing biodiversity projects such as through the German International Climate Initiative which has funded such projects since 2008, according to the Biodiversity Finance Initiative. Colombian bank BBVA — with the IFC as a structurer and investor — recently issued the world’s first USD 15 mn tranche of a USD 70 mn biodiversity bond. The bond will finance reforestation, regeneration of natural forests on degraded lands, climate-smart and regenerative agriculture, and restoration of wildlife habitats.
BBVA is a pioneer: The BBVA’s biodiversity bond linked its metrics to environmental benefits, the Financial Times reported. Investors make returns from a mixture of sources including carbon tax, government funding, and donors.
What’s slowing things down? Greenwashing is another big deterrent to green finance in general because the markets are voluntary and lack guidelines, making it hard to determine what is green and what isn’t, Baker McKenzie writes. Since there are no standard criteria for what qualifies as green, issuers decide which of their projects are eligible, allowing them the freedom to maneuver projects. Investors on the receiving end might be wary of the use of proceeds and whether they qualify for their investment requirements. Proponents of the financial tool, therefore, often advocate for increased transparency in the green bonds market.
Ultimately, investors want peace of mind: Since green and biodiversity bonds can be riddled with complexity, including what the standards and guidelines are, some investors choose to opt for more straightforward products. Setting clear guidelines would be key for biodiversity bonds.
