How bond markets can battle nature loss

‘Nature-positive’ investment is the latest frontier in sustainable finance. By supporting biodiversity and ecosystems, investors can help restore and strengthen the natural infrastructure that underpins the global economy. As lenders to countries and corporations, bond markets have an essential role to play in incentivising behaviour that supports the natural environment, alongside efforts to tackle carbon emissions.

As an emerging concept, nature positive investment is still being defined. Though it has the potential to encompass a vast array of issues and investment priorities, it makes sense for practitioners to start with those given urgency by policymakers and investor groups: land use and deforestation.

Deforestation, a critical contributor to climate change, not only releases vast amounts of carbon dioxide when trees are cut down and burned but also destroys habitats, leading to biodiversity loss and ecosystem imbalances. As lenders to companies with deforestation risk, from food producers to housing developers, fixed income investors have the power to curb deforestation, and in so doing advance their climate mitigation and adaptation efforts.

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However, investments that promote responsible land use and combat deforestation face several challenges. Chief among them is the issue of measurement and accountability. The absence of globally accepted quantitative and qualitative metrics makes measuring the efficacy of such investments difficult. This challenge is amplified by the complex nature of supply chains, where the end financial product might be multiple degrees removed from the land use decisions that underpin deforestation.

The green bond market is still finding its feet when it comes to deforestation solutions. A case in point is European supermarket retailer Ahold Delhaize’s recent deal combining vanilla, green, and sustainability-linked debt. The company’s green bond framework focuses investment on projects that reduce direct operational emissions, yet does not touch on the (much larger) problem of Scope 3 emissions, which include deforestation-linked impacts from the vast array of goods and services it offers consumers.

SLB's - clear targets required

Sustainability-linked bonds (SLBs) present a real opportunity to make significant strides here. These bond products are not tied to a particular project, rather they provide financing to the company or government based on their commitment to deliver targets, be they related to emissions, deforestation or land use goals.

This necessitates the setting of clear, quantitative targets and tools to monitor progress towards them. Their limited take up to date may explain why certain good candidates for issuing SLBs on the deforestation theme have yet to do so. For example, Brazilian beef producer JBS has issued two SLBs, but neither has a deforestation target.

Efforts are underway to ensure useful metrics are developed, notably through initiatives like the Taskforce on Nature-related Financial Disclosures and policies like the European Union’s Deforestation Regulation. Investors don’t have to sit on their hands, though. They can demand improved disclosures, standardised reporting, and third-party verification to bring about the conditions where SLBs can have maximum impact.

Sovereign issuers point one way forward. Uruguay issued its inaugural SLB in 2022, with one target linked to the restoration of native forest area based on a 2012 baseline. Though the lack of available data on reforestation trends makes it tough for investors to judge the feasibility of this target, it shows that bold issuers can incorporate nature goals in SLB structures.

Nature-positive fixed income investing is in its early days but with the pressing threat that environmental risk is creating for companies and sovereigns, nature conservation will soon be on a par with emissions as a standard investing metric. Fixed income investors can safeguard their portfolios by aligning financial flows with the broader objectives of climate mitigation and adaptation. The development of robust metrics, greater transparency, and investor engagement will be critical stepping stones on this path.