For the third time in a row, United Nations Environment Programme Finance Initiative (UNEP FI), Principles for Responsible Investment, EU Environment and Climate Business & Biodiversity Platform and the Finance for Biodiversity Foundation are kicking off the year with a webinar on the latest efforts that have potential to scale the market and help close the nature finance gap. Check out the 2022 and 2023 webinar recordings, and register here for the webinar on 30 January 2024.
This year, some of our experts are giving additional depth to our New Year review with this brief on the breakthrough trends in nature finance. For 2024, these are split between 1) products that are increasing in use for scaling finance for nature, and 2) nature-related investment themes.
In products (including instruments and vehicles) we see increased application of 1. Fixed Income Instruments (including Sustainability-Linked Bonds and Loans), 2. Debt Conversion, 3. Blended Finance, 4. Private Equity and Venture Capital, 5. Actively Managed Funds and Exchange Traded Funds, 6. Carbon and Biodiversity Credits; and for themes, the following are growing in investor interest: 1. Indigenous-led conservation, 2. Food & Ag, Ocean, 3. Nature-based Solutions (NbS) for climate, and 4. Nature, defined broadly.
Check out our overview
| Trending products used for nature finance
There are several financial products and mechanisms designed to fund nature conservation and sustainable development, or shift finance away from harmful activities. The nature finance gap is circa $700 billion per year, and dwarfed 140x by investments in sectors with a negative direct impact on nature, but these are the products that were increasingly in use in 2023 and expected to grow in the year ahead:
1. Fixed Income Instruments (including SLBs and SLLs)
Vanilla fixed income instruments refer to financial products with fixed coupon payments, pre-defined maturity dates and face value. These include green, blue, sustainability, SDG bonds as well as Sustainability-Linked Bonds (SLBs) and Sustainability-Linked Loans (SLLs). Given simplicity and standardization of terms, these instruments are preferred by institutional investors, e.g. pension funds and insurance companies which have to abide by strict investment and allocation rules and regulations. Broadly, these instruments are popular because they are a well understood and re-assuring format for investors as the payments are known in advance and remain fixed throughout. Those observing investor behaviour are seeing results from using typical structures with non-complex features. So far most of this activity is within European or US markets, though examples of issuances from emerging markets, where they are most needed, are increasing. Avoiding overheads involved in innovating new structures also has the potential advantage of lower cost-of-capital for issuers that can still serve to achieve the intended outcomes.
Sustainable Fitch reports that the share of green and sustainability bonds featuring terrestrial and aquatic biodiversity conservation in their use of proceeds (UoPs) has increased considerably in recent years. Just 5% of labelled bonds issued in 2020 featured biodiversity conservation as a UoP, but this has risen to 16% for instruments issued in 2023. The recent issuance by Fiji is a relevant example. A much larger share of green, social or sustainable (GSS) bonds feature related UoPs, such as sustainable water management, meaning that investors adopting broader nature themes can tap into a larger universe of assets. One example is Zambia’s $200 million Green Bond, where it is obligatory to disclose the use of proceeds to investors before the issuance of the bond. This clause in the framework ensures that green bonds can be issued solely for the purpose of nature investment out of this program. A similar procedure was followed by Fiji when they issued their first Blue Bond: projects to be financed under the current bond include NbS, biodiversity improvement through sustainable fisheries. Bonds also feature in the growing debt conversion space (next).
2. Debt conversion
Debt-for-nature conversion involves the sequenced application of a number of financing instruments including bonds, de-risking mechanisms and insurance. Supported primarily by The Nature Conservancy so far, this approach has received a lot of attention particularly from indebted countries, who are calling for its broader roll-out. 2023 saw both the largest conversion ever in Ecuador in May and the first ever in continental Africa, in Gabon, during August. Just two weeks after Gabon closed the deal, the country faced a political coup that had many wondering about the fate of the debt-for-nature deal. Subsequently it became clear that these transactions are well-designed to survive many potential circumstances, and indeed the Gabon bond has performed well with all payments made on time. As with other forms of sovereign finance, the deal is done with the state (i.e. not the political party), and unique to this model, the impact activities are set up via a Special Purpose Vehicle to be positioned to navigate potential policy changes. Notably, there is also the element of debt reduction/writeoff which will survive changes in governance because the new ruling parties are incentivised to maintain the financial benefits. There is also risk insurance and other backing built into the transaction. Although Gabon’s bonds had been trading in junk territory (Caa1), the debt-for-nature bonds traded at investment grade Aa2 (Moody) even after the coup, thanks to a political risk insurance policy from the International Development Finance Corp (DFC). DFC’s chief executive said that the insurance illustrates how it can “lift the credit profile of a bond issuance to deepen capital markets”. DFC is sharing 50% of the risk with a group of eight private insurers.
The fact that these transactions are developed so soundly is worthy of celebration (though not without critics who sometimes confuse modern debt conversions with prior smaller, bilateral “debt for nature swaps” and/or with “labelled” use of proceeds issuances). It bodes well for debt conversions as a high potential tool to engage with governments in solving both the debt crisis and building natural resilience to climate change, mostly in Africa where debt distress is highest. At least 5 major multinational banks (and in reality many more privately) have publicly expressed interest in arranging conversions, a market estimated to be worth $800 billion. Kenya is one of many countries where this tool is being actively explored.
Observers suggest more work is needed to help prioritise the countries that are facing the most need and negotiate deals that align with the priorities in their new National Biodiversity Strategy and Action Plans (NBSAPs), and with their Nationally Determined Contributions (NDCs), as a priority, but regional development banks are expected to help with this: debt conversions should accelerate in 2024 after 8 major development banks announced plans to boost financial instruments for sustainable climate and nature-linked sovereign financing. DFC and IDB, who have both actively supported the debt conversions undertaken so far, intend to lead a task force to oversee the new group’s progress. Colombia, Kenya and France also recently launched a review on the links between sovereign debt, climate and nature goals, which should better position countries on these topics.
3. Blended Finance
HSBC and Earth Security identified 31 investment vehicles which have mobilised blended finance in some way to fund nature-based solutions. These fell into 3 categories: Funds (pool of capital from multiple sources), Facilities (earmarked allocation of funding) and Bonds. More participation by private finance, particularly from larger long term investors like pension funds and insurance companies, in the space needs to be matched by de-risking capital and guarantees provided by public finance institutions. We hear broad willingness from investors to join in such funds, but that public finance is not stepping up to match scale or risk appetite at the correct level. This is starting to change for example with the announcement at COP28 by 8 development banks mentioned above who will increase access to mechanisms that lower credit risks investors face on green or sustainability-linked instruments, and the ADB Nature Solutions Finance Hub for Asia and the Pacific. There is heavy debate on de-risking approaches, including whether they should only be used sparingly to prove new transactions types or markets, whether it may be a permanent feature given the uncertain nature of nature-related revenue streams, or entirely limited to avoid introducing a new type of systemic risks.
4. Private Equity and Venture Capital
These are bigger players than ever in nature finance, for example via convertible notes – structured as a debt investment but with a provision that allows the principal plus accrued interest to convert into an equity investment at a later date – or venture debt – a type of loan that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. 2023 saw the launch of several new dedicated VC companies investing in nature and biodiversity, or established PE and VC firms announcing biodiversity as a core theme. “This space is on the cusp of a booming innovation cycle”, said the Head of Natural Capital at Schroders. “There is an emerging thematic opportunity (on nature) in private equity and venture capital investing…. Most of the opportunities today are either start-ups or early-stage, but they will be crucial for scaling the infrastructure and ecosystem to support the growth of the natural capital market.” Reuters reported in May that nature tech startups in fields such as regenerative agriculture, soil health, and natural carbon removals, were attracting the flood of VC finance. More were attracting serious interest at Davos last week, especially building from Artificial Intelligence (AI) technology.
Contributors to this review noted the importance of PE in particular and that it can be paired with concessional capital to help move through the “capital continuum” as it grows towards a viable company, surviving the “valley of death”, widely recognised as affecting start-ups in the commercial arena. PE has the advantage of working on ‘real data’ from the companies they interact directly with, overcoming one of the main challenges of large investors interested in nature. PE investments in nature are largely focused at this point on real assets like land and forests, and can be linked to real asset solutions for re-invigorating land through restoration, always in the context of a wider development. As more PE moves into this space, it also opens up the potential for banks who are not in a position to invest unless there is more risk pooling or “fund of fund” structures, where risk but also direct investor impacts are more diluted. Nevertheless, Phenix Capital Group reports that despite the popularity of private equity as an investment vehicle for biodiversity-related themes, it is still a small asset class now as the capital raised is concentrated in early venture and growth strategies.
5. Actively Managed Funds and ETFs
The number of actively managed funds for nature rose again in 2023, to 972 of which around half are open to investment with a target size of EUR 88 billion according to Phenix Capital’s annual thematic review. Of these, Phenix reports, 678 have a food systems theme. MSCI’s research identified 149 funds globally that were thematically linked to biodiversity based on their criteria, holding circa USD 60 billion, and most of which launched in late 2022.
Several biodiversity- and nature-related ETFs and Indexes launched in 2023, suzpported for example by Posaidon Capitalo who works with major index providers on thematic strategies focused on (i) deforestation and (ii) blue economy. actively managed, thematic strategies in equities have a way to catch up, and these instruments can in some cases be pre-mature as the data underlying the selection of stocks included remains weak, but should improve as an instrument for scaling over time. The development of the Taskforce on Nature-related Financial Disclosures (TNFD) disclosure recommendations could create the opportunity that as TNFD is more widely adopted, there will be a possibility to choose stocks based on TNFD reporting outcomes. Another booster for this will be the development of artificial intelligence (AI). Technology providers are screening relevant information including news related to a specific company on the internet and create a score based on positive (or negative) nature-related news.
6. Carbon and Biodiversity Credits
Major scandals in particular linked to avoided deforestation carbon credits tanked the carbon price worldwide this year. While increased scrutiny and criticism have rocked the Voluntary Carbon Market (VCM), it should not be written off yet. Announcements at COP28 suggested that governments and other stakeholders are doubling-down to boost integrity of the market. Practitioners in this space were deep diving throughout tit-for-tat analyses and rebuttals on how deforestation baseline levels are calculated, reference sites used, dynamic baselines, and other technical matters which had suddenly gained prominence in the mainstream press. Almost universally, stakeholders agreed that more integrity was needed in the governance of carbon credits, and that the work of the Integrity Council on VCMs couldn’t come fast enough.
While the year has been rough for avoided deforestation carbon credits, they still represent an important proportion of nature finance, and MSCI Carbon Markets reports the market performance is surprisingly positive. Governance of the market is also strengthening in response to the crisis of confidence. Sustainable Fitch reports, despite backlash, still rising corporate demand for carbon credits linked to nature-based solutions. John Kerry at COP28 included avoided-deforestation credits in his reference that carbon credits could create “the largest marketplace the world has ever known”.
Following the Kunming-Montreal Global Biodiversity Framework agreement in late 2022, in particular Targets 19(c) and (d), which “encourage the private sector to invest in biodiversity” utilising, amongst others “biodiversity credits … with social safeguards”, biodiversity credits have been a hot topic in 2023 and the first months of 2024 – including at Davos where Indigenous rights was emphasised. But whether biodiversity credits could emerge in time to make a significant contribution to closing the nature finance gap, is a question on many market participants’ minds. While the UK-France Panel has signalled high-level support, commentators suggest we are decades away from a voluntary market generating significant revenue with this mechanism. Nevertheless a rapidly growing number of project developers are starting to offer credits in the voluntary space including Savimbo, CreditNature, ValueNature, Replanet, Terrasos, Ekos, South Pole, Environment Bank, Wilderlands, CarbonZ and Orsa Besparingsskog (forest coop), and circa 30 governments have jurisdictional offset schemes and a handful of these operate crediting schemes for net gain including England’s widely-anticipated Biodiversity Net Gain scheme for any new housing, commercial and infrastructure developments. A smaller number, including the Australia Nature Repair Bill and New Zealand legislation, are undergoing public review for jurisdictional schemes involving credits for restoration not linked to compensation for developments. BloombergNEF (via Compensate Foundation) estimated that the footprint of eight of the most developed existing biodiversity crediting schemes covers more than 800,000 hectares with $8 million in funding so far pledged. The latest (2023) IPR Forecast Policy Scenario (FPS) suggests the market could reach $8 billion annually by 2030 and over $40 billion by 2050. WEF recently estimated that with effective support the market could reach $2 billion per year by 2030 and up to $69 billion by 2050, while the Biodiversity Credit Alliance published a paper that laid out the wide sources of potential demand and motivation for buying credits. In all cases, accurate forecasts are limited by a current lack of a common definition and framework.
Other ecosystem service-related credits are emerging driven by domestic policy frameworks, including reef credits in Australia, which have already generated over $2.7 million in returns for scheme participants; habitat banking in Colombia that is now regulated through resolution, and water credits in Indonesia.
| Trending nature investment themes
Nature is not a standalone topic, and we have spotted these trends in the spectrum of nature-related investment themes, aiming for positive impact:
1. Indigenous-led conservation
A major trend following the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) was a wider recognition within the financial sector of the role that Indigenous Peoples and Local Communities (IPs and LCs) play in stewarding nature. Prior to this, the nature topic was seen by many in the financial sector more as the domain of natural sciences, with IPs being perceived as affected stakeholders only, with requirements for FPIC engrained within international standards such as IFC PS6. Calls for IPs and LCs to be represented in key decisions related to finance and natural capital became more mainstream over the course of the year and many new investments in Indigenous-led conservation were announced; for example the 100% Indigenous-owned Hinemoana Halo Ocean Fund (H20 Fund) supported by Conservation International, the IDB loan facility for Chilean Indigenous people to preserve cultural identity, Canada’s Indigenous Community Infrastructure Fund and the Africa Conservation and Communities Tourism Fund1 (ACCT Fund) supported by TNC.
John Stackhouse of Royal Bank of Canada noted at a meeting of Canada’s First Nations Major Projects Coalition that many investors are now seeking joint ownership of projects with Indigenous communities, recognising the business benefits. Investors in nature markets are more aware than ever that investing in IPs and LCs-led projects is not only the right thing to do, but a key strategy to address environmental, social and financial risks effectively. While Indigenous-led efforts are gaining traction as an investment theme, there is still a very long way to go on the risk side in terms of respecting international law on Indigenous rights: a World Benchmarking Alliance analysis of nearly 400 global agri-food companies found a horrifically small number – only 1% – securing free, prior, and informed consent (FPIC) from Indigenous communities before conducting projects on their territories. The Biodiversity Credit Alliancehas actively promoted a rights-led approach and Indigenous-led project design using traditional knowledge of ecosystems in the biocredits space.
2. Regenerative food and agriculture
Many FIs’ materiality assessments are highlighting food and agriculture-related risks, impacts and dependencies on nature, which in turn is growing awareness of the need to transition to more regenerative practices in this space. The COP28 UAE Declaration on Food and Agriculture should also increase interest in resilient agriculture, and the G20 is expected to act on the removal of harmful ag subsidies. The recommendations of the TNFD have certainly played a part here: although the disclosure recommendations focus on impact and dependency and how these translate into nature-related risk, and guidance on how to report on these topics, the focus of the TNFD has also been on opportunities. An initial heatmap using ENCORE would often show food & ag as highly exposed sectors from both an impact and dependency lens. Participants in the UNEP FI-led TNFD piloting programme and Good Food Finance Network High Ambition Group, for example, explored food- and ag-related opportunities in the emerging landscape of nature tech, or in efforts that reduce pressures on nature such as innovative energy efficiency financing products in Africa. An Asian piloting institution that looked at its investments in wind farms found local fishermen as essential rights-holders in the locations assessed, as their activities could be potentially hampered by the operation of offshore wind structures, requiring closer engagement on sustainable food and energy strategies and investments in the local area. Throughout the financial sector, FIs are waking up to opportunities to invest in food systems transition to net zero, nature positive, and circularity. In April UNEP FI published a roadmap to assist both private finance but also public actors who should provide more de-risking support in this space, to help accelerate this trend. UNEP’s State of Finance for Nature 2023 reports that sustainable land management’s investment potential could quadruple by 2050, driven by sustainable food and commodity production. The COP28 UAE Declaration on sustainable agriculture, resilient food systems and climate action saw 159 countries (to date) committing to integrate agriculture and food systems into their NDCs and NBSAPs with an emphasis on resilience.
3. Ocean (marine and coastal) conservation
Between 2018 and the end of 2022, there were 26 blue bond transactions amounting to a total value of around $5 billion. Then in September 2023, the International Finance Corporation (IFC), the International Capital Markets Association (ICMA), the United Nations Global Compact, UNEP FI, and the Asian Development Bank (ADB) collectively published the long-awaited Blue Bond Practitioner’s Guide. This guidance provides clarity about what a blue bond is, which has reportedly acted as a catalyst to blue bond developers and reassured more market players to enter this space. In November, for example, IFC announced The T. Rowe Price Emerging Markets Blue Economy Bond Strategy, and its plans to raise $500 million in international capital from investors for supporting blue-labelled investments in global emerging markets facilitated through blue bonds issued by financial institutions and real sector companies. JPMorgan says blue bonds have growing relevance as Asia-Pacific economies are reliant on marine resources and many island economies face growing risk of natural disasters. There are critics of this market growth as well: blue financial instruments may be implicated in exacerbating debt for already indebted countries, with knock-on effects on the rights of communities (for example coastal fishing communities in South Africa). One potential investment opportunity remains the growing Marine Protected Area (MPA) segment – which can attract different types of capital based on risk/return and maturity of the MPA.
At the IUCN Leaders Forum in October, the UNFCCC Climate Champions and a dozen supporting organisations launched the Ocean Breakthroughs: 5 pathways to catalyze action to achieve a healthy and productive ocean. The Breakthroughs are expected to catalyse finance via for example Ocean Risk and Resilience Action Alliance (ORRAA) and the Global Ocean Trust.
Further, as more financial institutions look at the nature-related material risks, impacts and dependencies in their portfolio using TNFD-aligned disclosures, we expect to hear more about the ocean as an investment priority. Currently available tools are generally weaker at incorporating marine ecosystems but improvements are expected as demand for this information increases. More awareness of the ocean in supply chains for example is expected to trigger more investments in Sustainable Blue Economy sectors. A Deloitte report estimates that $175 billion investment a year is required to conserve the oceans with more than half of that – $90 billion – necessary just to reduce marine pollution.
4. Nature-based Solutions (NbS)
NbS is an investment theme often linked with carbon credits whereas in fact the UNEP State of Finance for Nature 2023 reports that only 1.5% of NbS finance is derived from carbon markets. Much of NbS finance today comes from a range of disparate sources including biodiversity offsets and credits (11.7%), sustainable supply chains (8.6%) and impact investment (4.6%). Private investment in NbS finance grew by 11% in the past year: though a respectable increment, not as much as would be hoped given that NbS offer significant investment opportunities due to their cost-effectiveness in sequestering carbon and multiple co-benefits. The European Investment Bank has a great report covering the state-of-play in this space.
With the UAE Consensus emphasising “the importance of conserving, protecting and restoring nature and ecosystems towards achieving the Paris Agreement temperature goal, including through enhanced efforts towards halting and reversing deforestation and forest degradation by 2030, and other terrestrial and marine ecosystems acting as sinks and reservoirs of greenhouse gases and by conserving biodiversity, while ensuring social and environmental safeguards, in line with the Kunming-Montreal Global Biodiversity Framework”, we expect natural climate solutions, which can include NbS, to gain more traction this year.
5. Nature, broadly
Many conservation initiatives are moving towards defining nature in its broadest sense, including for example drivers of nature loss, solutions such as circular economy (e.g. in the EU Taxonomy Delegated Acts) or regenerative agriculture, or by realm such as freshwater, or even by groups who steward or benefit from nature. Even the Kunming-Montreal Global Biodiversity Framework adopts a wide approach, not exclusively focused on biodiversity, but on nature in its broadest sense. This takes account of drivers of nature loss, ecosystem services and issues such as biomass, as well as genes, species and habitat diversity. Sustainable Fitch reported that for bonds in particular, a broader framing or multiple types of nature-related Use of Proceeds, have proven easier to secure investment, than solely biodiversity-linked bonds.
At the same time, as many products that previously would have been labelled “blue bonds” no longer claim as such since the blue bond guidance was released, many disparate products are now collected under the loose heading of “nature bonds” or “nature performance bonds”. A recent desk review by the authors found 5 different definitions of nature bonds in use. Consequently, there is a growing demand for similar nature bond guidance more broadly covering other ecosystems and building from guidance such as the IFC’s Biodiversity Finance Reference Guide and the MDB Common Principles for tracking nature-positive finance, but tailored to the bond market. Such guidance could follow a similar format of not introducing new principles but provide additional clarity within the broad ICMA definition of green bonds for a specific theme.
| The year ahead
The trends mentioned above all need to align with the priorities of countries in revising their National Biodiversity Strategy and Action Plans (NBSAPs) to contribute towards the mission and goals of the GBF. TNFD disclosure will help improve the quality of data and enable more “data-driven” nature investing approaches. More financial institutions are setting portfolio-wide targets for nature that will also increase the supply of finance for nature-positive and send demand signals to the business community. Countries will be increasingly enacting policies to safeguard crucial biodiversity assets, redirect subsidies to incentivize nature-friendly practices, address the primary factors contributing to biodiversity decline, and build their networks of protected and conserved areas. Barriers being address include alignment with policy and regulation, and the way the positive impact can be assessed, validated and communicated. More decisions are expected in late 2024 at the UN Biodiversity Conference COP16 in Colombia to further the transformative shift to nature positive economies
Join the webinar on 30 January to deep dive into these trends with market leaders!
- Diana Denke, Executive Director, Fair Carbon
- Ruth Murray, Investment Director, Sustainable Infrastructure,Gresham House
- Alexander (Sasha) Wiese, SDG Finance Expert at theAsian Development Bank (ADB)(also UNEP FI)
- Isabelle Combarel, Deputy Director ofSWEN Capital Partners
- Fabian Huwyler, Founder and Managing Partner,Posaidon Capital
| Author affiliations:
Jessica Smith, Alexander (Sasha) Wiese, Rhea Kochar for United Nations Environment Programme Finance Initiative (UNEP FI), Anne-Marie Bor for EU Environment and Climate Business & Biodiversity Platform, Sylvaine Rols for Principles for Responsible Investment, Natacha Boric for Finance for Biodiversity Foundation
| With sincere thanks for interviews and/or review:
Anita de Horde (Finance for Biodiversity), Oliver Withers (Standard Chartered), Tenke Zoltani (Better Finance / UNDP), Markus H.-P. Müller (Deutsche Bank), Lauren Ferstandig and Svetoslav Gatchev ( The Nature Conservancy), Katie Leach, Lee Backhouse, Rebecca E. (Lloyds Banking Group), Fabian Huwyler (Posaidon Capital), Romie Goedicke den Hertog (UNEP FI), Candice M.D. Stevens Sustainable Finance Coalition / IUCN World Commission on Protected Areas (WCPA), Bethany Davies (Principles for Responsible Investment), Maxim Vergeichik (UNDP BIOFIN – Biodiversity Finance Initiative).