15-12-2022 09:13

Biodiversity: The next frontier in sustainable finance

The World Bank’s recent issuance of a sustainable development bond raising awareness for biodiversity highlights investors’ growing interest in the issue. Biodiversity loss is directly linked to climate change, both reinforcing each other, with their interaction amplifying the risk of reaching planetary tipping points.

Biodiversity is rapidly climbing investor agendas. One case in point is the World Bank’s recent issuance of a NOK 5 billion sustainable development bond raising awareness for biodiversity and ecosystem services.

The International Bank for Reconstruction and Development (IBRD) bond drew strong investor interest after its launch on 15 November, becoming the largest non-sovereign NOK SSA (sovereign, supranational and agency) deal of 2022. Nordea acted as sole lead manager on the issuance.

Kamal Grossard-Amin, head of SSA Debt Capital Markets at Nordea, says the “extremely successful” outcome “demonstrates the commitment of both the issuer and the Norwegian investor base to transition to a sustainable society and raise awareness for biodiversity – a topic central to sustainability.”

Heike Reichelt, Head of Investor Relations and Sustainable Finance at the World Bank Treasury, adds: “It’s great to see investors’ growing interest in this topic. They’re looking for ways to show support for biodiversity.” She noted, however, that there’s still a way to go to “mainstream biodiversity into regular decision-making.”

What is biodiversity?

Biodiversity describes the vast variety of life on earth. It refers not only to species but also ecosystems that we rely on for crop pollination, soil formation, clean water, carbon sequestration and flood protection. The diversity and interaction of animal, plant and marine life keeps ecosystems functioning and our economies productive.

“For us, it’s a development issue,” says Christian Peter, Practice Manager for the Environment, Natural Resources and Blue Economy's Global Platform Unit at the World Bank. “Many of our economies, particularly in developing countries, rely on nature and functioning ecosystems for resources, services and industries.”

Biodiversity is also closely interlinked with climate, as explained in the World Bank’s publication “Unlocking Nature-Smart Development”. Damaged ecosystems no longer store carbon but release it, exacerbating climate change. Lost wetlands mean less flood protection. Land use changes can also increase the spread of infectious diseases such as COVID-19, as humans and animals come in closer contact.

Natural capital has suffered a steep decline in the past 50 years, and at least one million species are threatened with extinction in the coming decades. The World Economic Forum’s 2022 Global Risks Report ranks biodiversity loss as one of the top three threats humanity will face in the next 10 years.

Making the economic case for nature

The World Bank is one of the largest international financiers of nature, working with partners to mobilise private capital and deploy concrete solutions around the world.

One of the organisation’s focus areas is called “natural capital accounting” – ensuring that countries view nature as an asset to be included on their balance sheets. While programs such as WAVES (Wealth Accounting and the Valuation of Ecosystem Services) have been successful in getting natural capital onto balance sheets, the next step is to get it into the decision-making process, says the World Bank’s Christian Peter. The value of nature is not sufficiently taken into account in political and economic policy, he says, adding:

“We need economists to factor nature into their economic models. If you don’t take care of it, you won’t be able to reap the benefits you’re expecting in terms of jobs and growth.”

Investor interest in biodiversity

Investors welcomed the opportunity to invest in the World Bank’s sustainable development bond raising awareness for biodiversity.

“We are today witnessing rapid ecosystem changes and loss of biodiversity at an alarming rate due to climate change, unsustainable resource exploitation and overconsumption, particularly devastating for the developing countries,” said Kristine Lien, Portfolio Manager at Kommunalbanken, one of the investors in the bond.

“The need for preserving ecosystems and biodiversity is fundamental to ensure sustainable development, climate resilience, health and prosperity. World Bank is doing a very important work in combating climate change and biodiversity loss and KBN is pleased to support this,” she added.

Sparbanken Vest, another investor, said the bond fits with the bank’s strong ESG focus: “Investments like this represent both a safe investment and align well with the bank’s own long-term ESG strategy,” said Thomas Colliander, Finance Manager, Treasury at Sparbanken Vest.

The World Economic Forum estimates that over half of the world’s GDP, $44 trillion of economic value creation, depends on nature and its services. Ecological collapse would have far-reaching consequences for countries, businesses, investors and humanity.

The World Bank has developed its Economic Case for Nature, an ecosystem-economy model that highlights development risks from nature loss and effective policy responses. The model is part of the organisation’s contribution to COP15, the UN Biodiversity Conference under way in Montreal, Canada. There, representatives from countries around the world have gathered to agree on a new set of goals for nature and biodiversity over the next decade.

Nature-related financial disclosures on the horizon

Awareness is growing among investors and companies that biodiversity, like climate change, poses significant risks and opportunities. The Taskforce for Nature-related Financial Disclosures (TNFD) has gained momentum this year, developing a disclosure framework for organisations to report and act on evolving nature-related risks. Modelled after the Taskforce for Climate-related Financial Disclosures (TCFD), the TNFD aims to enable companies and financial institutions to integrate nature into their decision-making and to direct capital towards nature-positive outcomes.

Colleen Keenan, Senior Financial Officer at the World Bank Treasury, notes that bond issuance and reporting regimes like the TNFD help connect the dots.

“What investors in the private sector care about helps elevate and build momentum on these important issues, which is critical,” she says.

An estimated $700 billion a year in extra funding is needed to reverse the loss in biodiversity and ecosystem services by 2030.

What is a sustainable development bond?

The World Bank has taken a pioneering role in responding to growing investor interest that has expanded from green bonds to supporting sustainability and the Sustainable Development Goals (SDGs) overall.

In recent years, the World Bank has issued a number of sustainable development bonds, in particular in Nordic currencies, shining a light on issues such as food waste, water and ocean resources, gender equality and now biodiversity.

The sustainable development bond label emphasises the holistic approach the World Bank takes to mainstream these agendas in all its operations, supporting green and social projects.

Sustainable finance