Green bonds have been of the scene for a while now, but their wilder, more natural cousins are approaching from stage left. These instruments, which may be dubbed as nature bonds, biodiversity, bonds, or environmental bonds, among other titles, are being designed to bridge the gap between the natural world and the world of finance.
As evidenced by it being one of the main focus points at this year’s COP 16 (a.k.a. the biodiversity COP), the global interest in leveraging private finance to fund the protection of restoration of nature is growing. Unlike global treasures like the Amazon rainforest, which continue to do the exact opposite, thanks to us.
This is perhaps unsurprising, given suggestions that financial flows to nature-based solutions (NbS) are way below what is needed. In the State if Nature Finance Report 2023, for example, the United Nations Environment Programme suggested that flows to NbS at the time were in the region of USD 200 billion, which represents only a third of what they believe is required meet climate, biodiversity, and land degradation targets by 2030.
There is then, perhaps, no doubt that more money is needed. But how exactly can capital be directed to help finance nature? In the case of nature bonds, funds are raised by their sale, and the proceeds from the sale are used for financing, so for all intents and purposes they are similar to regular bonds. They way in which they differ is in how the capital raised by their sale is spent, and how this spending can generate returns for investors.
In terms of spending, proceeds may be used to finance conservation and restoration projects, the implementation of nature-based solutions designed for disaster mitigation (e.g. mangrove creation to limit coastal flooding risks), and projects to encourage and facilitate the implementation of regenerative agricultural practices. In terms of returns for investors, these can be generated by government savings deriving from less expenditure on disaster remediation, as well as new or increased revenues from ecotourism, improved agricultural yields, and the sale of biodiversity and carbon credits.
However, responsible investors may wish to consider some ethical criteria when assessing these instruments. For example, such investors may wish to ensure that the bond issuer has established a clear policy to ensure that free, prior, and informed consent is given by any communities (indigenous or otherwise) in instances of land purchases. They may also wish to ensure that, in instances of such purchases, indigenous communities will still be able to access ancestral lands. They have, after all, been stewards of such lands for generations, and have been very effective ones at that.
In summary, instruments such as nature bonds not only represent opportunities for investors to generate returns for clients, but also opportunities to positively contribute to the protection of the natural world while doing so. However, like with many things in life, they are not perfect, and investors may wish to ensure that doing good for the natural world does not come at cost to those people who live in close contact with it.