Risk and Opportunity in Biodiversity: How Sustainable Finance Can Help

As a speaker on the Innovative Structures panel at the Environmental Finance ESG in Fixed Income EMEA 2023 Conference, I had the opportunity to address an issue that is critical to the health of our planet and the global economy: biodiversity. The foundation of our natural capital, biodiversity is under increasing threat from human activities and there are complicated obstacles to solving biodiversity loss.

In this article, I outline how biodiversity loss poses material risks to business and how it connects to many other issues that companies can’t ignore. In addition, I cover how biodiversity conservation presents substantial economic opportunities, and how businesses can address and access these opportunities by issuing linked instruments that integrate biodiversity considerations.

Why Biodiversity Is Important

Biodiversity encompasses everything that comprises the living ecosystem on Earth. Preserving biodiversity is vital to the resilience and productivity of our natural systems and economy. However, human activities have resulted in unprecedented biodiversity loss, with an estimated one million species facing extinction today.¹ This rapid decline, which is tens to hundreds of times higher than the average rate over the past 10 million years, has resulted in a 47% average decline in the extent and condition of the world's ecosystems compared to their earliest baselines.²

The impact of biodiversity loss is significant, affecting the ability of ecosystems to provide goods and services, such as food, clean air and water, medicine, disease control, and regulation of natural disasters. More than half of global GDP is moderately or highly dependent on nature.³ As a result, while biodiversity must be part of the climate solution, biodiversity loss poses a major risk to societal and economic development — and the achievement of certain United Nations’ Sustainable Development Goals.

Biodiversity Opportunities for Business

At the same time, restoring biodiversity also presents economic opportunities. For example, if biodiversity loss in the Amazon rainforest were to reach a tipping point, the estimated cost would be US$ 256.6 billion. But implementing policies to avert that tipping point would generate approximately US$ 339.3 billion in additional wealth.⁴ Reversing biodiversity loss can lead to positive economic outcomes through greater efficiency, increased resilience, development of new products and services, reduced operational costs, and access to new markets and revenue streams.

Despite advances in mechanisms, frameworks and regulations aimed at reducing or reversing biodiversity loss,⁵ most businesses are not recognizing the risks and opportunities and taking steps to meet global biodiversity goals. Recognizing the economic significance of biodiversity is crucial for businesses to start managing risks and unlocking new opportunities for growth, innovation and resilience. Once a company makes it a priority to understand this relationship, it can begin to set up internal processes to bring about change.

By embracing sustainable practices and aligning with biodiversity goals, businesses can help drive the transition toward a more sustainable future. With clear roles, increased accountability, and supportive regulations, the economic potential of biodiversity can be fully realized, ensuring the preservation of our natural capital and promoting sustainable development for generations to come.

Integrating Biodiversity Into Fixed Income

Disclosure on biodiversity is still at an early stage, and clear roles and responsibilities and greater accountability for businesses on biodiversity are fundamental to meet the targets and halt the losses to nature. Integrating biodiversity into fixed income, specifically labeled debt instruments, is a way to address some of these challenges. By integrating biodiversity considerations into the process of issuing labeled bonds, we can help direct capital toward biodiversity-positive investments, while also providing investors with the opportunity to support projects and companies doing the right thing.

This could be done in many different ways. One way is for standard setters to define a specific biodiversity label, which would make the bond’s purposes explicit to investors and regulators. Other than labeling, issuers can also set specific biodiversity-related use of proceeds and targets in their linked instruments, which build in roles, responsibilities and accountability. A great example of this is Uruguay’s Sovereign Sustainability-Linked Bond Framework on which Sustainalytics provided a second-party opinion.⁶ Uruguay’s framework includes a key performance indicator (KPI) on the maintenance of native forest areas. Another example is Stora Enso's Green and Sustainability-Linked Framework,⁷ which includes sustainable forest management activities and a KPI on planting birch seedlings to improve biodiversity.

Another way to prioritize biodiversity is to incorporate biodiversity metrics into the reporting requirements for issuers. This involves developing standardized biodiversity metrics and reporting requirements which, if captured and implemented in the right way, would enable all market players to assess the biodiversity impact of their investments and monitor the performance of biodiversity-related projects, while also incentivizing companies.

In summary, with biodiversity being the foundation of our natural capital and at risk from human — in particular, business — activities, we are seeing regulatory and market momentum to mitigate biodiversity loss. It is, however, crucial for businesses to start acknowledging, identifying and thinking about addressing their biodiversity risks. Businesses that recognize and take steps to reduce the risks they face from biodiversity loss can access new opportunities for growth, innovation and resilience. At the moment, one of the possible steps businesses can consider is to issue use of proceeds or linked instruments frameworks that integrate biodiversity-related targets and KPIs.

For more information on how Sustainalytics can support businesses with sustainable finance solutions and second-party opinions, visit our website or contact us.