ESG Debt to Play Key Role in Financing Biodiversity

Market participants expect labelled debt to play a significant role in financing projects to restore and protect biodiversity and nature, Sustainable Fitch says in a new report.

In response to a polling question in Sustainable Fitch’s webinar on biodiversity and fixed income on which financing options offered the largest opportunity to increase investments in biodiversity, nearly 30% of respondents – the second-largest cohort – chose labelled bonds, just a few percentage points behind equity investments in ‘solutions’ stocks.

The pool of labelled bonds including terrestrial and aquatic biodiversity conservation as a use of proceeds (UoP) has risen significantly in recent years, with 16% of issues including this UoP in 2023, up from 5% in 2020, according to Environmental Finance data.

These trends are mirrored in the green and sustainability bond frameworks assessed by Sustainable Fitch’s ESG rating teams, with several entities featuring biodiversity-related UoPs in their bond frameworks, notably in corporate sectors with significant impacts on nature such as energy and utilities.

There was a rise in blue bond issuance over 2023 – although they remain a niche segment of the ESG debt market – with Sustainable Fitch providing second-party opinions on two blue debt frameworks in 4Q23 and their alignment with the International Capital Market Association’s blue bond guidelines.

However, the complexity of biodiversity-related data continues to pose challenges for investors with impact-focused strategies, hampering their ability to assess the materiality of nature issues for specific entities or assess entities’ sustainability performance against targets, sector benchmarks or peers.

When polled, the largest share of respondents (37%) said the main challenge to scaling up biodiversity-related investments is not lack of data per se, but that available data are not consistent, comparable or user-friendly.