New in Biodiversity Finance: Outlook for 2024

As we start 2024, we can expect the formation of the biodiversity and nature finance market to continue to fire on all cylinders across political commitments, market rules and standards, and pledges and transactions by investors and corporates. The biodiversity COP16 scheduled to take place in Colombia from October 21 to November 4, 2024, will be a crucial checkpoint on progress across all these areas. Expect to be overwhelmed with even more reports, pledges, announcements and transactions on all things nature in the lead to COP16.

The private sector will continue to respond to the market’s evolving understanding of opportunities and risks.

Opportunities

In 2024 we can expect to see growth in nature and biodiversity-themed portion of the green sustainable finance market. According to Environmental Finance , 2023 was a record year for sustainable bonds issued with terrestrial and aquatic biodiversity use of proceeds – 255 bonds worth $150 bn, bringing the all-time total to 699 binds worth $452 bn. The number of such bonds more than tripled between 2021 and 2023, demonstrating strong interest from investors in the biodiversity theme. A key caveat to note is that the financial value of these bonds includes all uses of proceeds, of which biodiversity related use of proceeds would constitute a portion. ???

The bigger opportunities will come from investments to transition economic activity towards practices that halt and eventually reverse damage to nature and ecosystems. These opportunities would address a broader range of uses of proceeds such as environmentally sustainable management of living natural resources, pollution prevention and control, and sustainable water management. According to Sustainable Fitch , focusing on these broader areas that address the key drivers of biodiversity loss in economic activity can help investors build nature-themed portfolios. ?IFC’s Biodiversity Finance Reference Guide provides an indicative list of such investments and how they meet individual targets of the Global Biodiversity Framework. Expect to see growing opportunities in the nature-based carbon credits market, extending beyond forests to include sustainable farming, biomass (see below), and ocean-based carbon removal. ?

Risks

Nature-related risks – critical change to Earth systems, biodiversity loss and ecosystem services collapse, and natural resource shortages -- continue to score in the top ten risks over the 10-year period, occupying second, third and fourth place respectively in WEF’s annual Global Risk Report 2024 . Given that nature-related risks have occupied top ten positions in the 10-year horizon chart for several years now, you would expect that they would be showing up in the 2-year chart. That may be happening soon.

2024 is the year of first nature-related disclosures in accordance with TNFD, contributing to deepening the market understanding of risks, dependencies and impacts on nature. TNFD announced ‘early adopters’ of TNFD -- 320 organizations from 46 countries with over $18 tr in market capitalization and assets under management -- which have committed to start making nature-related disclosures based on the TNFD Recommendations published in September 2023. These organizations commit to publish TNFD-aligned disclosures as part of their annual reporting for FY23, FY24 or FY25. (Press release )

Further urgency to get a handle on nature-related risks comes from increasing attention by the regulators. The European Central Bank will focus on analyzing nature loss and degradation and associated economic dependence and financial risks over the next two years. (Environmental Finance ). ECB put out a report “Towards macroprudential frameworks for managing climate risk” that proposes three frameworks for relating climate risks to financial stability, one of which looks at impacts related to nature degradation. According to the report, nature degradation has the potential to cause material impacts manifesting as financial risks, both chronic (largely in food production sectors) and acute (largely related to freshwater). Water-dependent sectors generate a quarter of EU’s GDP. Furthermore, 75% of corporate loans and 31% of corporate bonds in Eurozone are exposed to sectors highly dependent on at least one ecosystem service.

Preparations for meeting the requirements of the EU Deforestation Law that bans imports of commodities linked to deforestation and that comes into effect at the end of 2024 is forcing a rethink of global supply chains. Reuters reported on EU importers of coffee starting to reduce purchases from small farmers in Africa and other areas where ‘deforestation free’ verification is challenging. In addition to forcing changes in suppliers, I think there are likely to be implications on rethinking the role and responsibilities of traders and global brands in emerging markets, especially on the social side. In case of African small coffee framers, who are poor to start with, reduced purchases of their crop for the EU market is likely to make them worse off through the double whammy of lower volume sold and depressed prices. And in tropical countries poverty is a major driver of deforestation. Companies which choose to work with their small suppliers to achieve sustainable outcomes rather than abandoning them should be rewarded by sustainability and just transition minded investors.

MARKET TRANSACTIONS

Circular Economy

The World Bank issued a seven-year $100 million, principle protected Plastic Waste Reduction-Linked Bond. Return to investors is linked to Waste Collection Credits, Plastic Waste Recycling Credits and Verified Carbon Units to be generated by projects funded by the World Bank in Ghana and Indonesia. Investors in the bond will forgo a portion of ordinary coupon payments, channeling $14 million in up-front financing to selected projects to increase capacity, expand to new collection and recycling sites, and install food-grade recycling equipment. In return, the investors will receive annual coupons composed of fixed amount plus payments linked to the sale of a portion of the plastic and carbon credits generated by the projects. The bond offers investors a potential financial benefit compared to regular World Bank bonds. (Press release , FT )

Nature-based carbon credits

California-based Cultivo raised $14 million to advance a large pipeline of nature-based carbon removal projects across forestry, wetlands, grasslands, and regenerative agriculture. In addition to carbon captured, these projects intend to measure benefits to biodiversity, water storage, and local communities. While German BlueLayer raised $10 million for afforestation, reforestation, blue carbon, and REDD+ carbon projects. (Quantum Commodity Intelligence)

Brazil’s re.green received $37.8 million in financing from BNDES, Brazil’s development bank, for restoration of 14,000 ha of degraded land. (Carbon Pulse )

You can now buy carbon credits as you dock in Brazil’s third largest port of Itapoa. The port partnered with the nature-based solutions fintech Ambipar to sell carbon credits to clients using the port terminal. (Quantum Commodity Intelligence)

Microsoft sent a strong signal towards significance of regenerative farming by signing its first 30-year offtake agreement for soil-based carbon removal credits from US-based Grassroots Carbon. (Quantum Commodity Intelligence). Separately, pilots in US Midwest demonstrated that shifting from conventional to organic farming can generate carbon sequestration and, thus, carbon credits in the range of one ton of CO2e per ha.

There is now a methodology developed by Brazil-based Manaus to capture the removal, conservation, and preservation of carbon in agroforestry farming systems with a focus on coffee. Brazil’s certification company Tero Carbon wants to generate carbon credits from Brazil’s sustainable coffee plantations with a minimum size of 5 ha in production and 1 ha under forest conservation. (Quantum Commodity Intelligence)

India's agriculture ministry launched a framework for a voluntary carbon market in agriculture and accreditation for the growth of new trees through agroforestry. (Quantum Commodity Intelligence)

There has been increasing interest in biomass-based carbon removal approaches such as producing biochar from forestry and agricultural waste. This article by WRI provides a good overview of the role biomass could play in carbon capture and storage.

A side but relevant note – this FT piece covered a study that demonstrates that overhauling the global food system could make it a net carbon sink by 2040, while protecting an additional 1.4 bn ha of land and reversing biodiversity loss. But it would drive food commodity prices by 30%. This would be a hard sell politically, adding to already strong backlash from farmers . Thus, advancing additional revenue streams, such as carbon credits, from transitioning to sustainable food production is so important to offset some of the high costs of food commodities. As always, it is not without challenges. This FT article captures the benefits of regenerative farming and points out potential pitfalls to watch out for.

?STANDARDS

GRI updated its GRI 101: Biodiversity 2024 standard to help improve the transparency around the operations in supply chains, location-specific impacts, the direct drivers of biodiversity loss, and impacts on society.?

UNEP FI published a comparison of the main nature-related assessment and disclosure frameworks and standards that might help to wrap your mind around a number of initiatives in this space.

?REPORTS

Global Center on Adaptation published “Financing Nature-Based Solutions for Adaptation at Scale” report that looks at different types of NBS from improvement of sustainable production practices to green infrastructure to conservation and restoration of natural ecosystems and discusses financing approaches across these different types of NBS.

UNDP published “The Nature of Subsidies ” a guide to governments to repurpose subsidies harmful to biodiversity.