The International Finance Corp has developed impact metrics for biodiversity bonds that it expects to surge to rival the green bond market and potentially revive the flagging fortunes of the sustainability-linked bond market.
Rapid growth in biodiversity bonds could help to address the yawning funding gap for nature that was exposed at the UN-backed COP16 biodiversity negotiations in Cali, Colombia, in October when countries failed in an attempt to mobilise US$200bn annually in conservation funding by 2030.
"My objective is to create a new asset class of biodiversity bonds. I think that we can bring biodiversity bonds to scale because in capital markets, thematic bonds are probably the name of the game," said Alfonso Garcia Mora, vice-president for Europe, Latin America and the Caribbean at the IFC. "One thing that will be important is the extent to which the big financial institutions lean forward into biodiversity bonds, which will determine the potential of this market."
To coincide with COP16, the IFC published Biodiversity Finance Metrics for Impact Reporting in October and launched new biodiversity investments in Ecuador and Colombia.
The IFC announced a US$100m investment in Ecuador's Produbanco, a third of which has been earmarked to support biodiversity projects and finance. The remainder will support climate-smart projects and increase finance to women-owned small and medium-sized enterprises.
An investment of up to US$50m in a green bond issue by Colombia's Banco Davivienda that will be used to protect biodiversity and nature was also announced, which the IFC said was the second biodiversity bond following issuance in July of the first US$15m tranche of a biodiversity bond for BBVA Colombia that is expected to total US$70m.
Much of the work on biodiversity bonds is taking place in Latin America ahead of the UN-backed COP30 meeting in Brazil next year, and the IFC is supporting a similar focus on innovative financing instruments for the region by other multilateral development banks.
The Inter-American Development Bank and the World Bank have begun publishing guidelines for a new class of labelled bonds to support the environmentally critical Amazonia region, The guidelines were released as nearly 50 financial institutions across the nine Amazon countries signed up for an “Amazonia Finance Network” launched by IDB Invest and the International Finance Corp, the private sector arms of IDB and the World Bank, respectively.
"In Latin America for sure, we see more biodiversity bonds coming. I see a lot of demand in Brazil," Garcia Mora said.
New metrics
The lack of metrics has been holding back biodiversity and nature financing for some time despite increasing market interest and most banks, particularly smaller ones, lack an impact reporting system that can identify the outcome of lending.
It was a problem that the IFC encountered when working with BBVA Colombia and Banco Davivienda to analyse their lending books and identify clients with nature-positive activities that could benefit from biodiversity financing.
"The difficulty that we found when structuring biodiversity bonds was not really the guidelines but the metrics – the main issue was how to ensure that the bank follows the methodology of reporting back and that's something that the financial sector is not used to," Garcia Mora said. "The disclosure and following up the outcomes ... is the challenge, especially in developing countries", that lending and lenders have.
The IFC's Biodiversity Finance Metrics for Impact Reporting are designed as a "practical tool to advance the growth of the biodiversity finance market" and to offer guidance on impact reporting as data collection and attribution remain challenging.
They build on existing recommendations in green bond and loan principles and identify eligible activities and projects that allow impact reporting by linking metrics to each biodiversity financing activity. They also offer preliminary thoughts on the potential application of impact reporting to sustainability-linked instruments.
"There is growing interest in applying sustainability financing to biodiversity finance in particular," the IFC said in a statement, adding that sustainability-linked structures that aim to support biodiversity objectives would benefit from the development of KPIs tailored to specific sectors.
Examples include a water utility implementing nature-based water management into its sustainability strategy such as using wetlands to improve water quality and a forestry company aiming to increase the area of land that it dedicates to conservation and restoration beyond legal requirements.
The metrics were published in partnership with BNP Paribas, the Finance for Biodiversity Foundation, a group of 190 financial institutions with €22.6trn of assets under management, Natixis CIB and NGO the Wildlife Conservation Society as a supplement to the IFC's Biodiversity Finance Reference Guide, which was published in November 2022. The metrics are compatible with the Taskforce on Nature-related Financial Disclosures.
Garcia Mora said the creation of standards and taxonomies that identify sustainable investment is crucial to scale up financing and avoid fragmentation of the fledgling market.
"For thematic investments to grow, you need standards," he said.