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    Home»Bonds»can biodiversity bonds save natural habitats?
    Bonds

    can biodiversity bonds save natural habitats?

    July 30, 2024


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    In June, the Colombian subsidiary of Spanish banking group BBVA announced that it was issuing what it described as the financial sector’s “first biodiversity bond”, in order to finance habitat conservation and restoration projects in the South American country. 

    The $50mn initiative — backed by the International Finance Corporation (IFC), the private sector-focused arm of the World Bank, as structurer and investor — marks a turnaround for a nation recovering from half a century of violence and guerrilla activity. It also places Colombia among a select group of pioneers, including the Seychelles and Belize, that are using the financial markets to support the conservation of nature.

    While the green bonds market has seen explosive growth in the past decade, the capital it has raised has overwhelmingly been invested in climate mitigation, alternative energy, and green transportation projects. Minimal amounts go to biodiversity conservation and habitat restoration projects. 

    In financing nature, explicitly and directly, this Colombian bond breaks new ground, with metrics linked to objectives to benefit the environment. Investors will be repaid through a mix of funding sources including a carbon tax, the government budget and donors.

    Test yourself

    This is the sixth in a series of monthly business school-style teaching case studies devoted to responsible-business dilemmas faced by organisations. Read the piece and FT articles suggested at the end (and linked to within the piece) before considering the questions raised. 

    About the authors: Andrew Karolyi is professor and dean, John Tobin-de la Puente is professor of practice and co-director of the Initiative on Responsible Finance, both at the Cornell SC Johnson College of Business.

    The series forms part of a wide-ranging collection of FT ‘instant teaching case studies’ that explore business challenges.

    The question for those concerned about the destruction of the world’s natural habitats is whether this pioneering structured bond will be effective, and whether it could help to inspire a broader range of similar instruments aimed at countering loss of biodiversity around the world. 

    Meanwhile, the question for investors is whether the vehicle is sufficiently attractive and robust to attract a new and growing class of funders that may share an interest in environmental issues but also seek competitive returns.


    Located at the northern end of the Andes, Colombia straddles the Equator, the Pacific Ocean, the Caribbean, and the Amazon basin. It has the second-highest number of species on the planet after Brazil, and the highest species diversity when measured per square kilometre, according to the World Wildlife Fund. Colombia is home to more than 1,900 species of birds — on a par with Brazil and Peru.

    Colombia will be on the frontline of biodiversity losses

    But global warming threatens to cause dramatic harm to this biodiversity. Colombia will be on the frontline of these losses because it will be disproportionately affected by climate change compared to countries with fewer species that are more widespread.

    Now, though, it could also be in the vanguard of new financial models to reverse the trend.

    In 2016, a historic peace agreement between the government and leftist guerrilla group the Revolutionary Armed Forces of Colombia (Farc) marked the end of five decades of armed conflict. Despite continuing violence, the peace process has greatly improved the lives of citizens. However, it has also increased pressure on natural ecosystems. The political violence had meant large areas were shielded from illegal deforestation and degradation of the habitat.

    Five years after the peace deal, Colombia became the first Latin American country to issue a green bond in its domestic market: a 10-year $200mn offering aiming to finance a variety of projects intended to benefit the environment — including water management, sustainable transport, biodiversity protection, and renewable energy. High investor demand meant the final amount had been increased by half again.

    Brimming with life: the Amazon rainforest is an important reservoir of diversity for insects, animals and plants © Juancho Torres/Anadolu Agency via Getty Images

    Finance minister José Manuel Restrepo described the structured bond as an “important step” in finding new ways to finance investment in environmental projects: it would help develop a domestic green bond market and attract a wider range of investors. His ministry identified another $500mn in eligible projects that could be financed through green bonds, including a $50mn Colombian “blue bond” — financing focused on marine habitats and ocean-based projects that generate environmental co-benefits. This was successfully placed in 2023 with the help of BBVA and the IFC as structurer.


    Now, the announcement of BBVA Colombia’s biodiversity bond marks another step forward. It focuses on reforestation, regeneration of natural forests on degraded land, mangrove conservation, and wildlife habitat protection.

    In the case of green bonds, only a minuscule share of the money raised is spent on nature conservation, in part because few such projects generate cash flows from which to repay investors. Another reason is that it is harder to measure how effectively deployed resources dedicated to conservation — such as for monitoring species population growth — are, or to track activities that help to reach certain conservation target goals over time, such as for restoring degraded ecosystems.  

    Using private, financial return-seeking capital to finance the sustainable management and conservation of natural resources is viewed by many experts as the most realistic solution to the twin crises of biodiversity loss and climate change — given the magnitude of investment needed. 

    Yet there is growing political pushback against environmental and social initiatives, most notably in the US. 

    Regulators and consumer groups have also launched legal actions to challenge green objectives. Large corporations, including Unilever, Bank of America and Shell, have in the past year dropped or missed goals to cut carbon emissions. And there has been disillusion with the ability of sustainability-linked bonds to meet their objectives. 

    By association, that raises fresh questions about continued progress on biodiversity.

    In biodiversity finance, doing deals is inherently more difficult

    In tackling the climate crisis, the trajectory seems clear: the set of solutions needed is more or less agreed, and a good part of it makes economic sense. But, in biodiversity finance, doing deals is inherently more difficult.

    It is more complex to structure transactions that generate proceeds to protect wildlife, restore ecosystems and fund other activities that may not generate cash flows, all while ensuring investors are repaid. Early successes — such as Belize’s blue bond are encouraging — but the potential for real scale is still unclear.

    Questions for discussion

    Read:

    How companies are starting to back away from green targets (ft.com)

    Green bond issuance surges as investors hunt for yield (ft.com)

    Sustainability-linked bonds falter amid credibility concerns (ft.com)

    Consider these questions:

    1. How critical is the role of the IFC as structurer of the BBVA Colombia biodiversity bond deal in validating its legitimacy and providing investors with assurance? How important is it that IFC is also a co-investor in the biodiversity bond issuance?  

    2. What are the pros and cons of the fact that the $50mn BBVA Colombia biodiversity bond deal has been launched following Colombia’s successful placement three years earlier of its sovereign green bond, and following its newly announced “green taxonomy”?  

    3. What does the Colombian experience say about the likelihood of rapid change in how countries manage their biodiversity and climate impacts? Does Colombia demonstrate that such change is possible, or is its experience unique and unlikely to represent a model of rapid action for other countries?

    4. Can biodiversity bonds meaningfully help to address biodiversity loss? And is this transaction the start of a trend? If not, why would BBVA Colombia have executed this transaction? Is it a gesture of goodwill and a recognition of its own corporate responsibility, or a means to greenwash some of its other less appealing investments?

    5. Considering the economic and social context following the peace agreement between Colombia and the Farc forces, how might the shift from conflict to peace affect the country’s ability to balance economic development with environmental conservation?   



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