Nature-related bonds – which accounted for a growing share of issuances last year – could see a further boost, following the International Capital Market Association (ICMA)’s inaugural issuance of labelling guidelines for the asset class on Thursday.
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The new guidance by the standard setter details how issuers can tap on the global US$6 trillion labelled bond market – the largest source of market-based sustainable financing – to close the US$700 billion annual funding shortfall to meet the Global Biodiversity Framework (GBF)’s goals to halt and reverse nature loss by 2030.
While environmental, social and governance (ESG) bond issuances saw a slowdown in the past year – returning to 2020 levels in the pre-ESG boom – those incorporating nature conservation bucked the trend. According to credit rating provider Moody’s, a small but increasing share of green and sustainability bond proceeds went into nature-related uses in 2024.
ICMA’s latest guidance clarifies how green and sustainability-linked bonds (SLBs) can credibly be used to finance projects supporting the conservation or restoration of nature, or that address the direct drivers of nature loss, such as land use change, over-exploitation of resources, pollution, spread of invasive species and climate change.
Nature-related projects that align with ICMA’s existing green bond principles could range from energy production from discarded agricultural and forestry waste, to buildings constructed with less natural resources, including water and cement. Issuers of green bonds fully dedicated to nature-related uses can also use the optional “nature bond” label, according to the guidance.
Potential key performance indicators (KPIs) for SLBs focused on nature include the hectares of habitat restored, the abundance of key species, or reductions in pollutants discharged into ecosystems.
While SLBs – which link borrowing costs to performance targets – have been mooted as a potential tool to incentivise issuers to deliver on their sustainability targets, the credibility and ambition of the KPIs chosen by issuers have come under scrutiny. Last year, Climate Bonds Initiative found that less than a fifth of SLBs were aligned with market best practices.
When asked how issuers can avoid the credibility issues faced by SLBs in the climate space, Agnes Gourc, vice-chair of the ICMA Principles, told Eco-Business that she encourages issuers to thoroughly assess how their chosen sustainability performance targets and KPIs are material and ambitious, as highlighted in existing ICMA guidelines.
Gourc is also head of sustainable capital markets, DCM structuring & solutions, at French banking group BNP Paribas. She added that issuers should reference how their selected targets align with the GBF as well as the target-setting and risk disclosure guidances from the Science-Based Targets Network and Taskforce on Nature-related Financial Disclosures (TNFD) respectively.
The launch of ICMA’s new guidance comes amid growing investor appetite for nature-focused assets, particularly in Asia Pacific. A new survey by climate advisory firm Pollination found that all institutional investors surveyed in Singapore, Japan and Australia plan to increase nature-related allocations, despite growing political pressure against ESG investing in the United States.
Singaporean investors cited environmental impact as the top motivation, while their peers in Australia and Japan pointed to financial returns. However, capability gaps remain, with nearly half of investors in the region citing a lack of expertise as a key barrier to scaling up nature investments.
In the past few years, novel nature-themed financing mechanisms, such as rhino bonds and debt-for-nature swaps, have come to market. But experts have warned that they risk distracting developing countries from addressing underlying debt issues and could be exploitative.
In 2023, for instance, US conservation outfit The Nature Conservancy was forced to ditch their “blue bond” label in at least US$1 billion worth of debt swaps meant to fund marine conservation projects while cutting debt costs for Belize, Barbados, the Seychelles and Gabon after it was revealed that the not all the proceeds were being ringfenced for conservation.
ICMA subsequently clarified that the “blue bond” label should not be used to finance a country or company’s general purpose debt, and warned that alternative uses of this terminology could lead to “regrettable confusion”.