Finance for Biodiversity (F4B), an initiative from the Swiss-based Mava Foundation, has put forward a proposal for a nature performance bond (NPB), whereby a developing country could raise debt linked to nature-related outcomes.
Somewhere between a sustainability-linked bond and an outcomes-based bond such as a social impact bond, the NPB would have an interest rate, or even principal, that ratchets down as nature-based outcomes are met.
These could include biodiversity protection such as restoration of degraded forest and other landscapes, wetland management and species conservation and recovery, as well as climate change adaptation and mitigation, job creation, health and other social goals.
In September, Swiss Re published a report indicating that ecosystem collapse was threatening a fifth of the world’s countries – many of whose economies rely heavily on natural capital. Countries such as India and Nigeria were highlighted for having a high GDP dependency on biodiversity and ecosystem services.
Covid-19… has highlighted how a single country’s misstep with nature can bring the entire global system to a standstill
An NPB would address both biodiversity loss and climate adaptation, as well as ballooning deficits owing to Covid-19.
According to the World Bank, emerging and developing countries have announced Covid-19 rescue packages worth 5.4% of their GDP.
India’s April to August fiscal deficit reached 109% of the budgeted target for the current fiscal year ending in March 2021, as the pandemic continued to drag on the government’s finances.
The pain is universal. Back in July, Adam Wolfe of Absolute Strategy Research predicted almost 40% of the bonds in the benchmark JPMorgan index of emerging market sovereign external debt could be at risk of default in the next year or so.
There certainly seems to be more appetite for stacking social, climate and nature key performance indicators (KPIs) together and linking them to finance. But any push for an NPB feels like a long shot.
Debt-for-nature swaps have never really worked in terms of nature-based outcomes or replication.
Countries could also run the risk of not meeting their targets and therefore seeing no debt reduction benefits while resources had been used up trying to identify outcomes upfront.
Sensibly, however, F4B are pitching the idea as a means to crowd in further thinking on an NPB.
It’s an important conversation to start. Covid-19 has shown that what the global economy needs most is resilience.
It has also highlighted how a single country’s misstep with nature can bring the entire global system to a standstill.
Climate change is speeding up, and the finance sector needs to consider how to include resilience development into any lending requirements.
