Green finance experts pitch sovereign bond facility focused on biodiversity in developing markets

Children’s Investment Fund Foundation, Climate Bonds Initiative and World Bank among those to help develop proposal

The Children’s Investment Fund Foundation, Climate Bonds Initiative and the World Bank have thrown their weight behind proposals for a tool to help developing countries issue greener debt in the face of the looming economic fall-out from Covid. 

The three, sustainability heavyweights have joined academic bodies, NGOs and other development banks (see list below) to contribute to the development of a pitch for a Nature and Climate Sovereign Bond Facility to help governments mitigate the emerging sovereign debt crisis whilst investing in natural capital. 

The coalition, convened via an initiative called Finance for Biodiversity (F4B), observes in a new report that: “For the first time in history, there are calls for an ‘inclusive, green debt relief’ round”.

“Leading policymakers, organisations and figures in the financial community are calling for actions and initiatives that integrate nature, climate and other Sustainable Development Goals into the response to the debt crisis, by funding short-term recovery needs whilst kick-starting a virtuous circle to rapidly scale up international nature,” it said. 

In response, it argued a new facility should be set up by “one or a collaboration of international institutions” to “develop debt solutions and markets for nature- and climate-linked sovereign debt by advancing innovative instruments, coordinating efforts of public and private actors, crowding-in innovation and actors, mobilising finance, encouraging learning, promoting standardisation and reducing costs.”

Within this, it would have seven interlinking functions: 

  1. Catalysing the use of innovative sovereign debt instruments

  2. Coordinating the integration of nature and climate into international sovereign debt markets

  3. Managing performance assessment

  4. Leveraging the balance sheets of many public and private financial institutions

  5. Promoting standardisation of nature and climate performance outcomes

  6. Promoting institutional knowledge sharing and capacity building

  7. Reducing transaction costs to issuers and investors

“This year provides an historic opportunity to harvest a double dividend by aligning sovereign debt relief with nature and climate outcomes,” said Simon Zadek, Chair of F4B and Co-Director of the UNEP Inquiry into the Design of a Sustainable Financial System. “There is a growing appetite for inclusive, green debt relief, and the proposed Nature and Climate Sovereign Debt Facility can turn this vision into a reality,” 

Whilst biodiversity and other sustainability factors are increasingly embedded into other sectors and asset classes, the proposal warns “sovereign debt markets are lagging at a time when critical leadership is required”. Earlier this month, RI explored the investors who are ramping up their engagement with sovereign bond issuers on environmental and social issues. 

Last month, the UK Government published The Economics of Biodiversity: The Dasgupta Review in a bid to provide the first economic framework for biodiversity. However, F4B observed “developing nations lack ways to mobilise resources to safeguard these critical assets.”

It noted that Pakistan “is working to recover from COVID-19 by protecting nature and creating green jobs by piloting a new type of ‘nature performance bond’”. RI has previously reported that Mauritius is also considering issuing a sovereign bond to finance the protection and restoration of its oceans following an oil spill last year. 

F4B’s proposed facility would have strong alignment with key international nature and climate policy priorities, as well as be complementary to related initiatives advocating inclusive green debt relief.

Earlier this week, UN Environment recommended that financial organisations stop lending to fossil fuels and instead develop finance for “biodiversity conservation and sustainable agriculture”. France’s green corporate network Entreprises pour l’Environnement, also issued advice on how companies can help tackle biodiversity loss. 

Full list of Working Group on Nature and Debt: 

  • Agence Française de Développement
  • Centre for Sustainable Finance at SOAS University of London
  • Children’s Investment Fund Foundation
  • Climate Bonds Initiative
  • Inter-American Development Bank 
  • Institute for International Finance
  • International Finance Corporation
  • International Institute for Environment and Development
  • Global Environment Facility
  • The Nature Conservancy
  • Paulson Institute
  • United Nations Development Programme
  • World Bank
  • World Wide Fund for Nature