ICMA reveals novel direction for debt securities themed around natural environments
The Asia Pacific region is witnessing a surge in investor interest for nature-focused assets, as the global community seeks to address the growing crisis of biodiversity loss. This trend is reflected in the increasing issuance of nature-related bonds, including green and sustainability-linked bonds (SLBs), which are designed to fund projects supporting nature conservation and addressing direct drivers of nature loss.
The US$6 trillion labelled bond market presents a significant opportunity for issuers aiming to meet the funding shortfall for the Global Biodiversity Framework's goals to halt and reverse nature loss by 2030. However, the use of labels such as the "blue bond" label has sparked concerns, with the International Capital Market Association (ICMA) warning that alternative uses could lead to "regrettable confusion." ICMA has clarified that the "blue bond" label should not be used to finance a country or company's general purpose debt.
Environmental impact is the top motivation for Singaporean investors, while financial returns are the primary driver for investors in Australia and Japan. To ensure the credibility and impact of nature-related bonds, issuers are advised to reference the alignment of their targets with the Global Biodiversity Framework and the guidance from the Science-Based Targets Network and the Taskforce on Nature-related Financial Disclosures (TNFD). Issuers of green bonds fully dedicated to nature-related uses can opt for the optional "nature bond" label, according to the guidance.
Key performance indicators (KPIs) for sustainable nature-related bonds typically focus on measurable environmental impact metrics directly linked to nature conservation and restoration. Examples include the hectares of habitat restored, the abundance of key species in the affected ecosystems, and reductions in pollutants discharged into natural ecosystems. These KPIs are meant to reflect progress on nature-related sustainability targets that bond issuers commit to achieve.
However, these KPIs have been under scrutiny for credibility and ambition. A recent analysis by the Climate Bonds Initiative revealed that less than 20% of SLBs met market best practices regarding KPI alignment and rigor. To address these challenges, experts recommend that issuers thoroughly assess the materiality and ambition of their sustainability performance targets and KPIs, align them with established frameworks such as the Global Biodiversity Framework and the TNFD, and use external assurance providers to verify KPI performance and maintain transparency in reporting.
In the Asia Pacific region, institutional investors in Singapore, Japan, and Australia plan to increase their nature-related allocations, according to a survey by Pollination. Despite political pressure against ESG investing in the United States, this trend continues unabated. However, capability gaps remain, with nearly half of investors citing a lack of expertise as a key barrier to scaling up nature investments.
To support issuers in choosing credible KPIs, the International Capital Market Association (ICMA) has recently released labelling guidelines for nature-related bonds, including checklists, illustrative KPI registries, and reporting templates. These resources aim to standardize and verify KPIs, ensuring that the sector continues to evolve and provide meaningful, ambitious, and credible financing solutions for nature conservation and restoration.
- The surge in investor interest for nature-focused assets in the Asia Pacific region aims to address climate change and biodiversity loss, as reflected in the increasing issuance of nature-related bonds, such as green and sustainability-linked bonds (SLBs).
- The US$6 trillion labelled bond market offers a significant opportunity for issuers seeking to fund projects supporting nature conservation and addressing direct drivers of nature loss, but the use of labels like the "blue bond" label has sparked concerns about potential misuse.
- To ensure the credibility and impact of nature-related bonds, issuers are advised to align their targets with established frameworks such as the Global Biodiversity Framework, the Science-Based Targets Network, and the Taskforce on Nature-related Financial Disclosures (TNFD), and use external assurance providers to verify KPI performance and maintain transparency in reporting.
- Key performance indicators (KPIs) for sustainable nature-related bonds typically focus on measurable environmental impact metrics directly linked to nature conservation and restoration, but these KPIs have been under scrutiny for credibility and ambition, with only a small percentage meeting market best practices regarding KPI alignment and rigor.
- Institutional investors in Singapore, Japan, and Australia plan to increase their nature-related allocations, but capability gaps remain, with nearly half of investors citing a lack of expertise as a key barrier to scaling up nature investments. To support issuers in choosing credible KPIs, the International Capital Market Association (ICMA) has released labelling guidelines for nature-related bonds, aiming to standardize and verify KPIs and ensure meaningful, ambitious, and credible financing solutions for nature conservation and restoration.
