The Global Biodiversity Framework signed at the UN’s December 2022 COP 15 conference elevated the profile of biodiversity. Countries at the conference reached consensus to "halt and reverse biodiversity loss" and put “nature on a pathway to recovery" by 2030.

Their agreement helps to highlight the relationship between preservation and restoration of natural capital and slowing climate change as well as mitigating its physical risks. In addition, the framework advances appreciation of the credit investment materiality represented by biodiversity risks.

Biodiversity often is described to include issues such as regional species counts, ecosystem diversity within a region, genetic diversity within a species, and unique ecosystems or unique species in an ecosystem. Biodiversity impacts may include habitat loss or fragmentation, effects on vegetation production and habitat structure, and expression of genes in some species, including species development and survival rates.

Greater government appreciation of and efforts to preserve biodiversity suggests the potential for increasing government and regulatory action to mitigate and manage natural capital. From an investor’s perspective, government and regulatory actions could affect bond issuers due to greater investor scrutiny, operational controls, potential litigation, changing consumer preferences, and technological advancement.

The Global Biodiversity Framework¹ (GBF) is a non-binding plan that, among other measures, calls for effective conservation and management of at least 30 percent of the world’s land and water ecosystems by 2030; commonly referred to as the 30 x 30 plan. It emphasizes areas of importance or uniqueness for biodiversity and ecosystem functioning and represents increases from about 17 percent and about 10 percent of the world’s land and marine areas, respectively, currently under protection.

In addition, the agreement’s Target 15² would ensure that “all large companies assess and disclose their risks, impacts and dependencies on nature by 2030,” according to Environmental Finance.² The report noted that Target 15 received “unprecedented support” from corporate and financial leaders” at COP 15 “in recognition of the risks involved in uncontrolled exposure to nature degradation.”

A recent article, “Why climate change is intimately tied to biodiversity” published in The Economist in December 2022, explored what may be potential links between preserving biodiversity and reaching net-zero carbon emissions to mitigate the effects of global warming.³

“By investing in biodiversity—directing capital to projects that repair an ecosystem, for example—companies can offset their emissions,” the article offered. “By some estimates, schemes to manage carbon-rich peatlands and wetlands and to reforest cleared land could provide more than one-third of the emissions reductions that are needed to prevent more than 2°C of global warming.”

Similarly, in a May 23, 2023, research paper entitled “Links between physical climate and natural capital risks are rising to the fore,”⁴ Moody’s Investors Service noted, that “Credit effects of physical climate risks and natural capital considerations are linked. Physical climate risks related to global warming manifest themselves in severe weather events, as well as chronic, slow-moving trends that influence the speed and degree of natural capital erosion and can lead to higher carbon emissions.” Later in the report, Moody’s noted that “the preservation and restoration of natural capital can slow the pace of climate change and reduce the amount of CO2 in the atmosphere through carbon sinks.”

From an investment perspective, Moody’s expects “public sector issuers to remain at the forefront of financing nature and biodiversity projects. Nature-related risks and their links to climate change are emerging considerations in the adaptation and conservation strategies of sovereign governments.”⁴

Moody’s also noted that “Physical climate risks and natural capital considerations can hinder the health and safety of communities and employees, access to basic services and exacerbate income inequality. A significant percentage of private-sector issuers with elevated exposure to physical climate or natural capital risks also has elevated exposure to responsible production, health and safety, and demographic and societal trends.”⁴

With public and private bond issuers seeking financing to address climate and biodiversity risks, investors will look for improved disclosures on natural capital issues before investing as well as insightful reporting after investment. While much attention and regulation—passed and proposed—is aimed at climate risk disclosures, the Global Biodiversity Framework is an early example of several efforts to heighten biodiversity disclosure, measurement, and reporting, in addition to practical risk management.

The Task Force on Nature Related Financial Disclosures (TNFD), a financial services advisory group representing more than $24 trillion in assets, released the latest version of its proposed standards and disclosures framework. Formal adoption of disclosure rules may follow later this year. The voluntary recommendations would advance promulgation of standards and stimulate regulatory discussions.

In addition, the International Sustainability Standards Board (ISSB) formed in late 2021 to develop a comprehensive baseline disclosure standard. A formalized list of Sustainability Disclosure Standards is expected during 2023. They are expected to include disclosure of operating impacts and risks related to ecosystems and biodiversity. ISSB’s work will consider TNFD’s work to facilitate consistency.

Environmental Finance reported in December that the European Union’s (EU’s) “Corporate Sustainability Reporting Directive (CSRD) will require EU companies – and large non-EU firms with business in the EU – to disclose the impact they have on people and planet, including biodiversity. Likewise, the EU's Sustainable Finance Disclosure Regulation (SFDR) will soon require reporting on biodiversity, once the European Commission adopts the relevant delegate regulations.”²

The COP 15 agreement of nearly 200 countries to the Global Biodiversity Framework represents a positive development advancing the reporting and disclosure around risks arising from biodiversity impacts, as well as supporting advancement of bond issuance related to financing protection and restoration of natural capital. Because of the interrelationship of climate and biodiversity risks, the framework also advances efforts to address and mitigate risks associated with climate change.

At Breckinridge, the development of enhanced biodiversity measurements, metrics, and disclosures will provide additional data, complimentary to the climate risk data we factor into security analysis. The added data will offer the potential to gain deeper insight into the risks bond issuers face, as well as the strategies they are employing to address them.

 #BCAI-06162023-EYFQV0MV (6/30/23)

[1] “COP15 ends with landmark biodiversity agreement,” UN Environment Programme, December 20, 2022.
[2] “COP15: A historical moment for biodiversity and corporate disclosure,” Mirjam Wolfrum, Environmental Finance, December 23, 2022. The GBF also features 23 targets to achieve by 2030. “Target 15 ensures that all large companies assess and disclose their risks, impacts and dependencies on nature by 2030.”
[3] “Why climate change is intimately tied to biodiversity,” The Economist, December 20, 2022.
[4] Links between physical climate and natural capital risks are rising to the fore, Moody’s Investors Service, May 22, 2023.

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