Can biodiversity bonds save natural habitats?

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In June, the Colombian subsidiary of the Spanish banking group BBVA Announced which was issuing what it described as the financial sector’s “first biodiversity bond” to fund habitat conservation and restoration projects in the South American country.

The $50 million initiative — backed by the International Finance Corporation (IFC), the private-sector-focused arm of the World Bank, as a structurer and investor — marks a change of course for a nation recovering from a half-century of violence and guerrilla activity. It also places Colombia among a select group of pioneers, including the Seychelles and Belize, that are using financial markets to support nature conservation.

While the green bond market has seen explosive growth over the past decade, the capital raised has been largely invested in climate change mitigation projects, alternative energy and green transport. Minimal amounts are allocated to biodiversity conservation and habitat restoration projects.

In the financing of nature, this Colombian bond explicitly and directly breaks new ground, with metrics linked to objectives that benefit the environment.The loans will be repaid through a combination of funding sources including a carbon tax, the government budget and donors..

The question for those concerned about the destruction of the world’s natural habitats is whether this pioneering structured bond will be effective and whether it could help inspire a broader range of similar instruments aimed at countering biodiversity loss around the world.

Meanwhile, the question for investors is whether the vehicle is attractive and robust enough to attract a new and growing class of funders who may share an interest in environmental issues but also seek competitive returns.

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Located at the northern end of Colombia, located in the Andes, straddles the Equator, the Pacific Ocean, the Caribbean and the Amazon Basin. It has the second largest number of species on the planet after Brazil, and the greatest diversity of species when measured per square kilometer, according to the World Wildlife FundColombia is home to more than 1,900 bird species, on par with Brazil and Peru.

Colombia will be on the front line of biodiversity loss

But global warming threatens to cause Dramatic damage to this biodiversityColombia will be at the forefront of these losses because it will be disproportionately affected by climate change compared to countries with fewer and more widespread species.

Now, however, it could also be at the forefront of new financial models to reverse the trend.

In 2016, a historic peace agreement was signed between the government and the leftist guerrilla group Revolutionary Armed Forces of Colombia (FARC). It marked the end of five decades of armed conflict. Despite ongoing violence, the peace process has greatly improved the lives of citizens. However, it has also increased pressure on natural ecosystems. Political violence has made it possible to protect large areas from illegal deforestation and habitat degradation.

Five years after the peace agreement, Colombia became the first Latin American country to issue a green bond in its domestic market: a 10-year, $200 million offering aimed at financing a range of projects aimed at benefiting the environment, including water management, sustainable transport, biodiversity protection and renewable energy. High investor demand led to the final amount being increased by half again.

Minister of Finance José Manuel Restrepo described The structured bond is an “important step” in finding new ways to finance investment in environmental projects: it would help develop a domestic green bond market and attract a broader range of investors. His ministry identified another $500 million in eligible projects that could be financed through green bonds, including a $50 million Colombian “blue bond,” financing focused on marine habitats and ocean projects that generate environmental co-benefits. This was successfully placed in 2023 with the help of BBVA and the IFC as a structurer.

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Now, the BBVA announcement Colombia’s biodiversity bond marks another step forward. It focuses on reforestation, regenerating natural forests on degraded land, conserving mangroves and protecting wildlife habitat.

In the case of green bonds, only a tiny fraction of the money raised goes to nature conservation, partly because few of these projects generate cash flows with which to repay investors. Another reason is that it is harder to measure how effectively resources devoted to conservation are being used (for example, to monitor the growth of species populations) or to track activities that help achieve certain conservation goals over time, such as restoring degraded ecosystems.

Many experts believe that using private capital seeking financial returns to finance the sustainable management and conservation of natural resources is the most realistic solution to the twin crises of biodiversity loss and climate change, given the magnitude of the investment required.

Still, there is Growing political resistance against environmental and social initiatives, especially in the United States.

Regulators and consumer groups have also launched legal action to challenge the green targets. Major corporations including Unilever, Bank of America and Shell have either abandoned or failed to meet their carbon emissions reduction targets over the past year. And there has been disillusionment with the ability of sustainability-linked bonds to deliver on their goals.

By association, this raises new questions about continued progress on biodiversity.

In biodiversity finance, doing business is inherently more difficult

When it comes to tackling the climate crisis, the path seems clear: the set of solutions needed is more or less agreed upon and many of them make economic sense. But when it comes to financing biodiversity, reaching agreements is inherently more difficult.

It is more complex to structure transactions that generate revenue to protect wildlife, restore ecosystems and fund other activities that may not generate cash flows, all while ensuring repayment to investors. Early successes, such as The Belize Blue Bond These are encouraging, but the potential for real scale remains unclear.