Green bonds fall short in biodiversity and sustainable land-use finance, says research

Despite their significance to life on Earth, biodiversity and sustainable land-use sectors attracted a mere three percent of the USD 257.7 billion raised through green bonds issued last year, says a new paper. Dominant sectors, including energy and transportation, absorbed almost 80 percent of green bond proceeds in the past three years. 

Produced by the Global Landscapes Forum (GLF) with the Luxembourg Green Exchange (LGX), the paper, How can Green Bonds catalyse investments in biodiversity and sustainable land-use projects? aims to trigger a shift in “green” investor interest and inform the debate around sustainable biodiversity finance in the context of the post-2020 global biodiversity framework. The Luxembourg Green Exchange is the dedicated platform for green finance at the Luxembourg Stock Exchange.

Green bonds, which were first issued by the European Investment Bank (EIB) in 2007 and the World Bank in 2008, are debt instruments where the proceeds are exclusively used to finance (or refinance) projects with environmental benefits, such as renewable energy, energy efficiency or clean transportation projects. Issuers of green bonds are sovereigns, local governments and authorities, financial and non-financial corporates, and supranational and development agencies and banks.  

Overall, the green bond market is “rapidly scaling up” in value, according to the paper, but biodiversity and sustainable land use have been less appealing to investors because these can be under-developed in terms of information reporting, measurement and impact metrics. Yet the need is great: some 2 billion hectares of degraded land worldwide require restoration – a figure growing by about 12 million hectares annually, says the paper, citing figures from the World Resources Institutes (WRI) and the United Nations Convention to Combat Desertification (UNCCD). Forest and landscape restoration will require no less than USD 40 billion annually in each of the next 10 years to achieve the world’s commitments made through the Bonn Challenge, Initiative 20×20, AFR100 and the New York Declaration on Forests. 

Local, regional and national governments and private stakeholders in developing countries could play a major role in coordinating smaller projects and multiple value-chains to achieve scale while demonstrating positive impacts, which are very important to green investors, says Ludwig Liagre, sustainable finance advisor for the GLF and co-author of the paper. 

“Checking and reporting on the actual benefits provided by these instruments will help to convince investors that these are worthwhile investments and avoid any concerns regarding ‘greenwashing’,” he says.

At the same time, authorities in developed countries could work with their counterparts in less developed states and regions to build local capacity and resources for creating home-grown green bonds, as well as the pipelines necessary to market these, says the paper’s co-author Paul Chahine, sustainability research manager for the LGX.

“These biodiversity problems, while hitting every country, are especially hitting those countries that are known for their biodiversity richness,” says Chahine. “It would be great if there were capacity-building resources available, perhaps dedicated training initiatives for those countries.”

The paper points to examples of green bonds listed on the LGX and where issuers have stated their goals of using the funds raised to finance biodiversity and sustainable land use-related projects. Few results are available as yet for many of the examples, but if the issuers fulfill their goals, it may offer some reason for optimism. 

“There is a significant need for finance for the landscape approach and for biodiversity protection,” says Chahine. Landscape approaches balance competing land use demands in a way that is best for human well-being as well as the environment.

“Green bonds might represent a good, innovative tool for these sectors, which hasn’t been receiving much attention within the broader green bond allocation,” he says.

Furthermore, the European Union Sustainable Finance Taxonomy, now in development, could be a “game-changer” in terms of boosting interest in green bonds, by setting clear definitions of what economic activities and investments can be sold as genuinely “green” and that contribute to sustainable land use, biodiversity and other critical sectors, says Liagre.

“We expect there will be a definite push in the market for green bonds once the EU Taxonomy is fully finished,” says Chahine.