Pictet Asset Management has published a new report showing that the market for biodiversity finance is set to grow strongly in 2024.

The report, “Biodiversity Bonds in Bloom”, has been written by Sabrina Jacobs, Senior Client Portfolio Manager, and Phillip Buff, Senior Investment Manager at Pictet Asset Management. It shows that the market for bonds linked to biodiversity is expanding making up nearly a third of all ESG-labelled debt in 2024, with potential annual volumes reaching $300 billion by year-end.

Sovereigns and supranational institutions have so far dominated biodiversity-related capital, but corporate involvement is growing driven by regulatory pressures. Corporate biodiversity bonds have also proved popular with EM issuers, due to their reliance on natural resources. These issuers make up about two thirds of biodiversity bond issues, but according to Pictet, emerging market issues is set to grow strongly this year. Amongst emerging markets, Asian issuers have been most active, a trend that is expected to continue.

Pictet says that two types of biodiversity bond have dominated: One is the Use for Proceeds bond where funds raised are used for specific sustainability projects. The most popular are UOP nature bonds used to finance biodiversity conservation projects. These made up about 16% of biodiversity bonds issued in 2023.

The second type of bond are sustainability-linked bonds where the the bonds coupon can change according to the success and performance of pre-set biodiversity objectives.

Use of Proceeds bonds have surged in popularity among corporate issuers, while Sustainability-Linked Bonds with performance targets are also gaining traction, reflecting a shift towards integrating biodiversity considerations into corporate financing strategies.

Pictet says the attraction of such bonds for investors is the return they enjoy due to their “biodiversity risk premium”.

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