“We’re beginning to see the emergence of biodiversity credit markets”

Simon Zadek is the Co-CEO of NatureFinance. He is also a Senior Advisor to the Task Force on Nature Related Financial Disclosure. He has held many positions over a 40-year career in nature and finance, including Head, Secretariat, UN Secretary- General’s Task Force on Digital Financing of the Sustainable Development Goals. He has been a lecturer and professor at various management and business schools around the world and published extensively.

OPEC Fund Quarterly: What challenges will your organization address as a partner in the OPEC Fund’s Nature Solutions Finance Hub? 

Simon Zadek: The Nature Solutions Finance Hub is intended to be catalytic. What does that mean? Individual investments in nature restoration are not enough. Investments need to encourage an ecosystem that crowds in many other sources. Upstream, that means working on policies and regulations that can replicate the Asian Development Bank’s catalytic activities. Downstream, that means working on the “nature finance operating system”, including data and accounting systems to support market innovations and create the robust credibility required to crowd in private capital. 

OFQ: Can you give us one or two examples of innovative financing mechanisms that will be useful for scaling up these nature-based solutions? 

SZ: Green bonds have been around since 2011 but have delivered only modest gains to either side of the transaction, planet or people. What we’re seeing is a new generation of sustainability-linked financing instruments in the corporate space and also now in the sovereign space, most of which are nature- and climate-performance linked. If a government borrows money and commits to investing and delivering certain nature outcomes, it might get a step down (a reduction in the cost of capital), while if it fails there might be a step up (an increase in the cost of capital) – so it’s far more incentivized than “use of proceeds” green bonds (an instrument that funds projects with dedicated environmental benefits, Ed.). Another example would be biodiversity credit markets. We know about the potential of and flaws in carbon markets and now we’re beginning to see the emergence of a generation of biodiversity credit markets that have learnt from past successes and shortfalls and could play an important role in catalyzing biodiversity investments. 

OFQ: Can you share any examples of policy enablers that are helping governments to scale? 

SZ: If, for example, an Islamic country wants to issue a performance-based sovereign debt instrument like a green Sukuk (as Malaysia has announced), it needs to think about the design of the instrument. But it also needs to think about the policy and regulatory enabling environment that allows it to issue a bond of that kind and to fit into the way its debt management might work. Or if you think about trying to value natural capital on the balance sheet of a company that’s being listed on the New York Stock Exchange, you need the United States Securities and Exchange Commission to have guidelines that enable investors to understand how nature is being valued as part of a capital raising process. 

OFQ: What role do sovereign bonds have in meeting the financing gaps for nature-based solutions and what innovations are needed to get us there? 

SZ: The earlier example of the use of proceeds bonds and performance-linked sovereign financing instruments are key. For example, The Nature Conservancy, a global environmental organization, joined forces with the Inter-American Development Bank and others to work with Belize to advance a debt-for-nature swap that effectively unlocked resources to allow it to invest more extensively in coastal defenses. Why is that important in Belize? As well as protecting and investing in nature, such approaches may prove credit relevant and reduce the sovereign’s risk, lowering its overall cost of sovereign financing. For example, protecting corals is good for hotels and tourists to go paddling around and looking at coral reefs that aren’t dead. Beyond that, Belize is actually a coastal country and without those coral defenses it is at existential risk. So investing in those coastal defenses can reduce sovereign risk and the cost of capital for Belize across its entire sovereign debt stack. 

NatureFinance 

NatureFinance is a Swiss-based, international not-for-profit organization dedicated to aligning global finance with more equitable, nature-positive outcomes. NatureFinance works to make nature count in global finance and the global economy and is active in advancing the use of data to disclose and manage nature-related risks, developing impactful and equitable nature markets, while advancing financial innovation in the areas of sovereign debt and nature-positive investment.