Impact investing in biodiversity conservation with bonds: An analysis of financial and environmental risk

Impact investments have the dual goals of generating profit and environmental and/or social impact from the same project or enterprise. This talk scrutinises recent impact investments in biodiversity conservation and restoration – specifically, debt finance in the form of conventional bonds and impact bonds. The proceeds of these bonds finance projects aiming to enhance forest management, sustainable agriculture, endangered species protection, ecosystem service provision, and nature-based solutions to climate change such as REDD+. The talk will examine whether these dual goals are achievable by evaluating the financial risks and environmental risks within each bond's ‘theory of change’.

Financial risks stem from projects with vague cashflow forecasts, including when returns are tied to market commodities with high price volatility. Environmental risks stem from project sites with low or ambiguous threat statuses, and the use of metrics that are too (i) premature, (ii) vague, (iii) simple, and/or (iv) coarse to indicate conservation outcomes. For example, premature metrics focus on project activities (e.g. planting trees) and outputs (e.g. restored area), rather than the outcomes (e.g. change in forest carbon stock) required to determine impact (e.g. climate change mitigation). Similarly, vague metrics feature unspecific language such as ‘benefit’, ‘support’, and ‘enhance’ all of which evade stipulating clear targets, and make their achievement difficult to prove. Risk mitigation strategies involve using baselines and counterfactuals to establish additionality, and guarantors to protect investors if revenues prove insufficient.

The talk will promote improved bond design and disclosure, to better inform investor decision-making. This will help ensure bonds can fulfil their potential as a transformative mechanism for redirecting finance towards biodiversity-positive outcomes. In particular, bond proponents should be vigilant to ‘impact washing’ – claiming a bond has delivered greater biodiversity outcomes than it actually has. The talk centres on a paper published in Business Strategy and the Environment (Thompson, 2023) alongside forthcoming work in Nature Reviews Biodiversity. Implications for biodiversity management and for-profit conservation will be discussed.

Thompson, B.S. (2023). Impact investing in biodiversity conservation with bonds: An analysis of environmental and financial risk. Business Strategy and the Environment 32, 353-368.