Interest in debt-for-nature swaps has since increased, with several of the world's biggest banks lining up to do more deals. Image Credit: Shutterstock

From Wall Street to the City of London, senior roles are being created around one of ESG's youngest but fastest-growing areas: biodiversity.

Banks adding such positions include JPMorgan Chase & Co., Lloyds Banking Group Plc, NatWest Group Plc and Standard Chartered Plc. The goal is to monetize biodiversity through financial innovation, while navigating new regulations designed to protect the natural environment.

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Gwen Yu, who became JPMorgan's head of nature and biodiversity when the largest US bank created the role last year, said the challenge that she and her counterparts elsewhere face lies in turning a vast issue with scant data into something workable for financial professionals.

"It'll become scalable once we're able to break down the big numbers into specific market forecasts or business opportunity growth, either from a solutions or corporate-sector perspective," she said in an interview. Yu said her priority will be market and business development.

It's a market that's wide open, with banks still vying to get a foothold. In 2021, Credit Suisse became the first bank to design so-called debt-for-nature swaps that brought in private investors. The products allow borrower nations to refinance debt at more favorable rates, in exchange for nature conservation commitments.

Interest in debt-for-nature swaps has since increased, with several of the world's biggest banks lining up to do more deals. Barclays Plc, which is among banks exploring the market, estimates it may ultimately reach $800 billion.

At the same time, a growing number of investors has started delving into rewilding projects, helping to spawn a new market for so-called biodiversity credits. The market for such securities, which are supposed to represent a unit of improvement to nature brought about by some form of land-management change, may climb to almost $70 billion by 2050, according to the World Economic Forum.

Meanwhile, biodiversity-focused funds have seen "considerable growth" in the short time they've existed, with assets under management reaching just over $1 billion last year, up from $226 million in 2021, according to a Bloomberg Intelligence report by Eric Kane, director of US ESG research, and Melanie Rua, senior associate analyst.

An investor survey released by Morgan Stanley this month showed that 72 per cent of global investors are either "very" or "somewhat" interested in having their portfolios take nature and biodiversity risks into account. The top concern was water solutions, at 74 per cent of investors, Morgan Stanley found.

"There's a lot of opportunity," said Yu, who has a background in structured products at JPMorgan.

There's also a growing array of regulations that have clauses on biodiversity. These include Europe's Corporate Sustainability Reporting Directive, which is expected to force firms to fundamentally rethink their approach to the natural environment in which they operate.

In the UK, Lloyds appointed Katie Leach as its first-ever head of nature last year. Her past roles include program officer at the United Nations Environment Programme and head of biodiversity at ShareAction, a London-based nonprofit.

Leach said the finance industry is "beginning to understand that there's a really critical role they play in tackling nature loss alongside climate change."

Last year, StanChart hired Oliver Withers as head of biodiversity from a similar role at Credit Suisse, which has since been absorbed by UBS Group AG. And NatWest appointed Rhona Turnbull, a former Royal Bank of Scotland banker who's also worked in the UK navy, as its head of nature. Others creating similar roles include Lombard Odier Investment Managers, which recently appointed Marc Palahi as its chief nature officer. He previously worked at the European Forest Institute.

Investors, meanwhile, remain uncertain as to how to build a strategy around biodiversity, according to Morgan Stanley. Roughly a third of those surveyed by the bank's institute for sustainable investing said they're interested in the theme, but don't know how to invest in it.

The growing sense of urgency around biodiversity risks was galvanized after the Kunming-Montreal Global Biodiversity Framework, which was signed by almost 200 countries at the end of 2022. The agreement represents the biggest global commitment to date toward protecting the natural world. And last year, guidelines from the Taskforce on Nature-Related Financial Disclosures were unveiled, putting pressure on companies to disclose their biodiversity footprint.

But biodiversity remains one of the least-streamlined areas with links to environmental, social and governance investing. Leach at Lloyds is currently formulating the bank's biodiversity strategy, offering internal training and equipping the bank with the right data and tools. Her team also is "keeping a close watch" on financial opportunities, including biodiversity credits, she said.

"We know our clients are particularly interested in setting science-based targets for nature and how the release of guidance this year is likely to drive change," Leach said.

JPMorgan's Yu expects 2024 to be a pivotal year for biodiversity, with a summit on the subject set to take place in Colombia in October. By then, countries that signed up to the Global Biodiversity Framework more than a year ago will have had time to set plans for achieving their targets, she said.

That means "opportunities to fund and seed some of these important projects will become more tangible," Yu said.