Monday, December 23, 2024

Global Banks Embark on a New Wave of Product Innovation Targeting Nature

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(Bloomberg) — Some of the world’s biggest banks are about to gather for talks, with the goal of monetizing a theme that until now has left much of Wall Street drawing blanks: nature and biodiversity.

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JPMorgan Chase & Co. and Standard Chartered Plc are among lenders sending representatives for the first time to the United Nations’ COP16 biodiversity summit, which starts next week in the Colombian city of Cali. Other banks that plan to send staff include Citigroup Inc., Bank of America Corp., HSBC Holdings Plc and Deutsche Bank AG.

The sudden interest in a theme that’s long been deemed too obscure and niche for Wall Street comes as banks and asset managers increasingly look to biodiversity as a new incubator for financial engineering. Meanwhile, the UN has warned that without private finance taking an interest, there won’t be nearly enough money to fight the ongoing mass extinction of species and degradation of the natural world.

“The end goal is really to have more finance and investment going into the space,” Gwen Yu, head of nature and biodiversity at JPMorgan, said in an interview. By attending COP16, JPMorgan will be able to make progress in figuring out how biodiversity “fits into our book,” she said.

The summit, which starts on Oct. 21, will see negotiators from almost 200 governments gather to take stock of progress made since 2022, when they adopted the Global Biodiversity Framework. The goal of the GBF is to halt and reverse nature loss by 2030, something that will cost an additional $700 billion in dedicated spending each year.

For now, only about 10% of the countries that have signed up to the GBF have submitted the required National Biodiversity Strategies and Action Plans.

Oliver Withers, StanChart’s head of nature, said the next step is to look at sovereign investment plans and identify “what are the most bankable, investible opportunities that we can start pulling out of that process.”

Yu says JPMorgan will be looking to see what can be done to develop new and existing products, “to see if they make sense and if there’s client demand.”

On the institutional side, “the interest is in going beyond the niche funds or indices that already exist,” she said. “On the corporate side, it’s about how does this get embedded within business operations.”

Products

The small handful of biodiversity products doing the rounds to date includes so-called debt-for-nature swaps, which allow governments to refinance debt and then put savings toward nature conservation.

Once the domain of public finance only, debt-for-nature swaps were reinvented three years ago by Credit Suisse to include private investors. The total volume to date of such deals is just $1.6 billion, according to data compiled by Bloomberg. But there are signs of growth. Goldman Sachs Group Inc. and UBS Group AG, which acquired Credit Suisse last year, are among banks actively working on debt-for-nature swaps, and Bank of America completed its first deal last year.

StanChart has created a nature-innovation hub dedicated to new products. “There’s a moment here for us to really seize,” Marisa Drew, who took over as chief sustainability officer at StanChart in 2022 after almost two decades at Credit Suisse, said in an interview. The goal is to “both influence policymaking, but then take that and run with it in terms of mobilizing capital.”

New products being explored by bankers include biodiversity credits. These would function in a similar way to carbon credits, so that buyers could address their biodiversity footprint by investing in conservation projects. Hedge fund veteran Kyle Bass is among investors that have established a foothold in a regulated version of this market in the US.

Currently, when it comes to a global voluntary market, there’s a lack of mature frameworks, JPMorgan’s Yu said. It’s an exercise in trying “to understand what the market could be, if there is one, or if it just remains very niche,” she said. “And that’s still a question mark.”

Opportunities to invest in funds that target biodiversity are currently limited, with Morningstar Direct putting the universe at just under $4 billion. That follows 45% growth in assets under management over the past year. So far in 2024, biodiversity-labeled funds have delivered average returns of about 11%, compared with the 13% decline in the S&P Global Clean Energy Index.

Meanwhile, the private sector is under growing pressure to report its nature-related risks.

“Regulators all over our markets are asking questions about nature risk,” Drew said. The requirements affect everything from loan portfolios to exposures relating to corporate and sovereign clients, she said.

JPMorgan, Lloyds Banking Group Plc and NatWest Group Plc are among banks that have created senior roles dedicated to tracking regulatory and product developments within biodiversity.

“The big success here is acknowledgment that the private sector stands to engage on the topic in a very considered way,” StanChart’s Withers said. “That’s the big win.”

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