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ESG

Biodiversity preservation: private debt as a financing instrument for companies wishing to commit

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By Laurent Dubois, Managing Director – Private Credit, and Alix Faure, ESG Director of Sienna Investment Managers

The asset class makes it possible to establish a concrete, privileged, and constructive dialogue between fund managers and companies of all sizes determined to act to reduce their negative impact on biodiversity. For the benefit of investors interested in this theme.

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As the COP 16 on biodiversity comes to an end in Cali, Colombia, awareness is increasing among investors around the world. The erosion of biodiversity (all living beings, the ecosystems in which they live and their interactions) poses major threats to the future of the planet. If no significant measures are taken, the 6th ongoing mass extinction would result in the disappearance of nearly one million animal and plant species in the coming decades, according to the IPBES report in 2023. Created in 2012 by 94 governments, this international platform of experts, which assesses the state of global biodiversity, has identified five major pressures or direct causes of biodiversity loss: habitat destruction and habitat conversion (responsible for 30% of biodiversity loss), overexploitation of resources (23%), climate change (14%), ocean, freshwater, soil and air pollution (14%) and finally the multiplication of invasive alien species (11%). Climate change is therefore only one of the five factors putting pressure on biodiversity, but by no means the only one, even if it is becoming increasingly significant.

On the economic front, 55% of the world’s GDP would depend on biodiversity* and the estimated cost of the collapse of nature and ecosystems would be estimated at $2,700 billion per year (2.3% of global GDP) by 2030. Adopted at COP 15, the Kunming-Montreal Agreement, which identified 23 targets as objectives to be prioritized by 2030, provides for the mobilization of $200 billion per year by 2030. In parallel, the Nature Restoration Act, approved by the 27 member states of the European Union, aims to restore at least 20% of the EU’s land and sea areas by 2030 and all ecosystems in need by 2050. In this context, it is no longer time for simple observations but for action.

*World Bank Group Report

Alix Faure X Laurent Dubois

The challenge of data processing

Encouraged by the public authorities and helped by a recent democratization of the subject, the theme is now attracting investors and it is in this context that several dedicated funds have emerged. But an investment strategy in favour of the preservation of biodiversity cannot be reduced to excluding the sectors of activity that are the most problematic in terms of biodiversity. To direct financial flows to local companies committed over a long period, private debt appears to be a particularly suitable asset class. The nature of this method of financing, which is an alternative to bank debt or traditional bond issues, makes it possible to establish a privileged, fluid, and sustained dialogue between the managers of the funds that commit investors’ money and the companies. In this respect, private debt financing broadens the range of possible sources of financing from the borrower’s point of view on a fast-growing theme and to meet the needs of companies that require financing to upgrade their production tools. Thus, the use of impact clauses makes it possible to set the fund manager’s expectations in advance and to set a biodiversity trajectory that is measurable and enforceable against companies.

In terms of biodiversity, data processing is a crucial issue in order to correctly measure the commitment of each company to reduce its negative impact on biodiversity (water savings, elimination of toxic products, regenerated agricultural land, etc.), insofar as the issues related to the erosion of biodiversity are multifaceted. In this respect, the assessment of issuers should be facilitated with the entry into force, at the beginning of 2024 for companies with more than 500 employees, of the CSRD directive, gradually requiring large companies and SMEs to provide improved and standardised extra-financial reporting, with a focus on biodiversity. This transparency effort is necessary to improve trust between the parties. The processing of biodiversity data may be complex and still in its infancy, but private debt fund managers are in the starting blocks to support the transformation of the most motivated companies that are not necessarily affected by the CSRD.

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