Nature and biodiversity issues are gaining increased attention from corporate boards and investment committees. Markets recognise the need for nature and biodiversity data to support sovereign bonds in making informed decisions, managing environmental risks, and fostering sustainable development. However, despite significant progress, data gaps continue to hinder the effective integration of nature-based solutions into investment strategies.
What is the sovereign bond market ?
Sovereign bonds represent a significant asset class with a global market value of $66 trillion. They play a critical role in the financial system, reflecting macroeconomic trends, influencing capital markets, and affecting financial stability. These bonds are essential holdings for many financial institutions. Increasingly, institutional investors and credit rating agencies are focussing on the link between sovereign bond performance and environmental, social, and governance (ESG) criteria.
Incorporating nature and biodiversity data into sovereign risk analysis
Within the ESG framework, issues related to nature and biodiversity are receiving growing attention from corporate boards and investment committees as the market begins to understand the risks posed by environmental degradation to businesses, investors, and society at large. Despite this progress, data gaps remain a challenge for integrating nature into investment strategies. The sovereign bond market, in particular, has seen less exploration of nature-related risks compared to corporate risk assessments. Evaluating these impacts is complex due to their location-specific nature, making it more difficult to assess at a national level.
To assist investors in beginning their journey toward nature analysis at the country level, AXA Climate and LSEG have jointly developed a report that aims to:
1. Provide clarity on the main nature-related concepts
2. Explain why nature is of major interest for sovereign investment
3. Survey different datasets to highlight the need to evaluate nature-related risks and opportunities from a multi-dimensional perspective
4. Highlight the challenges that investors face regarding country-level nature analyses
This paper serves as a valuable resource on the available nature and biodiversity data for sovereign bonds, highlighting that selecting the appropriate indicator for each use case is essential for accurately evaluating the risks and opportunities associated with nature in sovereign investments.