Why biodiversity matters in fixed income

As bondholders, our relationship with the companies and governments we invest in is fundamentally different from that of shareholders. We do not share in the equity price upside when a business thrives, but we do bear the downside when it cannot repay its debts.

This asymmetry shapes our view of risk; from leverage and margins through to environmental performance, all material factors must be weighed. Biodiversity loss is one such factor, and one that is rapidly moving up an environmental agenda that has previously been dominated by emissions and plans for net zero.

Biodiversity risk comes in two forms, physical risk and transition risk. Physical risk arises when nature itself is depleted, and the credit implications here can be direct. Soil degradation reduces crop yields and compresses the margins of agricultural borrowers. Water scarcity raises operating costs and threatens production continuity for utilities, food producers, and manufacturers. A collapsed fishery undermines a sovereign's export revenues and debt sustainability. In each case, the degradation of a natural system translates into a measurable deterioration in the financial metrics we rely on to assess creditworthiness: revenues, margins, cashflows, and asset values.

Transition risk is different but no less material. Tighter land-use rules, biodiversity disclosure requirements, and penalties for environmentally damaging activities can reshape the economics of entire sectors, sometimes quickly. Together, these forces mean that biodiversity is no longer a secondary concern for responsible investors, it is an important part of assessing whether a borrower can meet its obligations over the long term.

How we assess biodiversity risk

Biodiversity integration in fixed income remains first and foremost a data challenge. Even within the investment grade bond universe, meaningful disclosure from issuers is limited and, in many cases, non-existent. Where data does exist, it tends to be qualitative rather than quantitative: a policy statement of intent rather than a measurable indicator of impact or progress. Our current approach is necessarily weighted towards the policy side; assessing whether issuers have credible frameworks in place, whether nature-related risk is recognised, and whether there is any credible roadmap for improvement.

At TwentyFour we supplement limited formal disclosure with controversy monitoring, because in the current environment it is often a controversy rather than a datapoint that first flags a biodiversity problem. The mining sector is an example of this, where a small number of names have a well-documented history of lax biodiversity management, and where reputational and financial risk can crystallise quickly. Our controversies score feeds directly into our overall ESG analysis. A poor score has a material impact on an issuer’s overall rating and triggers an internal review to determine whether the issue represents a genuine credit concern.

It is important to note that because of geographical differences in regulation, a strong biodiversity policy from a European issuer and a weak one from a US peer, for example, do not necessarily reflect strong or weak underlying performance – it may simply reflect the regulatory environment each operates in. Adjusting for such nuances is part of how we, as an active manager, assess the quality of issuer commitments.

Where is exposure most material?

Some of the most nature-dependent sectors are also among the largest issuers of corporate debt. Agriculture, food and beverage, construction, and utilities companies all rely directly on functioning ecosystems, be it healthy soils, stable water supplies or sustainable raw materials. When those systems degrade, input costs rise, operations are disrupted, and the ability to service debt is compromised. These are capital-intensive industries that borrow heavily and at long maturities, making biodiversity risk a live credit consideration.

For sovereign issuers, the exposure is equally direct, particularly in emerging markets (EM) where natural capital is a tangible source of fiscal revenue through industries such as timber, fisheries, agricultural commodities and tourism. When ecosystems deteriorate, so do export earnings and tax receipts, putting pressure on government budgets and debt sustainability. For EM-exposed fixed income investors, the health of a country’s natural environment should be a key sovereign credit variable.

Where is our focus in our own portfolios?

The sectors most directly exposed to biodiversity risk – mining, forestry, and agriculture – are areas where our portfolio exposure tends to be relatively limited, which is in part a reflection of our broader investment approach. That said, biodiversity does not sit at the periphery of our analysis. Utilities represent a more material holding in some TwentyFour portfolios, and in the current environment their biodiversity footprint is increasingly relevant. The rapid build-out of energy infrastructure to meet AI-driven power demand is placing new pressure on land use, water resources, and ecosystems, raising questions about whether the pace of development is leaving environmental considerations behind.

Data centre builders and users are another area of growing focus. Previously modest bond issuers, they are becoming increasingly significant in credit markets as so-called hyperscalers and technology companies raise capital to fund the AI investment cycle at pace. Their land, water and energy footprint is substantial and growing, yet biodiversity scrutiny of this sector remains underdeveloped relative to its expanding impact.

The contrast between issuers is already stark. Meta, for example, has committed to preserving or restoring native habitat across more than 50% of its owned data centre campus footprint (which equates to over 4,000 acres) with these practices now built into every stage of development. The sustainability objectives of other issuers in the space remain largely carbon-centric, with little in the way of concrete biodiversity commitments. We are concerned that in the race to build, these considerations may be left behind, and we intend to make sure they are not overlooked in our own analysis and engagement.

Lack of data remains fixed income’s biggest challenge

The most significant challenge in integrating biodiversity into fixed income analysis is the lack of data. Unlike carbon emissions, where years of measurement have produced at least a baseline of comparable, quantifiable metrics, biodiversity data remains fragmented, inconsistent, and largely qualitative. There is no single number that captures an issuer’s relationship with nature in the way a carbon footprint does, making it considerably harder to distinguish leaders from laggards with confidence.

The quality of disclosure from bond issuers varies enormously. Larger companies with dedicated ESG teams produce more and better information, while smaller issuers, including many in sectors that rely heavily on the bond markets, report far less. That does not mean size is a proxy for performance; larger issuers have the resources to measure and report, not necessarily better biodiversity outcomes. Geography compounds this further: European issuers are increasingly subject to mandatory disclosure requirements and investor pressure, while US and EM issuers are not. EM is a particular frustration, since data is thinnest where natural capital is most economically significant and where the impact of our engagement is arguably greatest.

The data we have access to today spans water efficiency policies and targets, land impact policies, waste metrics, hydrocarbon spill volumes, environmental fines, and palm oil supply chain exposure. A small subset of more directly biodiversity-specific datapoints also exists – biodiversity due diligence, risk assessments, targets, and net positive impact commitments – but coverage here is particularly thin. The core problem is aggregation: data coverage is skewed towards larger investment grade issuers, historical time series are short, and there is rarely an agreed baseline against which to judge whether a given figure is good or bad.

Several of these datapoints feed directly into the environmental component of our ESG scoring system, and in that sense biodiversity considerations do inform our investment decisions today. The inputs currently captured by our scoring system include biodiversity impact reduction initiatives, waste intensity metrics, hazardous waste ratios, environmental restoration reporting, water efficiency policies and targets, green buildings disclosure, water use intensity, and water recycling rates.

While none of these directly measures biodiversity impact, together we believe they offer a reasonable proxy for a company's approach to and impact on biodiversity. The limitation, however, is the same as above: coverage is uneven and tilted towards larger, higher-rated issuers, meaning the companies where nature-related risks may be most acute are often those for whom the data is thinnest.

A similar logic applies in our asset-backed securities (ABS) portfolios. Within the European collateralized loan obligation (CLO) market, for example, exposure to the chemicals sector has been gradually declining but remains moderate at around 7%. Chemicals is a sector we regard as carrying high environmental risk given both pollution and transition risk considerations. At a portfolio level, we evaluate each CLO transaction on its chemicals exposure and apply a scoring penalty to those above the median. We also engage with CLO managers on transition risk, though the volatile regulatory environment in this space continues to limit conviction.

The current dataset is probably better characterised as a starting point for conversations than a basis for confident analytical conclusions. This also explains why site-level disclosure matters so much, because unlike carbon, where volume is the primary variable, biodiversity impact depends heavily on location. A company operating in a biodiversity hotspot could be far more damaging than one with an identical or larger footprint in a less sensitive area. Obviously if there was a company with a very large hydrocarbon spill, significant water use, or large environmental fine then this would be a clear red flag, but spotting the good and the bad outside the worst offenders is challenging.

Regulation: what is coming and when?

The regulatory and framework landscape for biodiversity is still taking shape, but three distinct building blocks are emerging, each playing a different role. The European Union’s Corporate Sustainability Reporting Directive (CSRD) and the global Taskforce on Nature-related Financial Disclosures (TNFD) framework are focused on disclosure, pushing companies to identify and report their nature-related risks. The Science Based Targets for Nature (SBTN) go a step further, providing the methodology for companies to set measurable nature-related targets. Together they point in the same direction, even if adoption and enforceability vary considerably.

EU Corporate Sustainability Reporting Directive (CSRD)

CSRD is the most concrete mandatory biodiversity disclosure requirement currently in force. It requires large EU companies to report against the European Sustainability Reporting Standards (ESRS) E4, the EU’s dedicated biodiversity and ecosystems standard, with the largest companies reporting from financial year 2024. Crucially, ESRS E4 aligns closely with TNFD, effectively making TNFD-style disclosure mandatory for large EU issuers. However, its scope is narrowing, with recent simplification proposals reducing the threshold to companies with over 1,000 employees and €450m in turnover, a significant pullback from original ambitions, and smaller companies granted a two-year delay. CSRD remains the most meaningful biodiversity disclosure requirement globally, but it is becoming a narrower instrument than first envisaged.

Taskforce on Nature-related Financial Disclosures (TNFD)

TNFD, which is currently voluntary, provides a framework for companies and financial institutions to identify, assess, and disclose nature-related risks, and it is structured deliberately to mirror the Task Force on Climate-related Financial Disclosures (TCFD). Over 620 organisations representing $20 trillion in assets under management have committed to TNFD-aligned disclosure. Disclosures are built around four pillars: governance, strategy, risk management and metrics. Companies are expected to map where their operations and supply chains interface with nature, disclose land use, water, and pollution footprints, and report site-level exposure to protected areas and biodiversity hotspots. For investors, this is materially better than what exists today.

The path to mandatory adoption is also shortening. The International Sustainability Standards Board (ISSB) is targeting an exposure draft of biodiversity disclosure requirements by COP17 in October 2026, drawing directly on TNFD. However, limitations remain: there is no single aggregating biodiversity metric equivalent to carbon, and even among early adopters, coverage of relevant metrics is inconsistent. TNFD will raise the floor on disclosure, but it is unlikely to deliver clear, comparable numbers any time soon.

Science Based Targets for Nature (SBTN)

If TNFD tells companies how to disclose their relationship with nature, SBTN sets the bar for what genuine ambition should look like – it is intended to be the scientific gold standard for biodiversity target-setting. The parallel with the widely adopted Science Based Targets initiative (SBTi) for climate is instructive; it took years for science-based emissions targets to gain meaningful corporate traction, and SBTi now counts over 10,000 companies with validated targets. SBTN is at least a decade behind that curve. Only around 150 companies are working through the process, and fewer still have validated targets. Adoption is constrained by practical challenges, with supply chain traceability, local ecosystem data and the absence of a single aggregating metric making nature targets inherently harder to set and verify than carbon targets. SBTN is the right destination, and we will watch adoption closely, but for now it remains an aspiration rather than an analytical tool.

How biodiversity shows up in labelled bond markets

Within the labelled bond market, nature and biodiversity instruments remain a small corner. Blue bonds and biodiversity-themed structures are bespoke and limited in volume, which reflects a structural problem: most biodiversity projects lack the stable, scalable cashflows that bond formats require. More fundamentally, biodiversity is often not a discrete project, it should be embedded in every investment decision, which makes it an awkward fit for use-of-proceeds structures that lend themselves naturally to assets like wind farms or solar plants.

Biodiversity-linked issuance has so far been dominated by quasi-government entities and sovereigns, which account for around two-thirds of the market (see Exhibit 3). Corporate issuance remains thin, and what exists skews towards EM, perhaps unsurprisingly given the direct dependence of many EM economies on natural capital. As with green bonds more broadly, we assess labelled issuance at the issuer level rather than the project level, with the credentials of the company mattering more than the label on the bond. The “greenium” that once incentivised green issuance has largely compressed to a handful of basis points. However, biodiversity should not require a financial incentive to drive action; the risks to business models are reason enough.

How we engage with issuers on biodiversity

Direct engagement is our primary route to influence as fixed income investors. On climate, engagement has been made more straightforward by the existence of raw, comparable data on emissions, net zero targets and transition plans that give investors a clear basis for challenge and a measurable yardstick for progress. Biodiversity is considerably harder. In the absence of standardised numerical metrics, engagement on nature-related risks often amounts to little more than a conversation about a qualitative policy document, one that may articulate good intentions but offers little by which we can hold an issuer accountable. That is a genuine limitation, and one we expect to persist until disclosure frameworks like TNFD become more widely adopted.

Despite this, we believe engagement on biodiversity is too important to defer. We are focusing our efforts where we believe they can have the greatest impact, on sectors with the most direct and material dependencies on natural ecosystems. Agriculture, food and beverage, utilities and construction sit at the top of that list, but banks are another area of focus given we can look to influence their approach to lending in sensitive areas.

Our engagement with issuers in these industries focuses on whether they have mapped their nature-related dependencies, what steps they are taking to reduce their biodiversity footprint, and whether they are prepared for the disclosure requirements that are coming. We may not always be able to point to a number, but we can assess the quality of thinking and the ambition of commitments.

Given some of the barriers faced by issuers on biodiversity from a data collection and reporting perspective, progress will take time (more time than was required for emissions data collection and targets, for example) and we appreciate many of these engagements will be long-term in nature in order to see meaningful progress. However, we are aware that there could be situations where there is a total lack of understanding, engagement or acknowledgement of biodiversity from issuers. In this scenario, we will follow our escalation strategy which applies across all our engagements. We believe dialogue is more effective than automatic exclusion, and we will engage with management as appropriate to understand their position and to establish a suitable path forward.

Where we are unable to make progress, we may choose not to invest, reduce an existing position, exit entirely or decline to participate in future refinancings. All escalations are recorded and handled on a case-by-case basis regardless of strategy or region. While we prefer to keep such discussions private, we have on occasion published our views where an issue has proved difficult to resolve and we felt it warranted the attention of our clients or the broader market to assert more pressure. 

Examples of TwentyFour engagements

Conclusion

Biodiversity risk remains an early-stage investment theme. Data and reporting are less developed and fundamentally harder to measure than for climate risk, and biodiversity has been slower to attract the regulatory and market infrastructure that investors need. But the case for taking it seriously is already made. The financial links between nature loss and credit risk are real, and the issuers that are ahead of the curve today are likely to face fewer surprises as disclosure requirements tighten.

With no single aggregating metric for biodiversity, tracking progress is harder than it is for emissions, and distinguishing genuine improvement will require judgement on the part of investors as much as data for some time yet. The regulatory pipeline, chiefly CSRD and TNFD, will improve the picture, but only gradually. What we can do in the meantime is what we have always done on emerging engagement themes: focus our efforts where the exposure is greatest, ask the right questions of issuers, and build the analytical foundation now so that we are ready to act with greater conviction as the landscape matures.

For us, biodiversity integration is not a parallel process running alongside credit analysis, it is part of it. Where nature-related risks are material to an issuer’s business model, they are factored into our assessment of credit quality in the same way as any other operational or regulatory risk. An agricultural borrower with significant exposure to water stress, a utilities firm with a large land footprint in ecologically sensitive areas, or a bank with undisclosed financing exposure to high-impact sectors would be flagged as credit considerations, not just ESG ones. As data improves and disclosure frameworks mature, our ability to quantify these risks more precisely will improve. In the meantime, the quality of management thinking, the credibility of commitments, and the willingness to engage are themselves informative signals.

Looking longer term, we expect biodiversity to follow a broadly similar trajectory to climate, with a gradual tightening of disclosure requirements, a growing body of comparable data, and an increasing number of investors treating nature-related risk as a mainstream credit variable. The timeline will be longer and the path less linear, but the direction of travel is clear.

For fixed income investors with long-dated exposures, that trajectory matters. The bond issuers building credible biodiversity frameworks today are doing so partly because the regulatory and reputational costs of not doing so are rising, and we expect those costs to continue rising. Our role is to understand where different issuers stand, push for better where they fall short, and ensure that biodiversity is reflected in our credit assessment.