From a climate perspective, the formula is simple: protecting natural ecosystems — like the Amazon rainforest — strengthens the resilience of the global climate system. The alternative, where such ecosystems are destroyed, weakens it. Amid today’s polarised debates over fossil fuels, one point should be uncontroversial: natural carbon sinks, especially forests, are a universal good. Even better, preserving these ecosystems is significantly more cost-effective than many high-tech carbon capture solutions like CCUS.
In an intriguing twist presented in AFII’s latest research, the biggest beneficiaries of ecosystem preservation may be those under the most pressure to decarbonise. AFII research finds that Saudi Arabia — in particular its powerful sovereign wealth fund, PIF — could gain much from preserving the Amazon and other natural forest carbon sinks. With a broad portfolio of investments spanning public and private agroindustry, PIF has real leverage over the fate of these vital ecosystems. (“PIF, Aramco, and the Amazon”). In other words, as COP30 nears, some unlikely champions for the world’s forests may be poised to step forward.
The nature preservation also raises a key question for general investors: how should deforestation risks be managed within the fixed income asset class? World’s biggest asset class, meets one of the world’s largest carbon sinks. How they should intersect seems like an important question, but it’s one that is surprisingly under-researched (just ask your search engine).
To that end, we are extremely pleased to release AFII's “Deforestation and Fixed Income Markets: A primer”, which will be available in your local virtual library on Monday 3 November. Stay tuned for more.
A win-win for asset owners and governments
A key output of the COP process are country-level decarbonisation plans, known as Nationally Determined Contributions (NDCs). This year, the UNFCCC is receiving a fresh batch of 2035 targets, some of which have already been published, China and Australia key among them. UNFCC registry here.
And yet, while this is good to see, no-one in conventional financial markets will know about it. After all, if decarbonisation data, like that included in the NDCs, isn’t linked to a tradeable asset, why should traders give a damn?
This is a dynamic that we are set out to change. To learn more, please join the NDC vigilantes presentation on Thursday 6 November, co-hosted with Bloomberg [link]. At this event, we will unpack NBIM’s recently released climate report outlining the negative equity performance expectations in a 2.7°C world versus, well, something less hot, and argue that government bonds compensating for climate policy failures (i.e., failing to transition) should be a standard tool for such investors. And here we propose the transition linker, a new type of performance-linked bond, which we will present [research link] including a special application to both Latin America and nature/biodiversity [research link].
Returning to the resilience theme, as we write a Category 4 hurricane is bearing down on Jamaica and other Caribbean nations — another reminder of how physical climate risks are rising as mitigation efforts fall short. This underlines how investing in resilience will be essential to limit the damage caused by climate change, particularly in developing countries. But it’s a thorny problem: since in many cases, resilience doesn’t generate new revenues it simply helps avoid losses.
We look forward to a number of discussions around this theme, through our own concept of contingent resilience linked (CORL) bonds as well as the Brazil-led Tropical Forest Forever Facility (TFFF). Both approaches aim to bring in concessional capital, such as first-loss guarantees, to help transform high-risk assets into something investment-grade. This unlocks emerging market risk premiums and enables some of the resulting de-risking value to be monetised for public goods like climate-resilient infrastructure or forest conservation. Done right, this could become a flagship blended finance model.
We hope to see you in São Paulo!
