Biodiversity-related Sustainability-Linked Bonds

Standard financial assets have not proved to be effective tools to meet the objective of raising sufficient private capital for biodiversity protection. How to finance the reverse in biodiversity deterioration remains a challenge. In this paper a model of Biodiversity-related Sustainability Linked Bonds (BrSLBs) is proposed as an innovative financing instrument for biodiversity conservation and restoration. Following an option pricing approach, we derive a pricing model where the Key Performance Indicator (KPI) is related to the issue of contrasting biodiversity loss and nature deterioration. We propose a comprehensive pricing formula for BrSLBs which is based on multivariate digital options and accounts both for the KPI provision and the issuers' credit risk. The relevant questions regarding these instruments are investigated - e.g. the existence of a 'bio-sustainium', the interaction between sustainability performance and issuer's credit risk, the problem of optimal design of these bonds and potential greenwashing. Our paper contributes to understand and help expanding this segment of sustainable finance and thus to find a source of funding biodiversity preservation.