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EU Nature Law Could Catalyse Sovereign SLBs 

Investors, NGOs and think tanks have welcomed the contentious EU Nature Restoration Law, but criticise weakened proposals.  

The new EU Nature Restoration Law (NRL) has set a “powerful underlying policy foundation” to scale allocations from fixed-income funds into low-risk nature-related investments, according to think tank NatureFinance.  

On 27 February, the NRL was passed in a final EU Parliament vote, with 329 votes in favour, 275 against and 24 abstentions.  

Proposed by the European Commission in 2022, the NRL directs member states to restore at least 30% of natural habitats such as forests, rivers and coral beds from a poor to a good condition by 2030, increasing to 60% by 2040, and 90% by 2050.  

Member states must also put in place measures to achieve a “positive trend in several indicators in forest ecosystems”, as well as planting an additional three billion trees across the bloc and restoring 25,000km of rivers. 

Nature-related SLBs 

To achieve these goals, the NRL requires member states to develop National Restoration Plans (NRPs) which NatureFinance has said could mean governments will issue sovereign sustainability-linked bonds (SLBs) to meet their targets.  

“Adoption of the law opens up opportunities for the EU member states to integrate nature restoration into their public finances’ asset-liability management,” said Gregor Pipan, Senior Associate at NatureFinance and Senior Manager at the Sustainability-linked Sovereign Debt Hub.  

“Specifically, issuance of SLBs with KPIs and sustainability performance targets tied to the NRPs and relevant targets can show the commitments of European governments to meet these goals.”  

Further, SLBs could reward countries which met restoration or conservation goals with lower costs of debt service through potential step-down clauses, said Pipan, as well as through the reduction of risks to public finances originating from nature depletion.  

“This could be combined with sovereign green bonds issued to finance specific restoration and nature-based climate adaptation projects,” he added. 

The NRL requires EU member states to submit NRPs to the European Commission within two years of the regulation coming into force, showing how they will deliver on targets. They will also be required to monitor and report on their progress. 

Both Chile and Uruguay have issued SLBs, but to date no EU member state has done so.  

Enabling environment  

Meeting the NRL’s restoration targets would help protect food security and safeguard human wellbeing in Europe, according to Helen Crowley, Senior Advisor at climate and nature advisory and investment firm Pollination.  

“The significance of the passing of the NRL cannot be understated,” she said. “It is a watershed moment for the EU to restore nature and reset the foundation for a resilient economy in the face of challenges ahead.”  

Crowley added that the NRL would be additive to the foundation of sustainability- and nature-related policies that had been introduced over the past few years, such as the EU taxonomy and the Corporate Sustainability Reporting Directive, that helped create an enabling environment for the private sector to act on supporting nature.   

“It also builds on the biodiversity COP in Montreal and the amount of interest from the private sector, particularly finance institutions, who recognised the link between thriving nature and a thriving economy,” she said.  

But while there was celebration that the NRL had passed the European Parliament, some observers also noted that the contentious law had been watered down to tackle political resistance from conservative groups.  

Targets to restore organic soil were relaxed to satisfy some political and agricultural groups. In November, the World-Wide Fund for Nature (WWF) warned that the regulation had been watered down compared to the European Commission’s initial proposal and contained loopholes regarding obligations for member states.  

“The fact that some key measures to support the sustainability of farming were voted down in the negotiation process clearly shows the need for greater collaboration and understanding across all sectors of Europe’s economy and society,” said Noor Yafai, Europe Director for Global Policy and Institutional Partnerships at the Nature Conservancy (TNC).  

“Agriculture depends on biodiversity, and therefore it is critical that we build stronger partnerships between policymakers, civil society, farmers, and industry to find a way to make nature protection and restoration feasible, affordable, and inclusive.” 

The final step in the process for finalising NRL is the formal approval of member states at the EU Council, which is expected to take place in March or April.   

The EU Council is under fire this month for not approving the EU Corporate Sustainability Due Diligence Directive despite reaching a provisional agreement with the European Parliament in December.  

A spokesperson told ESG Investor that the WWF expected member states to “follow the European Parliament’s suit and seal the deal on the NRL”.   

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