Welcome to the Conservation Finance Guide. The overall goal is to provide practical tools to support the rapid expansion of sustainable finance mechanisms that generate long-term funding for biodiversity conservation.
Welcome to the Conservation Finance Guide. The overall goal is to provide practical tools to support the rapid expansion of sustainable finance mechanisms that generate long-term funding for biodiversity conservation.
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To navigate directly to a Category of Finance Mechanisms within “Risk Management”:
Risk management mechanisms and strategies seek to either leverage the risk abatement properties of well-managed ecosystems or use various risk management mechanisms to improve the conditions or conservation of natural ecosystems. Managing risks is a challenging endeavor for individuals, localities, and businesses and the insurance industry has become extremely experienced at developing and selling a range of risk instruments to facilitate risk management such as damage, liability, and health insurance. Other tools are designed for managing financial risks and can be combined with investments to facilitate transactions that would have not been possible without managing risk through instruments such as loan guarantees and payment for success programs (also known as “impact bonds”). The combination of risk management instruments and/or various return-based investments instruments can produce what is termed “blended finance” which is considered a strategy of financial risk management that facilitates private sector investment in nature.
To navigate directly to a Class of Finance Mechanisms:
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Insurance products are financial tools that are used to manage risks for governments, companies, households and individuals. The Association of British Insurers describes insurance as the following, “Insurance is a financial product sold by insurance companies to safeguard you and/or your property against the risk of loss, damage or theft (such as flooding, burglary, or an accident). The company pools clients' risks to make payments more affordable for the insured, with each member paying regular premiums to the insurer. If a customer, or a holder of an insurance product, makes a claim for lost, damaged or stolen goods, the insurer will pay out for that loss that is covered under the specific policy” (ABI, accessed December 18th, 2019). Insurance for conservation has many possible benefits that can be divided into two large categories: 1) insurance on environmental damages caused by natural or human activity and 2) aligning incentives through reduced insurance premiums based on investing in or maintaining natural infrastructure that decreases risks of losses. The former has been implemented in Quintana Roo, Mexico, for reef restoration following storm damage, and the latter has a good example in South Africa for decreases in home insurance premiums following the eradication of invasive alien plants that pose elevated fire hazards. Forest carbon projects are also known to purchase insurance to mitigate against forest fires and insect damage risk.
Disaster Risk Insurance
Insurance schemes that cover– against a premium– financial losses due to extreme weather and natural disasters (i.e. such as earthquakes, floods). If the event occurs, the insurer refunds a percentage of the loss. Insurance is widely used to increase households' and enterprises' resilience to shocks. Forests and other natural assets can be insured.
Green Measures to Reduce Insurance Premiums
Companies operating in fishing and other economic sectors with risk of high impact on natural assets need to insure their operations to better manage commercial risks. The insurance companies can offer those enterprises discounts on premiums if they adopt green measures that both contribute to mitigating the risks incurred by the insurers and produce environmental benefits. These green measures can effectively realign company investment to more sustainable practices. Another example is discounts on fire insurance premiums in South Africa for private land owners who remove high fire risk invasive species from their land.
EIA Performance Bonds
A performance (or contract bond) is a surety bond issued by an insurance or financial company to guarantee satisfactory completion of a project by a contractor. Performance bonds and other financial guarantees can be linked to EIA provisions. These are provided by the project developer -usually for long term mining projects- to assure stakeholders that financial resources can be deployed even if the developer cannot comply with EIA provisions. It is a promise from a surety that monetary compensation will be provided to the owner if the project developer fails to act. The resources from the surety can be quickly deployed to save or recover critical environmental assets and can be accessed even in case of bankruptcy.
Environmental Risk Insurance
Insurance schemes that cover against environmental liabilities (i.e. the financial risk associated with environmental pollution and contamination) in exchange for a premium. In addition to preventing future expenditures and thus reducing business risks, they can provide contingent resources for immediate remedial action in the event of an environmental disaster.
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The concept of “pay for success” solutions is that private companies or NGOs take on the risk of implementing projects or programs that seek to achieve quantified public benefits (i.e. a reduction of a certain percentage of poaching) within a previously established agreement with government or donors to pay for the services, including some profit margin, once the activities have been successful. This allows government to decrease its own risk when piloting new approaches while allowing innovation and promoting efficiency and effectiveness of programs. For the private sector, or NGOs, the system allows private finance to flow into public projects that would otherwise have only been financed with grants. This approach is also called “pay for performance” or “impact bonds.” The original development of the pay for success model was called a social impact bond and was piloted for anti-recidivism programs in the UK. A good example in the nature space has been implemented by Quantified Ventures in their Wetlands Environmental Impact Bond (EIB) in Louisiana, USA. The EIB allows private capital to address erosion issues rapidly and private investors receive a return on their investment following successful implementation.
Sovereign Wealth Funds
State owned investment funds capitalized from balance of payments surpluses, foreign currency operations, royalties on extractive industries and other transfers and economic rent. Available resources are generally invested in capital and equity markets often through intermediaries to achieve returns. These returns are either re-invested or distributed to the Government or other recipient entities. Their investment policies can be oriented towards sustainable standards and practices-for example by investing a percentage of the capital in green bonds or impact investing. Similarly, the distribution of annual transfers may be earmarked to the environmental-particularly if the sovereign fund is capitalized from natural resource royalties.
State owned investment funds capitalized from royalties on oil and gas. Available resources are invested in capital and equity markets to achieve returns. These returns are either re-invested or distributed to the Government or other recipient entities. Their investment policies can be oriented towards sustainable standards and practices-for example by investing a percentage of the capital in green bonds or impact investing. Similarly, the distribution of annual transfers may be earmarked to the environment and climate change-particularly due to the fact of the negative impact of oil and gas on the environment and climate.
Sovereign Wealth Funds-Oil and Gas Funds
Conservation Impact Bond (Payment for Results)
A social and development impact bond where resources are linked to a conservation outcome.
Development Impact Bond (payment for results)
A social and development impact bond where resources are linked to a conservation outcome.
Wildlife Impact Bond (payment for results)
A social and development impact bond where resources are linked outcomes featuring the protection or conservation of wildlife.
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Blended Finance is defined by Convergence as “the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.” (Convergence Finance). They note that blended finance strategies have mobilized approximately $140 billion to-date based on their data. The concept of blended finance includes situations where multiple finance tools with different risk/return profiles are combined in a single project or investment deal so that returns to certain investors are enhanced relative to risk - while donors with lower needs for returns can accept higher risk and lower returns. Combining different instruments - for example, a grant, a financial guarantee, concessionary or subordinated public debt, discounted lending or return rates, and private investment - allows for a wider range of finance sources to participate in a program or company’s financing. For more information see Convergence.
One useful element of many blended finance solutions are financial guarantees. Financial guarantees are finance tools that reduce the risk of providing loans and encourage greater experimentation in lending. For example, loan guarantees are described as having the “objective [of] induc[ing] lenders to extend loans to individuals and firms they would otherwise not accept as loan clients” (Vogel and Adams, 1996). Loan guarantees have been useful for experimental new funds for nature such as Althelia (Mirova) and others who have been able to decrease the risk of non-repayment to investors in the fund through a loan guarantee program. As an example, Mirova’s $100 million Sustainable Ocean Fund is supported by USAID which will provide up to $50 million in principal protection in the event of a loss of investment.
Another example of a blended finance approach can be seen in the Debt Conversion that was orchestrated to help fund marine conservation in the Republic of Seychelles. In this case, the Nature Conservancy combined a loan and grants (provided in part by philanthropic foundations) in order to buy back debt held by the Paris Club.
Enterprise Challenge and Innovation Funds
Funding instrument that distributes grants (or concessional finance) to profit-seeking projects on a competitive basis. It subsidizes private investment in developing countries where there is an expectation of commercial viability accompanied by measurable social and/or environmental outcomes. Challenge funds can mitigate market risks, while spurring innovation to fight poverty and reduce environmental degradation.
Financial Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. Guarantee programs are often designed to help entrepreneurs obtain bank financing by dealing with collateral constraints. The guarantee functions as a promise by the guarantor to the lender that, in the event that the borrower defaults on payment, the guarantor will repay the lender a specified proportion of the foregone principal. This allows traditional lenders to take risks and learn new markets outside current risk profiles. The scheme can be attached to biodiversity related businesses which are often operating in non-mature markets and lack financial records
Private Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. The guarantee functions as a promise by the guarantor to the lender that, in the event that the borrower defaults on payment, the guarantor will repay the lender a specified proportion of the foregone principal. This allows traditional lenders to take risks and learn new markets outside current risk profiles. The scheme can be attached to biodiversity related businesses, which are often operating in non-mature markets and lack financial records. Private companies and Non-government organizations can extend these guarantees.
Public Guarantees
Guarantees can mobilize and leverage commercial financing by mitigating and/or protecting risks (such as political, regulatory, and foreign-exchange risk), notably commercial default or political risks. A public guarantee can encourage financial institutions, i.e. commercial and development banks, to offer loans to new companies. Public guarantee programs are often part of bilateral or multilateral development assistance and seek to address market failures without unintentional distortion of existing banking systems and financial markets. The scheme can be attached to biodiversity related businesses.
Project Finance for Permanence
Project Finance for Permanence (PFP) is an innovative approach to permanently and fully fund conservation. The terminology is borrowed from Wall Street, where a single "closing" is negotiated with Government, foundations and private donors to gradually eliminate the gap in protected areas financing. PFPs is a solution for graduating from piecemeal funding initiatives. Successful PFPs were completed in Brazil, Costa Rica, and Canada.
Lower cost of capital for conservation investments
Identify and model policy interventions that can lower the barriers that hold back private investment in biodiversity-friendly sectors. The aim is to lower the capital costs of investment and achieve a better risk-return profile for investors and for companies receiving financing. The analytical framework and model developed for renewable energy may be adapted to conservation investments.