Editor’s note: From “climate adaptation” to “ecosystem services,” environmental jargon is everywhere these days. Conservation International’s blog looks to make sense of it in an occasional explainer series we’re calling “What on Earth?”
In this installment, we break down “conservation finance,” which isn’t as dull as it sounds — and which might be the final frontier for protecting nature.
What is ‘conservation finance’?
“Conservation finance” refers generally to a range of financial mechanisms that can help fund the conservation of nature.
OK. But why do we need to pay for conservation in the first place?
The short answer is that conservation is often just one choice among many that countries and communities make. For example, if you own an acre of tropical forest, leaving the forest in place likely won’t generate the income and livelihoods that you are seeking. So, you may sell the trees for timber and put a farm there — which will make you money in the short term but may not be sustainable over the long term.
Conservation finance seeks to flip that script by aligning incentives to make standing forests (or other ecosystems) more valuable standing than cut. This can create powerful monetary incentives to keep ecosystems intact while still accounting for people’s reliance on these places for their lives and livelihoods.
What kind of incentives are we talking about?
These incentives can take the form of grants, loans, bonds, trust funds, swaps — many conventional financial instruments can be channeled toward “green” investments. Incentives can also be non-monetary in the form of assistance with agricultural improvement, education, health or other needs.
Give me an example of one.
How about three examples?
- In Ecuador, a Conservation International pilot project led to the creation of Socio Bosque, a government program that pays landholders a stipend not to cut down their forests. At minimal cost, it has saved millions of acres of forests while helping reduce poverty at the same time.
- The Critical Ecosystem Partnership Fund provides grants for nongovernmental and private sector organizations to help protect biodiversity hotspots, Earth’s most biologically rich yet threatened areas.
- Debt-for-nature swaps enable countries to swap foreign debt for a promise to protect a given area of forest.
So where does this money come from?
Most of the funding has come from charitable foundations, national governments, multilateral institutions, etc. With the possible exception of “green bonds,” private-sector money — from institutional investors, for example — has been largely missing from the conservation finance equation.
Why is that?
Because more often than not, it doesn’t make financial sense for investors. Let’s bring in an expert to explain.
“In most of the developing world, conservation right now is not a viable economic option,” says Agustin Silvani, vice president of conservation finance at Conservation International (CI). “It usually doesn’t pay; there are no cash flows associated with it. And so you end up with deforestation and environmental degradation not because people hate nature, but because they see it as the only way to pay the bills. We need to fill this finance gap.”
What is this gap?
A recent analysis by McKinsey, a consulting group, found that global conservation needs stand at about US$ 300 billion. Current global conservation spending: US$52 billion (mostly in rich developed countries). It’s nowhere near the kind of money needed to make a planet-sized dent in climate change, deforestation and so on.
“If we’re going to fill this gap, we’re going to have to tap other pools of funding,” Silvani says. “Public funding and philanthropic funding will have to increase, but that’s not going to be enough. So we need to figure out how we’re going to tap in to private capital, the institutional investors, who have access to trillions of dollars.”
What’s holding these investors back?
You mean aside from the lack of cash flows? An aversion to risk, mostly.
To some, a lack of standards and certainty in the conservation finance world has kept trillions of dollars of private funds on the sidelines. “There are signs that the financial market can be realigned to channel capital into the green economy … We need political investment to unlock private investment,” one financier told a high-level summit on forests in 2014, calling for governments to create the conditions to enable more private-sector funding.
What kind of conditions would be needed?
A price on carbon would be a good start, according to Silvani.
“Forests and other ecosystems store vast amounts of carbon, yet this service largely goes uncompensated,” Silvani says. “A price on carbon would immediately incentivize and drive more investment to conservation, since investments in nature are some of the most cost-effective and impactful in terms of carbon.”
Another is the valuation of nature’s benefits: “Of course carbon is just one of the services forests provide. Nature needs to be taken into account in economic decision-making,” Silvani says, pointing to recent developments that are helping companies understand their reliance on, and impact on, nature.
Back to green bonds — can’t companies invest in more of those?
Part of the appeal of green bonds is that they are well-understood, even boring — and that’s kind of the point, Silvani says. “Boring is good in this space. These are traditional products, as trustworthy and as simple as opening a checking account, and that’s the kind of thing that attracts investment.”
The problem, he says, is that there isn’t enough of that money: Of the nearly US$ 700 billion invested in green bonds, only 1 percent of it currently goes to investing in forests and sustainable agriculture.
Can’t we just create more green bonds, then?
It’s not that simple — and even if you did, there are limitations. For example, two new and innovative bonds launched in part by CI (including this one) focus only on small geographic areas, at least for now.
So what happens now?
While green bonds aren’t going away, signs are pointing to bigger change in conservation finance, Silvani says.
Financing initiatives like the Global Conservation Fund (GCF) continue to have massive impact, with GCF having helped protect more than 800,000 square kilometers (300,000 square miles) of land and sea. The Paris Agreement in 2015 galvanized commitments to direct funding, public and private, toward fighting climate change. And at the 2016 World Conservation Congress, CI joined over 20 other NGOs in a statement of intent for the Coalition for Private Investment in Conservation, a shared effort to develop new investment models that can help close the conservation funding gap. Meanwhile, the role of indigenous peoples and local communities as stewards of their lands has gained a higher profile in recent years, and increasingly conservation finance is being geared toward supporting this home-grown conservation.
It pays to protect nature — and the world looks increasingly willing to pay for it.
Bruno Vander Velde is CI’s editorial director.
- New bond aims to unlock private investment to protect forests
- What on Earth is ‘natural capital’?
- Elephants with a trust fund? Endowment to protect future of a ‘magical’ forest