How green bonds can fund a conservation renaissance

Editor's note: This essay is the fourth in a series, “Conservation Innovation: Voices of a New Generation,” which has been produced by the Lincoln Institute of Land Policy in collaboration with The GroundTruth Project on GlobalPost. The essays were written for presentation in Sydney, Australia during the November 2014 World Parks Congress organized by the International Union for the Conservation of Nature. 

ZURICH — Only around $50 billion is spent each year on the protection of nature around the globe. The lion's share – around 80 percent, or $40 billion – comes from government budgets and philanthropy.

Even if public and philanthropic investment levels were to more than double to $100 million per year, the level of investment by the private sector would still have to increase by a factor of 20-30 in order to meet the estimated total annual need of $300 billion to $400 billion.

While this sounds like a daunting challenge, achieving this level of private investment is not an unrealistic goal. The additional investment required equates to just a small fraction of total new or reinvested capital worldwide each year.

And there is without a doubt interest in making conservation-related financial investments among both private individual and institutional investors. After all, such investments can offer both financial and environmental returns as well as portfolio diversification.

The projects they finance can also provide private investors protection against anticipated macroeconomic developments, such as resource constraints, as well as protection against unwanted regulatory changes like compulsory financial offsetting of undesirable environmental impacts.

The idea behind market-based conservation finance is simple. Financial capital (money) is invested in an identifiable asset (an identifiable piece of natural capital such as a river or an expansive open space) that in turn generates benefits (ecosystem services) that yield cash flows that go back to the investor. This structure permits the underlying natural capital to be protected for the long term while providing the investor with a financial return.

But why do only comparatively few investment opportunities exist in this area today, even though resources such as forests or coral reefs have the potential to deliver regular "natural" income streams?

To begin with, there is the difficult problem of putting an economic value on the natural assets that provide ecosystem services. There is the further difficulty of devising a financially sound mechanism that will generate reliable project cash flows from these ecosystem services. Such financial mechanisms need to be durable, overcoming short term opportunity costs (for example, the foregone profits associated with unsustainable fishing practices). They also need to be replicable across geographies as well as scalable, allowing them to attract a large number and broad spectrum of investors.

Can we create a financial mechanism that will provide investors with reliable project cash flows and, when pooled together with other projects, provide financial diversification, meeting the risk/return expectations and investment profiles of key investor segments?

Based on recent experience with “green bonds” in global financial markets, the answer appears to be “yes.”

Green bonds, as described by the World Bank, “are fixed income, liquid financial instruments that are used to raise funds dedicated to climate-mitigation, adaptation, and other environment-friendly projects.” When issued by multilateral institutions such as the World Bank, or agencies of national governments such as the German Development Bank, such bonds may carry low, or even concessionary interest rates. Furthermore, a number of private financial institutions, attracted by the reliable returns on projects financed by green bonds, have entered the marketplace.

The Green Bond market is rapidly growing. First issued by the World Bank in 2007, the green bond market grew to $11 billion in 2013. As reported by the World Bank, some $32 billion of green bonds have been issued by multilaterals, governments and corporate issuers from January through October 2014, and could surpass $40 billion for the year.

To date, most of the proceeds from green bonds have been invested in renewable energy and energy efficiency projects. A smaller percentage has been invested in projects that involve sustainable land use, biodiversity conservation and the availability of clean water. This smaller slice of the larger green bond pie can be referred to as the market for “conservation bonds.”

Why should conservation bonds continue to grow as a significant, relatively low-cost source of conservation finance? Investors continue to look for new types of assets in which they can safely invest. Strong demand for a wide variety of green bonds has led to substantial oversubscriptions of several recently issued bonds. And the need for such bonds will continue to be substantial, underwriting the provision of valuable ecosystem services such as the provision of water for households, industry and agriculture, mitigation for the disturbance of wildlife habitat, or the sequestration of carbon in tropical and temperate forests.

Selected conservation projects lend themselves well to bond financing. If executed with a commercial mindset, they can generate predictable, steady cash flows, thanks in part to long-term revenue contracts for the sale of sustainably produced commodities and payments for ecosystem services.

Multi-national institutions and national government entities would seem to be the natural issuers for such bonds. But with nature as the underlying asset, project bonds and securitized bonds issued by private sector banks and specialized conservation entities can be equally successful.

Finding qualified borrowers will be critical to any conservation bond effort. In view of persistent budget limitations in developed countries, however, new and innovative solutions are required. With green bonds so well positioned to play a meaningful role in channeling private capital toward the protection of nature, it is time to move forward in bringing these innovative financial instruments to markets – and to the aid of our natural assets – around the world.

Fabian Huwyler is a vice president with Credit Suisse’s Sustainability Affairs group based in Zurich, Switzerland. He’s a member of the IUCN World Commission on Protected Areas Young Professionals Group and has been instrumental in conceptualizing Credit Suisse’s emerging conservation finance program.
 

Read Part One of the series: How to keep the American Southwest from drying up altogether

Read Part Two of the series: Why military lands make great conservation areas

Read Part Three of the series: Why reversing deforestation is all about love