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The Growing Case for Conservation Finance – Environmental Finance (2017)

Conservation Finance Moving beyond donor funding toward an investor-driven approach – Credit Suisse, WWF, McKinsey (2014)

Conservation Finance From Niche to Mainstream: The Building of an Institutional Asset Class – Credit Suisse and McKinsey (2016)

NRCS and Investment Capital: Investing in America Together – Encourage Capital (2017)

Conservation Finance Network

It’s Time For The UK To Explore Conservation Finance

Guy Whiteley

Our natural world and climate are experiencing catastrophic change, largely because it’s more profitable to destroy ecosystems than to conserve them. We can begin to redress this imbalance by using conservation finance to support opportunities that protect ecosystems and generate some form of return. Here’s how that can work in the UK.

30 October 2017 | Environmental NGOs, major banks, and strategic consulting groups rarely agree on anything, but almost all agree that our governments haven’t allocated nearly enough money to meeting the climate and conservation challenge – certainly not enough to slow or reverse the trends, and definitely not enough to roll with the calamitous changes that lie ahead.

WWF, Credit Suisse, and McKinsey & Company, for example, say we need an additional $200 to $300 billion per year to protect the living ecosystems that support life as we know it – but where to get it? Part of the answer lies in ramping up conservation finance, which can broadly be understood as finance that provides conservation impacts and returns for an investor. Low interest rates, demand from conservation-minded impact investors, and development of projects with attractive risk/return profiles has meant the sector has seen some recent momentum.

Of course, investment returns are not easily associated with conservation. But as understanding of the dependence of economies and wellbeing on ecosystem services grows, businesses and consumers are prepared to pay for conservation friendly products and services, and governments are prepared to establish regulations and incentives ensuring conservation goals. As a result, it is not difficult to envision investment opportunities resulting from the development of these sustainable services, products and supply chains as well as from projects that provide environmental credits for sale in voluntary and regulated environmental markets.

Ecosystem Marketplace’s matrix of existing market mechanisms provides a handy overview of potential opportunities arising from environmental protection. Even projects which struggle to provide cash returns can attract investment through impact bonds, which have seen successful application in tackling social issues and require no cash flow directly from the conservation activity, only that an outcome donor is prepared to pay for conservation impact.

An example conservation activity turning into investable products has been the development of conservation notes:

  • Since 2014, Credit Suisse has provided clients the opportunity to invest in nature conservation projects through the Nature Conservation Note. The notes attracted €15 million of investment from individuals in 2015 and supports projects selected by Althelia Ecosphere as part of their Althelia Climate Fund. The funds initially support two sustainable land use projects in Peru and Kenya with returns coming from premium agricultural products and carbon markets.
  • The Nature Conservancy’s Conservation Note, targeted at individual investors, has raised $42 million since 2012 and has had significant conservation impact, as detailed in the 2016 Impact Report. The funds raised through the note support the Conservancy’s global priorities. The minimum investment for the note is $25,000 and can potentially attract a 2% return over a 5-year term (returns fall as term decreases). Returns are generated through the Conservancy’s revenue generating activities including conservation land sales, grants and donations.

Ricardo Energy & Environment were recently commissioned by DEFRA to explore the level of private investment (including conservation finance) in the natural environment in the UK. It was a short review targeting engagement with stakeholders in Government, conservation NGOs and business. We identified a significant number of projects and initiatives where businesses made financial contributions to conservation. Agriculture is the fountainhead for many environmental issues and supply chains and represents 70% of land cover in the UK and therefore it was not a surprise it represented the most common destination for private support.

The UK conservation sector, however, is yet to be in a position in term of mindset, or ready to go bankable projects to take advantage of developments in conservation finance. Stakeholders cited a wide variety of regulatory, financial and social barriers to investment. The key barrier was the perceived lack of an investment case for most conservation projects. This resulted in part from of a lack of awareness of the potential (an issue of capability) and difficulty in establishing causality between an investment and return (an issue of evidence).

In the absence of impact bonds, some form of return associated with a conservation project is critical to attract investors. Our review found that the majority of funding provided to conservation activities was grant based with no return demanded of the project. Voluntary carbon markets, PES, recreation/ecotourism and environmental products are relatively well developed in the UK but there is no example of third party investment. These projects provided little scale to attract investors or evidence of return. Aggregation of projects is therefore a key opportunity in a country where projects are likely to be disparate. Some green shoots for conservation finance did exist with a couple of NGOs exploring the use of debt and equity finance in financing conservation work.

If it so wishes the UK Government is in a strong position to drive conservation finance through awareness raising and changing risk-return profiles. But primarily, a clear vision is required. A Conservation Investment Plan which defines priorities, future market development, the roles of critical stakeholders and key opportunities could provide a path forward for investors and the conservation community. A more active role for Government could change the risk/return profile associated with conservation investment. Catalytic First Loss Capital, guarantees, or tax incentives as currently in place for social investment (Social Investment Tax Relief (SITR)) could all be used.

With the impending exit from EU, reform of agri-environment subsidies is in the offing. This presents the opportunity for new models of financing public good provision. Outcome payments could support the development of impact bonds and blending of public and private finance could reflect the multiple beneficiaries of conservation and ecosystem services and leverage public finance. But it is difficult to ignore that the ultimate driver of investment, albeit politically difficult, is wider ranging regulation and markets to price externalities.

Markets have traditionally been treated with suspicion by many in the conservation community and expansion of conservation finance is unlikely to be treated any differently. A view not without merit. The involvement of the private sector in the provision of social and environmental goods has not always been a success in the UK. This is why the conservation community, Government and potential investors need to have an honest discussion about the key concerns and opportunities prior to the sector taking off in the UK. Bringing together different stakeholders can alleviate any worries and generate opportunities.

Ricardo Energy & Environment, with other organisations, recently ran the first Climate Finance Accelerator workshop, which brought together countries, finance experts, development banks, and institutional investors to catalyse investment into countries’ climate action plans under the Paris Agreement.  There is little reason why this cannot be done for the conservation finance space in the UK and beyond. Ricardo Energy & Environment are also supporting development of the ECOSTAR Nature Accelerator which is part of the wider European focused ECOSTAR initiative. The Accelerator, powered by Fledge, provides support and training to nature based entrepreneurs.  A more targeted model of support, it can be utilised to support would be entrepreneurs to become a destination for finance.

Conservation finance represents a significant but at present untested opportunity for the UK. Ultimately the sector will be defined by the needs of investors, conservation groups and the Government. Key questions need to be answered: is there sufficient scale on offer, are the opportunity costs of land too high, what is the future of policy? But there is no shortage of models to provide guidance.  Global developments in conservation finance, as well as in social and climate finance provides approaches that can be emulated in the UK.

Guy Whiteley is a Senior Economist at Ricardo Energy & Environment working on conservation finance, natural capital and climate change.

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