What exactly is conservation finance? Why is it increasingly relevant to environmental conservation today? Which sectors does it involve? How does it work?
If you are new to conservation finance, these may be some of the questions you find yourself asking. Here, we attempt to answer some of these questions and give a brief overview.
This overview is not meant to be all-inclusive or in-depth. Rather, it seeks to paint a picture of the field with broad-brush strokes so that newcomers may gain an understanding of some basic concepts and orient themselves within this evolving and exciting field.
What is conservation finance?
Conservation can be broadly defined as the stewardship, protection and restoration of nature and the environmental services on which people depend. It encompasses a diverse set of subjects including forestry, agriculture, fresh water, open space, oceans and cities.
The practice of conservation finance is far from new. In the United States, it dates back to the 1634 creation of the Boston Common, the first example in the English-speaking world in which a self-governing people taxed themselves to purchase open space for the provision of public and private benefits (Levitt, 2005).
Although its boundaries are somewhat fuzzy, in the most general sense, conservation finance can be considered to be the practice of raising and managing capital to support environmental conservation (Clark, 2007). It includes the set of financial structures that can be employed to invest in the conservation and restoration of ecosystems and the services they provide over the long term (Huwler, Kaeppeli, Serafimova, Swanson, & Tobin, 2014).
At the core of conservation finance is the underlying belief that it is possible to align environmental, social and economic returns: the so-called triple bottom line. New strategies that rely on market-based mechanisms to stimulate positive environmental and social outcomes, as well as financial returns, have emerged. These strategies complement the traditional funding models, which remain critical, particularly for leveraging private-sector conservation investments.
Sources for conservation financing include public, private and non-profit entities. Structures include tax incentives, loans and investments, ecosystem-services markets, and catalytic grants and donations.
What challenges does conservation finance address?
There is a need for enormous increases in the financial resources deployed for conservation and increasing recognition that conservation finance has the potential to address this need while generating significant financial returns. (Clark, 2007; Huwler et al., 2014; NatureVest & Eko Asset Management Partners, 2014).
Annual funding across the globe is estimated to be approximately $50 billion, provided primarily by philanthropic, multi-lateral, and governmental sources (Parker, Cranford, Oakes, & Leggett, 2012). This falls far short of the estimated $300-$400 billion needed annually (Credit Suisse, World Wildlife Fund, & McKinsey & Company, 2014).
With flat and sometimes shrinking government support and limited philanthropic dollars, filling this gap from current funding sources is highly unlikely (NatureVest & Eko Asset Management Partners, 2014).
Private investment capital offers enormous potential to help fill this gap. Even if only 1% of the global assets under management (money currently invested across the globe) were allocated for private conservation investments, it would provide enough capital to fill this annual shortfall (NatureVest & Eko Asset Management Partners, 2014).
What fields have contributed to this growing specialty?
Conservation finance is strongly interdisciplinary by nature. It bridges the gap between the banker and the biologist, finance and ecology, and Wall Street and the Catskills Mountains.
Professionals in the field have a wide range of backgrounds including investment banking, environmental science, law, conservation biology, and management consulting. They work in for-profit, non-profit, and public organizations. They collaborate with stakeholders ranging from local communities to international development finance institutions (DFIs) to national, state and local governments (World Wildlife Fund, 2009).
How is the field combining tradition and innovation?
Traditionally, conservation has been funded by non-market mechanisms such as public-grant programs, private foundation grants, donations from wealthy individuals and families, and government budget allocations (World Wildlife Fund, 2009). These funding streams can be volatile over time, as they are often affected by the state of the economy and shifting donor interests. As a result, the availability of funding does not always align with the highest conservation priorities at the right time.
This can result in piecemeal outcomes as conservationists protect what they can with limited funding. However, conservationists have been and continue to be very successful in achieving enormous results in the face of these challenges.
Conservation finance presents the opportunity to complement traditional funding and form more diversified and dependable funding streams. Such sustainable funding enables organizations to engage in more proactive, strategic conservation and execute holistic programs with long-term, scaled-up goals and objectives.
Conservation finance vehicles primarily include innovative market-aligned mechanisms that generate double- and/or triple-bottom-line returns. These include:
- Direct earned income via the sustainable production of food and fiber, recreation, hunting or ecotourism;
- Environmental services markets (such as a market for watershed protection in which downstream water users pay upstream communities to preserve watershed health); and
- Impact investing seeking to maximize a double or triple bottom line (investments with financial, environmental, and/or social objectives) (World Wildlife Fund, 2009).
Public and/or philanthropic grants often are used to catalyze the process by helping to shape conditions that enable conservation investments and increasing the appeal of such deals to private-sector investors.
How is the market expanding?
A November 2014 study by NatureVest and Eko Asset Management Partners found that the market is undergoing rapid growth and increasing interest. Private investment in conservation doubled from 2004-2008 and again from 2009-2013. $23.4 billion in conservation impact investments were made from 2009-2013. 92% of this total came from international DFIs, which expect to increase these investments by 50% by 2018 (NatureVest & Eko Asset Management Partners, 2014).
While private investments only accounted for about 8% of the total, they grew by an average annual rate of 26% and are projected to total $4.6 billion from 2014-2018. DFI funders primarily invested in water quantity and quality conservation projects while private investors focused on sustainable food and fiber production projects (NatureVest & Eko Asset Management Partners, 2014).
The capital available for conservation projects is rapidly increasing and ready to start filling the gap in global funding. However, only time will tell if the conservation finance market will be able to mature and better structure itself to effectively absorb this growing capital.
What challenges lie ahead?
The conservation finance community is adept at working with the traditional funding vehicles described above, but these funding sources are not projected to increase significantly in years to come.
It appears that much of the future of conservation lies with the rapidly growing investments market (NatureVest & Eko Asset Management Partners, 2014). However, this market has not reached maturity. It faces several significant barriers that must be overcome in order to take advantage of the increasing capital available.
- There is a shortage of investable deals with an appropriate risk/return profile, a clear exit strategy, and a skilled management team with a track record of success (NatureVest & Eko Asset Management Partners, 2014).
- Short-term valuation of natural ecosystems encourages disregard for the public goods they provide, such as the provision of water quality and quantity (Huwler et al., 2014).
- Most investable conservation deals are too small to attract investment at scale (Huwler et al., 2014; NatureVest & Eko Asset Management Partners, 2014).
- Conservation finance asset classes are undeveloped and unstandardized (Huwler et al., 2014) .
- Institutional investors lack familiarity with environmental issues and conservation deals.
- The conservation community has a dearth of the financial skills needed to structure investable deals.
- There is a lack of effective and standardized impact measures (NatureVest & Eko Asset Management Partners, 2014).
Some of these issues may need policy interventions to tweak market conditions to allow for increased investments. Others will be addressed as management teams gain experience and develop new tools and techniques.
If current trends continue and the conservation finance market is able to overcome these challenges, it will surely play an increasingly important role in providing the capital needed for environmental conservation around the world.
Network was developed to help both seasoned professionals and those just entering the field navigate these challenges and to stimulate innovation by highlighting successful case studies, building a community of practice, and bringing the potential of conservation finance to a wider audience.
Last updated December 28, 2015
Credit Suisse, World Wildlife Fund, & McKinsey & Company. (2014). Conservation finance: Moving beyond donor funding toward an investor-driven approach. Retrieved from https://www.credit-suisse.com/media/cc/docs/responsibility/conservation-finance-en.pdf
Clark, S. (2007). A field guide to conservation finance. Washington, DC: Island Press.
Huwler, F., Kaeppeli, J., Serafimova, K., Swanson, E., & Tobin, J. (2014, January 21). Making conservation finance investable. Stanford Social Innovation Review. Retrieved from http://ssir.org/up_for_debate/article/making_conservation_finance_investable
Levitt, J.N. (2005). From Walden to Wall Street: Frontiers of conservation finance. Washington, DC: Island Press.
NatureVest & Eko Asset Management Partners (2014). Investing in conservation: A landscape assessment of an emerging market. Retrieved from https://www.jpmorganchase.com/corporate/Corporate-Responsibility/document/InvestingInConservation_Report_r2.pdf
Parker, C., Cranford, M., Oakes, N., & Leggett, M. (2012). The little biodiversity finance book. Oxford, UK: The Global Canopy Programme.
World Wildlife Fund. (2009). Guide to conservation finance. Washington, DC.