Preserving healthy terrestrial and marine ecosystems, and the clean air, fresh water, and biodiversity on which we all depend costs about $300 billion to $400 billion every year. Funding a transition to a low carbon world will cost billions more. Governments can provide only a fraction of that amount, but the private sector manages an estimated $300 trillion in assets and many investors want to play a larger role in “green” finance as part of a growing commitment to clean energy, reducing risks to supply chains, preserving access to natural resources, and sharing responsibility for the global commons.
The financial challenges, however, can be daunting. The key challenge to be addressed is ensuring that scarce public resources are deployed in a way that catalyzes the required redirection of finance for achieving conservation outcomes. In this regard, blended finance has attracted significant interest in recent years. Blended finance combines the power of development finance and private capital to reduce risks and increase opportunities for private investors.
In the climate change mitigation space, the GEF and other International Financing Institutions have successfully used blended finance models over the past two decades to pioneer and scale-up financing of new technologies in renewable energy, energy efficiency, urban transport, and other related fields. As sustainable energy technologies began achieving significant cost reductions and countries put in place enabling policy environments (e.g., feed-in-tariffs, power purchase agreements), the opportunity for private sector investment expanded greatly. However, mobilization of private capital for blended finance schemes involving biodiversity and natural resources management – Conservation Finance for short - is still incipient.
Project Spotlight: Wildlife Conservation Bond
The Wildlife Conservation Bond or "rhino bond," issued by the World Bank with funding from the Global Environment Facility, is not just another financial product. It is a game-changing innovation that can direct funding to nature reserves and protected areas whose budgets have been stretched by the coronavirus pandemic, a drop in tourism, and recent fiscal strains.
The rhino bond is an example of how thinking out of the box and collaborating across institutions can result in an attractive investment opportunity that can be scaled for wide benefit. Donors can work jointly with financial institutions, corporates, or other entities with good credit ratings to package products that can achieve the risk/return profile needed for investors. Ultimately, this initiative could be replicated in other parks to protect additional rhino populations as well as other umbrella species whose threatened status is consequential for all of us.
What We Do
The GEF has a long history of using blended finance in environmental areas. Many early success cases are in climate change mitigation areas including renewable energy and energy efficiency. Through GEF funding, governments put enabling environments in place such as feed-in-tariffs and power purchase agreements. With this foundation, and the significant cost savings of sustainable energy technologies, the private sector scaled-up its investment.
Recently the GEF has started to move towards the frontier space of natural resources management. GEF support for conservation finance can play a key role in encouraging international collaboration and cross-country learning as a pre-requisite for scaled-up impacts. For example, the Risk Mitigation Instrument for Land Restoration project, managed by the Inter-American Development Bank, combines a GEF investment of $15 million with $120 million in co-financing to deploy innovative risk mitigation instruments to restore degraded lands in Latin America through investments such as sustainable management for increased eco-system services, landscape regeneration, intercropping, shade-grown systems, high-value forest products, and silvo-pastoral systems.
GEF experience shows that blended finance is a potent instrument. With the risk assurances provided by blended finance, the private sector invested in projects at a much higher rate than “regular” projects. During 2013-2014, the GEF provided $1.4 billion in climate finance through “regular” channels. This finance mobilized about $800 million from the private sector, or about 60 cents for each dollar from the GEF.
Investments in blended finance were on a smaller scale, but packed a bigger punch. In the same year, US$175 million from the GEF for blended finance operations mobilized about US$1.1 billion from the private sector. This leverage ratio of 6.3 was several times higher than from our “regular” operations.
GEF supports a number of investment funds that are already paving the way for mobilizing private capital toward conservation finance. Mirova recently began market-testing its Land Degradation Neutrality Fund project, which will blend public and private finance to address land degradation by investing in agriculture, forestry, and other projects that promote sustainable land management, as well as conservation and land restoration projects. The Meloy Fund will establish the first fund for sustainable small-scale fisheries in Southeast Asia to improve the conservation of coral reef ecosystems by providing financial incentives to fishing communities in the Philippines and Indonesia to adopt sustainable fishing behaviors and rights-based management regimes.
There is a huge potential for mobilizing private investments in conservation and ecosystem management. The main barriers for scaling up conservation finance include lack of capacity, small size of projects, heterogeneous nature of projects, and lack of enabling environment. In order to address these barriers, interested actors have come together to create the Coalition for Private Investment in Conservation (CPIC). The CPIC was launched at the IUCN World Conservation Congress in September 2016, with the intent of increasing deal flow into global priority conservation projects.
The GEF and Rockefeller Foundation recently joined forces to initiate work on the CPIC Conservation Finance Initiative, which will focus on scaling up and demonstrating the value of blended finance in conservation using financial blueprints jointly developed by experienced investors and banking institutions alongside experts in on-the-ground project design in biodiversity and natural resources management. The Conservation Finance Initiative, to be managed by IUCN, combines a GEF investment of $8 million non-grant with $2 million of grant funding from Rockefeller Foundation, and is expected to mobilize up to $100 million of private sector investment. The aim is to overcome hurdles to private sector investment in natural resources management and improve the conservation and sustainable use of biodiversity by demonstrating innovative finance blending models.
The use of blended finance in natural resources management and conservation is not a panacea that can be exclusively relied upon to drive the needed transformation in global economic systems. Yet it holds great prospects for mobilizing private capital, and is therefore an important element in the package of available instruments focused on investing in the global commons. Broader support for appropriate policy frameworks that can help improve predictability and support low-emission investments is critically important, as is support for institutional strengthening and targeted capacity building in both the private and public sectors. At the same time, there are many opportunities to expand use of blended finance. Doing so will require continued innovation on the ground to help countries and private sector partners match the right types of financial instruments to specific projects goals and objectives, including in the natural resource management sectors. Support for project preparation, along with aggregation and bundling of projects that can attract large scale investors will also be needed in many cases.