Conservation Finance as a New Asset Class for Impact Investments

Environmental conservation projects face a dramatic shortage of funds. Estimates indicate that $300 billion to $400 billion is needed each year to preserve and restore ecosystems.

Some asset managers and conservation experts have suggested that private investors could close more than half the gap by profitably funding enterprises or projects in areas such as sustainable food and fiber production, habitat protection, and water quality and conservation.

Source: Althelia Funds. The role of private capital in conservation.

Impact Investments Generate Positive, Measurable Impact as Well as Financial Return

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". Impact investments provide capital to address social and/or environmental issues.

In 2010, J.P. Morgan Global Research, Social Finance at J.P. Morgan, and The Rockefeller Foundation, in partnership with the Global Impact Investment Network (GIIN), published a research note entitled "Impact investments: An emerging asset class". They suggested that impact investing will establish itself as an important investment movement over the coming years. In 10 years, impact startups raised $12.9B globally in Q1 2022, in the fifth highest quarter on record, though down 15% year on year.

Impact investing occurs across asset classes, including private equity/venture capital, debt, and fixed income. Impact investments can be made in either emerging or developed markets, and depending on the goals of the investors they can target a range of returns from below-market to above-market rates.

Bridging the Gap Between Philanthropy and Mainstream Capital Markets

WWF Impact Ventures supports innovative business ideas that deliver positive benefits for people and nature. Bridging the gap between philanthropy and mainstream capital markets, whilst providing additional access to funds, allows these companies to accelerate development, test solutions and learn faster.

Expectations for financial return vary dramatically. Some investors expect returns that compete with, and even outperform, traditional investment benchmarks, while others concede that their impact investments may deliver a lower return than that of a comparable investment that does not target social impact. It can take decades to realize, verify, and capitalize on conservation benefits.

Challenges to Impact Investment

McKinsey Sustainability identifies the following challenges to impact investment:

• No sizable cash flows shortly after a project begins. Some projects only start producing cash flows after years of investment. Others have benefits that are hard to monetize, such as the economic gains that come from preserving biodiversity or from mitigating the risk of future losses. Preserving and rebuilding coastal wetlands, barrier islands, and oyster reefs, for example, can reduce costly damage from storms. Though many parties benefit from a restoration project, it can be hard to get some of them to fund the project up front or to pay for the services it provides.
• The inherent complexity and unpredictability of natural systems. Even with the latest scientific knowledge it can be difficult to predict the conservation outcomes from managing a natural system in a particular way. Natural systems impose variability on business activities, for example those related to food and fiber production. Revenues from conservation projects may be linked to sales of goods and services or to conservation outcomes, all of which may be affected by this variability.
• The multifaceted nature of many questions related to land use, particularly its objectives and its governance. This can be a hugely complex area, with political and cultural sensitivity regarding human boundaries and activities, and natural migration or other processes.

Improving Risk-Return Profiles Through Blended Finance

One nascent but promising concept for improving risk-return profiles to suit private investors is blended finance. This involves carving out investment tranches with less favorable risk-return profiles so they can be funded by concessional capital from public or philanthropic sources. For example, using early-stage grant making by nongovernmental organisations to fund the development of conservation projects, donor-funded guarantees, junior debt or equity.

Another scaling approach is to create investment products with familiar, widely used structures. For example, a private equity–style conservation fund could direct as much as $200 million toward 10 to 20 projects in established markets such as sustainable agriculture, ecotourism, and sustainable forestry.

Sovereign institutions could issue bonds covering a large ecosystem, use the proceeds to finance conservation there, and repay the debt with revenues from park-access fees and other sources. An example of a conservation finance product is the "rhino bond", which is managed by the Zoological Society of London, the charity that runs London Zoo. Investors in the $50m bond will be paid back their capital and a coupon if African black rhino populations in five sites across Kenya and South Africa increase over five years. The yield will vary depending on changes in the rhino population, which has sharply declined since the 1970s.

Financial Times: How conservation investment could be a lifeline for endangered species

The Near Future of Conservation Finance

Conservation finance is perhaps 10 years behind the renewable energy market, but might develop more slowly because it does not enjoy the subsidies that incentivised energy investment. For a conservation finance scheme to be of interest to investors it typically needs a value of at least $200m, which could be a package of projects — for example 20 projects each with a value of $10m.

Another challenge for conservation groups is that most people in finance are not used to dealing with non-governmental conservation organisations, and there is little precedent for structuring suitable products, assessing risk and pricing potential returns.

Despite these challenges, conservation finance represents a genuine opportunity to align capital markets with the urgent need to protect and restore the natural world. Wild Around is committed to supporting the ventures and frameworks that make this possible.