This blog is co-authored by Alfonso Pating and Peter Trousdale.
Photo @Satya Deep on Unsplash
Countries are rolling out climate plans and commitments that will shift trillions of dollars of private financing from fossil fuels and projects that cause deforestation towards clean energy and biodiversity conservation. For this green transition to continue, impactful ideas and commercially viable solutions must exist as incentives for investors to realign their investments.
A financial mechanism we can leverage for the fight against climate change is Biodiversity Finance. The utilization of this mechanism has seen some success over the past few decades. Let’s briefly look at some examples that showcase how innovative finance can support biodiversity conservation:
Payment for Environmental Services
Payments for Environmental Services (PES) incentivize local stakeholders to conserve natural resources. This market-based approach can be thought of as a subsidy to compensate loss due to environmental protection. In PES schemes, beneficiaries of environmental services such as private sector companies or national or local governments pay forest owners and farmers to serve as environmental stewards.
In Uganda, the International Institute for Environmental and Development and the Chimpanzee Sanctuary and Wildlife Conservation Trust have collaborated on a PES scheme1 to incentivize local farmers and landowners to conserve and restore Chimpanzee habitats. This project attempts to counteract the clearing of forests to produce cash crops such as tobacco and rice in an area home to one of Uganda’s largest chimpanzee populations.
Environmental Fund
In Tungurahua Province, Ecuador, the provincial government and private energy companies established a forward-thinking and inclusive environmental trust fund2 in 2008. The Tungurahua Páramos and the Fight Against Poverty’ fund provides long-term mechanisms to protect the natural environment of Andean highlands known as Páramo while also improving the quality of life for the indigenous communities that border the land.
The funding comes from voluntary contributions by public, private, and community entities interested in contributing to this broad and impactful provincial project. The fund splits the total contributions into two categories: 60% becomes a growth fund while the remaining 40% goes towards immediate conservation and poverty reduction projects. This fund structure allows the fund to sustain itself and continue to operate without new contributions.
As a result of this structure, the financing for the project continues to boast impressive sustainability. As of October 2020, total lifetime donations reached nearly $7 million. In total, the fund has directly invested around $5.5 million into various Páramo Management Plans.
In recent years, China has taken biodiversity finance and begun explore the utilizing of more complex and innovative instruments combined with public financing mechanisms to create more favorable conditions to attract investors, including:
Carbon Credit Forward Repurchase Agreement
In China's Fujian province, the state-owned Shunchang Forest Farm considered using carbon credits to create a more sustainable business. However, due to the low liquidity and high volatility of the carbon market, financial institutions do not recognize carbon credits as collateral. Market prices often don’t fully reflect the value of carbon credits. Furthermore, a maturity mismatch for funding exists as carbon credits from sequestration may take years to accumulate, while the linked loans and investments have much shorter repayment horizons.
To overcome these issues, Shunchang Forest Farm collaborated with the Industrial Bank of China (CIB) to create a financial instrument based on carbon credit foward contracts. In March this year, CIB Nanping Branch disbursed a 20 million RMB loan to Shunchang Agroforestry Center using carbon credit futures as the collateral in conjunction with a forward contract repurchase agreement. This structure allows Shunchang to receive money for the sale of these contracts immediately. At the same time, the bank mitigates the risk with a deal for Shunchang to repurchase these contracts at a future settlement date.
Carbon Related Loans
The utilization of green loans as a funding mechanism has grown tremendously over the last few years. The funds from green loans support green projects, and carbon loans take the idea one step further. Carbon loans specifically require the funding to go towards carbon-reducing projects by utilizing the carbon credits as a financial asset.
In China, various regions across the country have implemented several carbon-loan pilot programs. For example, in Zhejiang province, the Quzhou Agricultural Development Bank and the local government collaborated to design a loan program that used carbon credits accumulated from forest sequestration as collateral.
Another loan program in Hangzhou — developed by Postal Savings bank of China and the local government with NRDC’s support — provided preferential interest rate loans to bamboo growers to fund the sustainable management of their forests. The preferencial interest rate is contingent upon the adherence to the amount of carbon sequestration. These loans are provided to business owners along the bamboo industry supply chain. These innovative mechanisms can help alleviate financial pressures for struggling small businesses and facilitate an economic recovery for the region.
Using innovative loans to help preserving forestry with the potential for carbon sequestration can support biodiversity into the future and promote ecosystem resilience to climate change3.
As seen in the above examples, financial mechanisms can serve as a powerful long-term tool to support the conservation of natural ecosystems, reduce and sequester greenhouse gases, and improve local economic conditions.
Practical solutions are a necessary component in implementing the global biodiversity framework. Financial resources, both public and private, are essential in supporting all efforts to reverse biodiversity loss and its impact. Biodiversity finance is a key component in shifting private capital towards the restoration/conservation of biological diversity, and financial institutions must accelerate their adoption and innovation of this mechanism to achieve the objectives set forth by their respective countries.
Reference:
1. “Fresh look-back at a Payment for Ecosystem Services (PES) project in Uganda”.
2. “Fondo De Manejo De Páramos Y Lucha Contra La Pobreza De Tungurahua”.
3. Buotte, Polly. “Carbon sequestration and biodiversity co-benefits of preserving forests in the western United States”.
