SEPTEMBER 18, 2023 | Nature, Climate, and the Economy
Financing Conservation: Six Mechanisms Sri Lanka Should Know About

The frequency and brutality of climate shocks and natural ecosystems losses have posed significant challenges for countries across the globe. For many developing countries these shocks come amidst the mounting pressure of economic crises and ongoing debt restructuring. Countries such as Sri Lanka, find themselves at the crossroads of economic vulnerability and environmental conservation. There is a global recognition of the need for innovative financing solutions that act as a bridge between fiscal responsibility and ecological stewardship. This article looks at six such financial instruments and initiatives that offer new means of tackling some of the most pressing challenges of our time, and can serve as inspiration for Sri Lanka’s own efforts.

1. Biodiversity Bonds – South Africa’s ‘Rhino Bond’

The IUCN Red List, a critical indicator of the world’s biodiversity, reports that 42, 100 species are currently threatened with extinction. Biodiversity is a key component of healthy ecosystems, the loss of which could prove detrimental for the health and safety of communities across the globe. Conservation efforts are crucial components of mitigating such loss. However, most conventional financing mechanisms have failed to provide the funds needed to close the conservation financing gap. Biodiversity bonds pose a possible remedy in closing this gap.

In the face of relentless threats of poaching and habitat loss, South Africa has embarked on a mission to protect its rhino population through the Wildlife Conservation Bond, also known as the Rhino Bond. South Africa’s black rhinoceroses are a critically endangered species. Driven by the demand for their horns on the black market, population numbers have staggered from 65,000 in 1970 to 2,300 in 1993. Since then, conservation efforts have been successful in growing the population by more than 12%, resulting in more than 6,000 black rhinos in South Africa today.

The Bond operates on a simple yet innovative premise. Inspired by the principles of impact investing, it seeks to leverage private sector capital while offering investors a financial return on their investment once conservation outcomes are achieved. Investors forgo their coupon payments on the bond while the World Bank (the issuer of the bond) makes investment payments to finance conservation efforts at two parks – the Addo Elephant National Park and the Great Fish River Nature Reserve. If conservation efforts are deemed successful, investors receive a success payment at maturity, which is provided by the Global Environmental Facility (GEF) out of their 13.75 million USD results-based grant. By linking performance with investment returns, the bond creates a tangible connection between investors and environmental conservation. Thereby aligning private sector interests with the well-being of the rhino population in South Africa.

While biodiversity bonds like the Rhino bond hold immense potential in improving mitigation efforts, its relative novelty in capital markets means that credibility is yet to be achieved. Uncertain outcomes and indefinite expectations could lead to disgruntled investors losing faith in the notion of sustainable financing overall. However, with adequately defined measurements and feasible expectations of population growth, such limitations could be counteracted. Accounting for its drawbacks, bonds of this nature could provide essential support for endangered species such as the Manta and Devil rays in Sri Lanka. Financing sustainable fishing practices could strengthen the fisheries industry by ensuring consistent fish stocks for species that are already in high demand.

2. Crowd Funding – The Case of Palau

Coral reefs make up some of the most diverse ecosystems on the planet. Supported by 800 different species of hard coral, these underwater rainforests are home to more than 25 percent of all marine life. However, coral reefs are one of the most vulnerable ecosystems to climate change. Rising temperatures have altered ocean chemistries, leading to a decrease in hard coral cover. Compounded by overfishing and human induced stressors, these delicate ecosystems face a serious existential threat.

To address these challenges, the Pacific island nation of Palau has been proactive in implementing conservation measures, including the establishment of Marine Protected Areas (MPA) and sustainable fisheries management. While Palau has a cultural legacy of marine conservation, its most remarkable initiative was seen when the country turned to one of the most innovative and novel fundraising schemes of the digital age – crowdfunding.

In 2014, the ‘Stand with Palau’ campaign raised $53,000 from more than 400 donors to support the Marine Sanctuary’s implementation. By leveraging the collective financial support of individuals, organizations and businesses, the campaign enabled local communities to directly engage with global supporters. In 2015, the Pacific Island nation of Palau took a leading role in marine conservation efforts by announcing the designation of 80 percent of its Exclusive Economic Zone (EEZ), an area larger than the US state of California, as a no-take marine protected area.

While many countries have designated Marine Protected Areas (MPAs), intended to preserve and protect marine life and the habitats within them, the effectiveness of MPAs depends on its overall size, and the ability to implement respective enforcement mechanisms. Developing countries with the richest marine ecosystems often do not have the resources needed to safeguard large reef habitats. Crowdfunding, in this regard, offers an avenue to access capital that could be used to widen Marine Protected Areas, therefore ensuring greater diversity of marine life. Additionally, the immediate and community driven nature of crowdfunding mechanisms could be instrumental in the event of disasters. The fire on board the MV-X-Press Pearl off the coast of Sri Lanka which led to the nurdle spill of May 2021, is one such example. In these circumstances, the existing funding set in place to maintain marine protected areas may be inadequate or unable to immediately respond to such emergencies.Crowdfunding could therefore provide the immediacy and urgency needed to combat such challenges.

3. Blended Finance – Coral Reef Initiatives

While MPAs offer significant relief for the restoration and preservation of ecosystems, resilience to climate change is an important factor in determining continuity of coral reefs threatened by ocean warming and acidification. In 2018, the IUCN report claims that 33 percent of coral reefs are now faced with extinction. While country specific initiatives are crucial to maintain the survival of ecosystems, the threat of extinction is a global reality. Funding that goes beyond site specific needs to encompass coral reefs across the globe is needed to mitigate further loss.

Blended finance mechanisms such as the Global Fund for Coral Reefs (GFCR)have the potential to provide adequate funding needed to address the issues on a cumulative level. Established in 2020, the GFCR is a global financing mechanism dedicated to the conservation and restoration of coral reefs. In October of 2021, the GFCR approved its first at scale private sector programme in the blue economy – the Global Fund for Coral Reefs Investment Window.

The mechanism is structured in two parts. The first engages the GCF as an anchor investor with an investment commitment of 125 million USD. By improving investor confidence and increasing demand for shares, the GCF hopes to capture a total fund size of 500 million USD from both public and private sector investors. The second relies on the GFCR grant window, which aims to mobilize 125 million USD of concessional capital from philanthropies and other agencies to foster an enabling environment for seeding a pipeline of investment ready projects. As the first and only blended finance instrument dedicated to coral reefs, the fund aims to further public and private sector investment in sustainable ocean production, eco-tourism, infrastructure and waste management.

Utilizing the GFCR, the ICUN has applied for funding for the Sri Lanka Coral Reef Initiative (SLCRI). Focused on priority coral reef sites in the North Western, Eastern and Southwest region of the country, the initiative is designed to protect coral reefs through multisector and multi-stakeholder participation and private sector friendly investments. Blended financial mechanisms of this nature allow access for countries such as Sri Lanka with limited public spending capacity to garner support from public, private and international investors.

4. Blue Bonds – Sovereign Debt for Nature

Similar to the Pacific island nation of Palau, the Seychelles are particularly reliant on its maritime resources for transportation, nutrition and tourism. The country’s large scale industrial tuna fishing industry provides 17 per cent of the country’s employment and makes up 68 per cent of the entire export trade. Unsustainable fishing practices have been a cause for concern in the Seychelles since the 1980s, when mechanized long lines requiring fewer fishers led to overfishing and limited employment opportunities. Attempts to reduce exploitation of coastal resources were made through the issuing of low-interest government loans issued to encourage the relocation of large scale fishing vessels to less exploited offshore fishing regions. Instead of allowing fishery stocks to replenish, the scheme led to the exploitation of both offshore and inshore regions. With the failure of short-term solutions to tackle exploitation, the country turned to blue bonds.

As the first of its kind, the Seychelles sovereign blue bond raised 15 million USD from international investors. Developed by the World Bank, the bond enlists both public and private investment as part of a blended finance mechanism aimed at developing the blue economy. Proceeds from the bond will go towards the expansion of marine protected areas and ocean conservation. At its core, blue bonds are issued to finance a variety of Sustainable Development Goals (SDGs), relating to marine resources and ocean economies.

While blue bonds offer significant inroads to capital markets, its relative novelty implies an indefinite framework. Unlike green, social, and sustainable bonds (ESG labeled bonds), blue bonds are not bound by a consistent set of rules as those that are detailed by the International Capital Markets Association (ICMA). The lack of a consistent framework makes it difficult to establish baseline categories and make evaluations on the effectiveness of projects. This may shroud risk factors for many investors and lead to future uncertainty where returns are concerned. However, despite its novelty, it is important to note that the blue economy exists adjacent to existing sustainable bond frameworks. ICMA has developed frameworks around green, social, and sustainability-linked bonds. Blue bonds could therefore be aligned to those frameworks and principles by being denoted as “blue-green bonds” or “blue-sustainability linked bonds.” Developing countries such as Sri Lanka, which have already drawn up frameworks to sell green bonds could benefit from this alignment and thereby extend their efforts to finance conservation schemes into the blue economy.

5. Tradable Credits – Old Tool, New Face?

As climate activists call on countries to reduce emissions, individuals and companies have employed multiple tradable resource credit permits in order to incentivize stakeholders to achieve emissions reduction targets. These permits, ranging from cap and trade systems to credit schemes, claim to control the use of limited resources such as carbon emissions. However, over the past year Shell, one of the leading FTSE oil companies, abandoned its targets to invest 100 million USD a year in carbon credit schemes on account of the company’s concerns that such offsetting schemes have no environmental impact in controlling carbon emissions. Shell joins a long list of companies such as Nestle and Gucci that have moved away from offsets after Carbon Trust discontinued its carbon neutral labeling scheme. Due to the voluntary and unregulated nature of the carbon market, the lack of transparency means that such credits can be bought by companies to veil the extent of their carbon emissions.

Within this context, carbon emissions schemes have lost some degree of credibility. However, other tradable emissions permits such as Biodiversity credits offer alternative more concrete outcomes and could thereby still be used as a means to incentivize companies and business to buy into net positive investment opportunities.

Biodiversity credits, also known as conservation credits, are a financial instrument designed to quantify and compensate for the negative impact of development projects on a natural ecosystem, while generating a positive net impact on conservation efforts. The idea behind biodiversity credits is to create a market where individuals, corporations, or other entities can purchase credits to offset their ecological footprint. The process of generating a biodiversity credit begins with identifying a habitat or ecosystem under threat which then becomes a biodiversity stewardship site. Through a biological survey, a baseline condition is established and a long-term plan is implemented in partnership with landowners with the aim of improving and protecting the ecological integrity of the habitat. If the established goals are met, biodiversity credits can then be generated and traded by parties looking to offset their ecological impact, meet regulatory requirements, or achieve their Environment Social and Governance (ESG) goals.Funds from the sale of biodiversity credits are collated in the Total Fund Deposit, which is used to finance the management of the stewardship site. Once the threshold of the Total Fund Deposit is reached, the revenue generated from additional sales are paid to the owner of the site.

While market forces determine the overall price paid for each credit, the landowner and credit purchaser are able to negotiate any price as long as the requirement for the Total Fund Deposit is met. By attaching an economic value to an ecological site, these credits create a market driven incentive for responsible development and conservation. In the aftermath of Covid-19, many sovereign stakeholders in developing countries have scrambled to exploit their domestic resources in efforts of boosting their economy. The notion that biodiversity and natural ecosystems could be regarded as financial assets in and of themselves, in new and someone foreign to many countries. However, this could be crucial for many developing countries to access the capital needed for sustainable and conservation friendly development.

6. Conservation through Commercialisation?

Climate change has transformed the frequency and severity of natural shocks. Recent floods in countries such as Nigeria, Bangladesh, Vietnam and the United States demonstrates that this threat is now a widespread reality. In August of 2022, Pakistan declared a state of emergency due to what was described as the worst floods in living memory. While Pakistan’s floods can be attributed to the increasing severity of its monsoons, the country is also at the mercy of inadequate infrastructure to accommodate its growing population. With an agricultural sector that makes up 22.3% of its GDP, it’s capacity for environmental management is intrinsically linked to its prospects for further development. However, the lack of sufficient infrastructure, its reliance on delicate ecosystems to boost its agricultural sector, and the demands of a growing population mean that conservation efforts may be difficult to sustain.

In light of recent disasters, the question regarding a possible balance between economic growth, population health, and environmental conservation confronts existing realities. Many of those realities, especially those of developing countries are constrained by budgetary restriction and weak institutional support. However, it is important to expand on the possible alternatives that countries across the globe could employ when faced with the compounding threat of climate change. The Grensmaas project, despite its vastly different context, is one those alternatives.

Located in the Limburg province, in the southern region of the Netherlands, the Grensmaas project is another noteworthy example of sustainable conservation financing in action. The project rests on three core objectives; flood protection, ecological restoration, and gravel extraction. Stretching over 43 kilometers of land, the intervention widens the channels of the Maas by providing 350 hectares of space for water, restoring natural river dynamics in the area, thereby ensuring flood protection measures for tens of thousands of families situated along the riverine. Apart from widening its channels, the project achieves ecological restoration by providing an additional 1000 hectares of nature-preserved land as a part of the Maas Valley River Park. The social, cultural, and commercial opportunities this presents, from the growth of new plant species to a wider range of outdoor activities, is vast and varied. While the overall cost of the project amounted to 700 million euros, its third core objective, the mining and extraction of 54 million tons of gravel from the river bed, ensures that the project is able to generate profits and thereby support itself through commercial instruments throughout its execution.

Projects such as Grensmaas, offer possible answers to the universal questions of development versus conservation, and the need to prioritize human settlement over environmental sustainability. While it may not be entirely applicable to many countries, the prospect of locating commercial incentives that could sustain conservation and mitigation efforts is aligned with the principles of Blue and Green economies. As the climate continues to generate shocks to economies worldwide, the need to center economic incentives in developing countries within conservation efforts is more critical than ever.

Way Forward

Conservation efforts across the globe are in urgent need of sustainable financing. The challenge to meet this need is difficult but surmountable. The growing recognition of natural capital, the increasing availability of innovative financing instruments, and the expansion of climate-oriented funds means that there are now a greater number of financing alternatives for countries like Sri Lanka that do not have the fiscal capacity to sustain conservation efforts through traditional budgetary sources. At the Centre for a Smart Future, we are looking at some of these instruments and mechanisms specifically to identify their applicability to Sri Lanka, and learning lessons on how they can be deployed sensibly and sustainably. It’s vital that domestic economic and governance considerations are borne in mind when choosing these instruments and mechanisms for use in Sri Lanka, and government, development partners, policy think tanks, and environmental specialists should be engaged inclusively to get the best outcome for the country.

Tashyana Handy is a researcher with the Centre for a Smart Future, and is Project Coordinator on a project focussing on innovating financing for marine conservation. This article is written under CSF’s Natural Capital Forum workstream. For more writings from the Natural Capital Forum, visit Cover image (c) Anushka Wijesinha 2023.