The ‘Green Bond’ Market Leaves Wildlife Behind
WHY YOU SHOULD CARE
Because “green” doesn’t always mean what you think it does.
By Siddarth Shrikanth
Late last year Seychelles issued the world’s first government bond dedicated to marine conservation — a so-called blue bond, aimed at supporting sustainable fisheries.
But an initial round of congratulations soon gave way to nagging questions among investors: Why was the issuance so small, at $15 million, and why had it taken so long?
Capital market instruments designed to improve the natural environment are more than a decade old. The World Bank issued the first “green” bonds in 2008, and the market has since grown steadily, expected to top $250 billion in issuance by the end of 2019, according to the Climate Bonds Initiative.
But amid all this accelerating activity, the planet’s wildlife — on land and in the oceans — has been mostly left behind. Classifications vary, but estimates suggest that …
A mere 5 to 10 percent of green bond proceeds have gone toward funding biodiversity conservation projects.
The vast majority flows into energy, buildings and transport. Much of the money coming into the conservation sector still comes from public funds, resulting in an annual funding shortfall of about 85 percent, according to McKinsey and Credit Suisse.
“Conservation market mechanisms are nowhere near their potential,” says Bikram Chaudhury, CEO of Singapore-based GreenArc Capital and a former managing director at Credit Suisse. Conservation is “globally undercapitalized and unlinked to true markets,” he says.
Analysts point to a number of factors holding back the development of the market. Chief among them: a lack of investment-ready projects that offer meaningful deal sizes for investors to justify the costs of due diligence.
“The lack of a project pipeline is an important barrier we face,” says Katherine Stodulka, program director at the Blended Finance Taskforce, a London-based group that tries to fund projects through a combination of private and concessional capital, such as grants or interest-free loans. “It is no accident that renewable energy has been more easily investable … given the sheer number of projects and the predictable revenue streams they generate.”
Even when projects are underway, they can have unpredictable cash flows at first. A game reserve, for instance, may take years to restore wildlife populations before they become attractive to tourists.
The Tropical Landscapes Finance Facility is one example of a “blended” initiative, with a target of $1 billion in long-term loans to landowners to protect endangered species in Indonesia. Donor-based capital is used to finance early-stage development costs and technical assistance through a $100 million grant fund, according to the task force. Once projects reach maturity and generate steady cash flows, these are securitized and sold as notes to private investors.
Such financing structures can “begin to create that investment mindset” in sectors “which are traditionally seen as aid-based,” says Stodulka.
Another problem is the regulatory vacuum in which most conservation finance projects operate. There is little by way of common standards coordinated and enforced by national and international bodies.
“The fact that 5 to 10 percent of conservation is being funded through the market is, in itself, incredible,” says Gabriel Eickhoff, CEO of Lestari Capital, a Singapore-based conservation investor with $10 million in assets. “If those sectors were properly regulated and systematized and leveraged by true markets rather than by people simply wanting to do good, the potential is endless.”
Eickhoff notes that carbon trading, for example, now has a set of common measures, spearheaded by the European Union, that has resulted in a deep and liquid market for offsets. But measuring conservation outcomes is more difficult: While carbon avoided in one part of the world can be counted against emissions elsewhere, the value of protecting plants and animals can be hard to quantify and compare, let alone trade on exchange platforms.
However, efforts are underway to capture the value of nature. “Because [valuing nature] is so complex, people turn away from it,” says Mark Gough, CEO of the Natural Capital Coalition, a London-based body working to create a unified system to value ecosystems. “But with evidence and collaboration, it can absolutely be done,” he says.
In the meantime, the lack of a developed, regulated market has hurt pioneering efforts — including the Seychelles blue bond. An individual involved in structuring these deals said the “long, complex” setup process can be traced to a tangle of over two dozen implementing bodies, financial institutions, international bodies and governments that needed to be involved, in the absence of established players and standards.
Even if markets had reliable methods to financially value and trade natural capital, the principle remains controversial. George Monbiot, an outspoken critic of market-based conservation, has called the idea “morally wrong, intellectually vacuous, emotionally alienating and self-defeating.” He insists that “intrinsic values” should be enough to justify protection.
But Eikhoff disagrees, noting that human beings have always tried to “commoditize” nature, from extracting minerals to building houses from wood.
“Once we connect markets, we can actually fund the correction of the harms caused by all that commodity production,” he says. “While I accept the precautionary principle, I say, ‘Don’t stop it, improve it.’”
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.