A New Lifeline for Wildlife Conservation Funding
What do capital markets have to do with biodiversity? So far, very little. That changed this week with the launch of a landmark Wildlife Conservation Bond or “rhino bond” that offers payment tied to the protection of black rhinos, a critically endangered species whose health is essential to ecosystems. in which they live. The bond will support the conservation of black rhinos in South Africa in two of their strongholds in the country: Addo Elephant National Park and the Great Fish River Nature Reserve.
The Wildlife Conservation 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 budget strains.
While there is a growing awareness of the need to protect wildlife for the health of the planet, most investments in nature today come from national and subnational governments and, to a lesser extent, banks. organizations, international NGOs, private foundations and international organizations. agencies. Private sector actors, financial intermediaries and institutional investors are absent. Large investors and financial institutions have largely avoided this space so far due to its risk/reward profile. The nature conservation business is a long-term business and involves uncertainties that may be unknown to investment managers. On top of all this, there is a perception that investments in nature may not be profitable.
The five-year rhino bond, which raised $150 million on its March 23, 2022 issuance, changed that story. It is a combination of existing financial products – a bond with an excellent credit rating (AAA for bonds issued by the World Bank), combined with a performance-based grant financed by the GEF which results in a new financial structure that can successfully leverage capital investment markets to directly support endangered species conservation.
At the end of the bond’s life, investors will receive principal (through the safest type of issuer you can find) plus a variable payout based on the growth rate of the rhino population blacks in the two target areas in South Africa. This variable payment or success payment is funded by the GEF.
In the worst case scenario, if rhino population growth is flat or negative, investors will receive principal repayment at maturity, with no success payout. In the best-case scenario, if the rhino population exceeds 4%, investors will receive both the principal amount and the GEF-funded success payment. In the intermediate outcomes, with population growth between 0 and 4%, the success payment will increase by fixed amounts over the life of the bond in a phased manner.
In all cases, bondholders will promote biodiversity conservation efforts. In effect, in exchange for the payment of potential success at maturity, investors agree to forgo the coupons that a traditional World Bank Group bond would pay. These lost coupons are the source of funding for on-the-ground conservation activities in the two parks selected for this project. These activities are designed not only to target black rhino population growth of at least 4 percent, but also to improve the management of more than 150,000 hectares, reduce poaching and provide more than 2,300 jobs to local communities. in and around the two protected areas – a welcome boost in a region hard hit by COVID-19.
The bond issuance followed earlier work to identify suitable parks, explore the financial characteristics of the bond, and establish the types of conservation activities that should be funded to achieve the growth goals of the bond. black rhino population. This phase of product development under the $4.5 million Rhino Impact Investment Project was funded by GEF and led by UNDP in partnership with the Royal Foundation, the Kingdom’s Illegal Wildlife Trade Challenge Fund Kingdom and the Zoological Society of London.
It also builds on WEF support for other capital market transactions, including the first sovereign blue bond issued by the Government of Seychelles, issued in 2018 in collaboration with the World Bank to increase investment in areas. protected marine areas and more sustainable fishing. Another example is a project approved by the GEF Council in December 2021 to provide partial credit guarantees in collaboration with Corporacion Andina de Fomento for the issuance of two green bonds in the capital markets of Peru and Ecuador aimed at sustainable land use and biodiversity conservation in priority countries. dry forest territories of these two countries.
These are some of the many efforts the GEF is making to harness private sector financing for environmental protection through its blended finance initiative, also known as the ungranted instruments program, which aims to show how innovative financing can help combat global environmental degradation.
The Rhino Bond is an example of how original thinking and collaboration between institutions can result in an attractive investment opportunity that can be scaled up for broad benefit. Donors can work in conjunction with financial institutions, companies or other entities with a good credit rating to offer products capable of achieving the risk/return profile necessary 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 significant to us all.
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