The conservation finance market is growing fast – but investors lack access to investable deals

New report sheds light on the latest developments in the conservation finance market

8 September, 2021 – Conservation finance is becoming an investment opportunity of considerable proportion, according to the latest research by the Coalition for Private Investment in Conservation, led by South Pole, the Cornell Atkinson Center for Sustainability, and the International Union for Conservation of Nature (IUCN). The research was supported by American Bird Conservancy and the Global Environment Facility.

The new in-depth analysis of investors and conservation project developers shows that the volume of return-seeking finance in conservation is projected to grow significantly compared to 2020. This is novel, as conservation finance has historically relied on grant-based public and philanthropic funding. The analysis found that:

• Investors’ awareness of conservation finance opportunities has progressed markedly in the past five years, contributing to the surge in interest in conservation finance that seek a return on investment
• 70% of surveyed investors are planning substantially higher investments in conservation in 2021 compared to 2020 (over 10% increase). Project developers are also seeking more funding for conservation projects, aiming to raise 85% more in in 2021 than they did in 2020
• 92% of the investments analyzed were linked to market-rate, rather than concessionary returns – implying that conservation deals are increasingly more attractive financially

“The conservation finance sector still lacks multi-year, in-depth data specifically on private, return-seeking investments in nature. This research collaboration is an effort to fill in that critical data gap. With better insights into the opportunities of the market, return-seeking investors can explore new, innovative instruments and revenue streams to complement the conservation activities that have primarily relied on the limited, grant-based public and philanthropic funding in the past,“ says Martin Stadelmann, Director of Climate Investments at South Pole.

The lack of diversity in asset classes and concentrated financial flows hinder growth of conservation finance

The report found that the conservation finance market is dominated by 7 investor countries, the use of private equity and debt, as well as commodity sales as main revenue sources. This implies that current investors are not leveraging the full suite of available asset classes, and that there is major potential to scale conservation efforts when accessing finance from other geographies like China, Japan or Latin America:

• Financial flows are highly concentrated: 99.7% of reported investments originated from just seven countries – Australia, Germany, the Netherlands, South Korea, Switzerland, United Kingdom, and the U.S.
• The main investment instruments were private debt and equity, as well as real assets (91%) – with few using publicly traded instruments (8%). The lack of publicly-traded conservation assets means that the financing costs for conservation are still much higher than for other sectors, such as renewable energy.
• The primary revenue sources for conservation investments were sustainable commodities (55%) and environmental markets, including carbon and biodiversity credits (31%). Relying on commodity markets alone limits the type of conservation projects available for investments.

“The majority of conservation finance investments are currently made through a narrow set of investment vehicles. Raising awareness of the other available conservation assets could drive down the cost of financing conservation. This report shows that environmental markets have great potential for scaling investments in biodiversity conservation, but also that they need to develop further if they are to become mature markets for mainstream investors,” says John Tobin, Professor of Practice at Cornell University.

Lack of bankable deals and unsuitable impact measurement pose challenges for investors

The report also found that investments in nature are increasing, but it is not happening fast enough to avert the global climate and biodiversity crisis. Small deals, long investment time horizons, high investment risks, low transparency on conservation impact, and particularly lack of bankable deals still hinder the scaling up of return-seeking investments in conservation:

• Respondents cited the lack of investable deals as the most important barrier for investments. There is a disconnect between project developers and return-seeking investors – project developers are not aware of investors’ requirements for internationally recognized standards and competitive returns
• 85% of the individual deals were reported to be small (under USD 5 million), with only 2% of deals above 51 million
• The high costs of quantifying impacts (70%) and lack of standardized measurement metrics (48%) were said to be the key barriers for measuring conservation outcomes
• The effectiveness of conservation impacts is sector-dependent: respondents estimated that their investments in forestry projects have generated more biodiversity impacts than their investments in sustainable agriculture, oceans, or coastal areas.

Overcoming these issues will be key to ensuring that growing financial flows translate into tangible benefits for global ecosystems.

“The challenges outlined in this report are all too real. But there are two key pieces to accelerating capital flows that can make a big difference: to better engage with investors, developers can streamline risk factors by market-testing novel concepts and structures with institutional investors. On the other hand, investors who adjust their comfort level with uncertainty are much better equipped to commit to transactions that truly make a difference for conservation, rather than avoiding risks and allowing the untenable status quo to continue,” ​​says Charlotte Kaiser, Managing Director of NatureVest at The Nature Conservancy.

“The growing interest in conservation finance from for-profit investors inevitably increases the short-term gap between existing investable opportunities and investors requirements. But there are reasons to be optimistic – the conservation market has a unique potential to grow. In order to successfully scale the market, we must focus on the ‘missing middle’ and design strategies that can accelerate the number of investor-ready opportunities. We must also seek to capture the multi-dimensional impacts of conservation in a set of readable outcomes and metrics,” says Vincent Gradt, CEO at Mirova Natural Capital.

New technologies and nature-related disclosure requirements can unlock future investments in conservation

Finally, the report found return-seeking corporate funds, new technologies and disclosure requirements are expected to drive more investments in conservation in the coming years:

• Digital innovation is creating better online marketplaces for natural capital, and improving conservation impacts measurement through remote sensing and artificial intelligence.
• Nature-related disclosure, driven by initiatives such as the Taskforce on Nature-related Financial Disclosures and the EU Taxonomy, will push the private sector to re-evaluate and publicly report on nature-related risks and impacts, and drive investments via public equity and debt.
• New, large corporate funds for nature – established by companies like Apple and L’Oréal – are expected to channel significant amounts of supply chain-driven investments into conservation over the coming decade.

Despite these innovations, conservation investments will not scale quickly enough to protect the world’s most precious ecosystems and the global climate. The report calls on the public sector to build bankable project pipelines, help de-risk private investments, and create the right regulatory environment to mobilize private investments into conservation at a scale.

“Within this decade, we need to move from millions to trillions when it comes to financing nature and achieving global climate and biodiversity objectives. The report shows that there is growing interest from policymakers and investors to invest in nature – and that now is the time to power the nature investment revolution,” says Elmedina Krilasevic, Senior Program Coordinator for NBS Finance at IUCN.

Media contact

Isabel Hagbrink, Director of Communications, South Pole

i.hagbrink@southpole.com

About South Pole

South Pole is an award-winning climate action project developer and a leading provider of global climate solutions and finance. www.southpole.com

About the Cornell Atkinson Center for Sustainability

The Cornell Atkinson Center for Sustainability is the hub of collaborative sustainability research at Cornell University, forging vital connections among researchers, students, staff, and external partners. www.atkinson.cornell.edu

About The International Union for Conservation of Nature (IUCN)

The IUCN is the global authority on the status of the natural world and the measures needed to safeguard it. https://www.iucn.org/

About the research

The report is based on data from in-depth surveys conducted between January and June 2021. The survey targeted conservation project developers, public and private investors, and organizations that identified as both developers and investors. It gathered data from a total of 35 organizations. The data collected is primarily related to 1) investments in conservation deployed in 2020, and 2) investments secured for conservation projects in 2020. Additional data was collected on investments made and projects developed between 2015 and 2019, and on predicted investments for 2021. The report also conducted a literature review of recent reports on conservation finance to identify data linked to the total size of conservation investments, common barriers and enabling conditions, as well as sector-specific trends.

28% of respondents were investors, 25% project developers, and 46% reported activities linked to both investing and project development. Together, the respondents reported USD 1.33 billion invested in conservation in 2020 and USD 1.13 million of additional investment, either private investments mobilized by the public investors responding to the survey, or return-seeking investments raised for projects developed by the respondents. Some respondents chose not to disclose the amounts they invested but provided non-financial data, so the overall investment volume represented by the respondents is arguably higher. To avoid double counting, the report only analyzes in detail the USD 1.33 billion directly invested by respondents.