6. Biodiversity business opportunities

Though the bigger part of this report focused on biodiversity from a risk perspective, and though biodiversity risks can likely be more significant from a financial perspective, there are several biodiversity business opportunities (BBOs) that can create both leverage for conservation as well as make good business sense. A number of them are outlined below.

  1. Providing debt or equity to businesses that have a positive (direct or indirect) influence on biodiversity. A forthcoming report by IUCN and Shell94 provides an overview of various BBOs that either directly or indirectly contribute to conservation. These are outlined in Table 12. It also includes estimates for potential market growth by 2010 and 2050.

    With respect to securities, there is an interesting initiative underway concerning long-term forestry bonds that have an indirect positive impact on biodiversity. It was initiated by Henderson Global Investors and is receiving financial support from the IFC (see Box IX).

  2. Due diligence and advisory services. Being able to understand the relation to ecosystems and its associated risks and opportunities to a diverse range of private sectors enables FIs (e.g., investment banks) to carry out biodiversity-related due diligence and project advisory services. Niall Cameron, global head of traded products at ABN AMRO, for example, outlined in the January 2007 issue of the Banker 95 that the bank's clients may be affected by environmental change or water shortages and that the bank can provide help to hedge these risks.

  3. Biodiversity-related insurance cover. With new legislation coming up in Europe, to hold operators directly responsible for impacts on flora and fauna, insurance and reinsurance firms that are willing to understand the underlying risks associated with it have the opportunity to explore new markets. Another example concerns the Panama Canal. Around 65% of the insurance premium of the shipping companies using the canal is environment-related, such as too little water or delays because of regular dredging. Reforestation will drastically cut insurers' exposure to BBRs.95

  4. Government-induced opportunities. Biodiversity conservation was traditionally perceived as the responsibility of the government, but increasingly involves the private sector in a variety of ways. The financial sector can take advantage of this by partnering with governments to share the risk of investing in or providing loans to biodiversity-friendly businesses. Examples can include fiscal advantages for biodiversity-related investments (see Box X) or a guarantee fund whereby investors are given certain guarantees on their investment pre-hand, which are backed by the government. In the recently launched “Potsdam Initiative – Biological Diversity 2010” the environmental ministers of the G8 countries express their urge to “... enhance financing from existing financing instruments and explore the need and the options of additional innovative mechanisms to finance the protection and sustainable use of biological diversity, together with the fight against poverty. In this context we will examine the concept and the viability of payments for ecosystem services”.

  5. Access to capital. Especially for banks and other FIs in emerging markets, they can increase their chances of funding by International Financial Institutions (e.g., International Finance Corporation – IFC), which require more and more strict environmental and social risk guidelines, when they provide evidence of having the capacity in-house to deal with environmental risks.96

  6. Conservation land as a result of default or debt work-out. Should a bank acquire a significant amount of biodiversity-sensitive land as a result of default or debt work-out situations, collaborations with NGOs, local conservation organizations or the government might be helpful in finding suitable (conservation) purposes for the land, while the bank remains owner of the land. This could be used at the same time to bolster a financial institution's reputation or be used for marketing purposes.

Box IX: Eco-securitisation

This initiative, initiated by Mark Campanale of Henderson Global Investors and established mid-2006 by the International Finance Corporation with the backing of the UK's Department for International Development, aims to link the long-term outlook associated with sustainable management of natural resources with the funding capacity and requirements of asset backed securitisation (ABS). ABS is a capital market financial instrument that can be described as the financing or re-financing of income-yielding assets (such as forests) by packaging them into a tradable form such as through the issue of bonds. Focusing on the forestry sector, it boils down to offering the cash-flow that will be generated from sustainably managing a certain patch of forest over a certain period to investors (securitizing the asset), who consequently provide the upfront transfer of funds to the forest owners in order to be able to manage the forests sustainably over a period of time. Investors in ABS enjoy legal and structured preference over traditional investors. Forest owners would need to be able to spot potential demand amongst growers, run the business (of sustainable forestry) in an effective and efficient way, and if enough cash-flow can be generated over a time period to pay off the investment, the forest owners would have the residual value of the investment. Other than the forestry sector, this approach has the possibility of financing other types of “natural infrastructure” such as fisheries and water supply.

Source: Eco-securitisation website – www.ecosecuritisation.com


Box X. The Netherlands's fiscal green funds

In order to stimulate environmentally friendly investments in the Netherlands, the Dutch ministries of VROM (Housing, Spatial Planning and the Environment), LNV (Agriculture, Nature and Food Quality) and Finance, in collaboration with the Dutch banking sector, initiated a green fiscal policy in 1995 to make investment in green funds attractive for private investors. Banks and specialized green funds provide low interest loans to entrepreneurs who engage in activities such as biological agriculture, nature development, sustainable/green housing and renewable energy technologies. Some of these investments have a positive contribution on local biodiversity. While the return on investment is generally lower with green funds, the government has provided a fiscal advantage for those who invest in these green funds (such as the Rabo Groenbank – by Rabobank) to make it financially attractive. The initiative has been a success in the Netherlands and various major banks, such as ABN AMRO, ING bank, Fortis, ASN Bank and the Triodos bank, are now offering green bonds or other green products. As of December 2005, the total invested capital amounted to € 1.5 billion, of which € 282 million has been allocated to the project category “nature, forests and landscapes”. The difference between the Dutch green funds and SRI is that investors in SRI funds invest in regular companies and therefore do not receive a fiscal advantage.

Source: SenterNovem, 2006. The Green Funds Scheme - Annual Report 2005. Utrecht.

Though a number of BBOs have been identified, some of which could provide new growth opportunities for investors, actual investments by the private sector have remained limited to date. Several factors have been recognized that contribute to this:94

  1. Absence of adequate policy frameworks. A good example here concerns so-called markets for ecosystem/environmental services. In places where regulatory frameworks have been established, such as for the European Carbon Market or the US markets for conservation banking and wetland mitigation banking, demand for ecosystem services and biodiversity is being captured through an (artificial) cap or floor. In places where regulatory support has remained absent it appears to be much more difficult to capture demand and initiate biodiversity business initiatives.

  2. Lack of multi-stakeholder ownership. Involve several types of stakeholders, such as governments, NGOs and businesses, where each stakeholder has its own strengths and weaknesses when it comes to commoditizing biodiversity.

  3. Lack of coupling business development and/or technical assistance with appropriate finance. The challenge is to integrate biodiversity management into standard due diligence and project implementation processes, while ensuring that these additional measures do not unduly constrain the market.

  4. Absence of flexible financial models. Various financing instruments can be used to promote biodiversity business, using combinations of debt and equity finance, on a commercial, non-commercial or ‘sub-commercial’ basis. Some practitioners indicate a preference for debt or quasi-debt finance, due to concerns about barriers that exist with equity investors on biodiversity business. However, there is no strong consensus on this point. More experimentation and analysis is required.

  5. Lack of performance indicators. Both process-and output indicators are critical to the success of biodiversity business. However, these must be fit-for-purpose, simple and cost-effective.

Table 12. Summary of direct and indirect markets for ecosystem services and potential for growth94

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