Conservation finance - what is it and is it for your firm?
Investment in forests is an investment in people, economies and the health of our planet.
Years ago, many discussions about sustainability centred around deforestation – and for good reason. Since the end of the last ice age 10,000 years ago, the world has lost one-third of its forests, with three quarters of that occurring in the last 300 years. Two billion hectares of forest — equivalent to twice the size of the US — has been cleared, primarily for agriculture.
The peak of deforestation took place in the 1980s, and has since been in decline – good news for biodiversity, global carbon levels and the local communities.
However, although deforestation is dropping, reforestation has not reached the necessary levels and much of the land is still at risk of deforestation.
The need to restore native landscapes remains critical – reforestation offers immense benefits by sequestering carbon in trees and soil, while also boosting biodiversity and supporting socioeconomic development in local communities.
Finding the money to do this is obviously key, hence the rise in conservation finance.
For CFOs and finance directors, conservation finance represents a compelling opportunity to diversify investment portfolios while contributing to global sustainability efforts.
The question is, should your company get involved?
What is conservation finance?
Conservation finance offers CFOs and finance directors a novel approach for strategic investment.
This innovative approach to funding ecological projects is garnering significant attention from the corporate world, as it aligns financial returns with tangible environmental benefits.
At its core, conservation finance involves channelling private capital towards initiatives that preserve ecosystems, protect biodiversity and mitigate climate change.
Examples of conservation finance
- Green bonds
- Carbon credits
- Ecological services payments
Blended finance
Blended finance combines public and private capital to mitigate investment risks and attract more funding to conservation projects. These innovative structures are proving particularly effective in de-risking investments, thereby making them more palatable to cautious institutional investors.
Natalia Moudrak, managing director climate risk advisory at insurance giant AON, highlights the crucial role of data when it comes to blended finance.
Moudrak says: “(Re)insurance data can help quantify the benefit of such investments, and can help unlock capital to mobilise private sector participation in the innovative financial structures.”
But perhaps the greatest opportunity provided by conservation finance is enabling access to hard-to-reach markets and developing economies. For CFOs considering expansion into these markets, conservation finance could offer a unique entry point, potentially combining market penetration with sustainability goals.
World Bank Amazon rainforest bond
Back in August 2024, the World Bank launched a bond to support reforestation in the Amazon rainforest, supported by companies including Microsoft.
“This new outcome bond is a remarkable win-win, creating a bridge between capital markets investors seeking to support positive development and environmental impact in the Amazon with reforestation projects that will help safeguard one of our most valuable natural resources with rich biodiversity, climate and social benefits,” said Jorge Familiar, vice president and treasurer, World Bank.
The first form of the bond was launched in July 2024. However the now-largest World Bank outcome bond ever priced has a new fixed guaranteed component and a variable component linked to the generation of Carbon Removal Units (CRUs) from reforestation projects in the Amazon rainforest regions of Brazil.
This is not the first time that the World Bank has launched projects to support the Amazon rainforest: in fact, it has been supporting the rainforest through multiple projects over many years.
The World Bank estimates that the Amazon rainforest in Brazil alone generates an economic value of US$317bn annually for local communities.
Beyond its regional impact, the Amazon plays a crucial role globally. As the world's largest tropical rainforest, it acts as one of the most significant carbon sinks, with Brazilian regions contributing an estimated US$210bn in annual value to the planet.
The World Bank's Amazon Reforestation-Linked Outcome Bond is a US$225m, nine-year principal-protected bond issued by the International Bank for Reconstruction and Development (IBRD or the World Bank).
The bond integrates capital and carbon markets to support large-scale sustainable forest management by providing resources to local communities.
“Unlocking low-cost, institutional debt financing is essential for the growth of the Voluntary Carbon Market (VCM). The World Bank’s innovative approach to conservation finance in the Amazon supports forest protection and sustainable livelihoods and offers new tools for private investment in environmental initiatives,” says Brian Marrs, senior director for energy & carbon removal at Microsoft.
The bond features a unique structure in which investor returns are tied to the issuance and monetisation of CRUs, which are becoming increasingly valuable in global carbon markets, as private entities seek them to meet voluntary climate change mitigation goals.