Conserving Earth’s animals and plants takes money. Protected areas like national parks are the main way countries try to conserve wildlife, and preventing people from hunting or farming inside protected areas is expensive. So expensive, in fact, that only 22% of surveyed protected areas reported having adequate staffing and budgets. Another paper estimated that protected areas with lions had a collective annual budget of $381 million, but needed $1.2 to $2.4 billion to be managed effectively. What tools exist for increasing conservation funding?
The newest instrument is often called a “biodiversity bond” or “wildlife conservation bond”. My very own World Bank pioneered this idea in 2022 with the $150 million “rhino bond” to support two protected areas in South Africa.
Let me tell you how the rhino bond works. Private investors purchased $150 million worth of bonds. They are going to get their $150 million back at the end of the 5-year bond period. Usually, they would receive annual payments (“coupons”) during the bond period. Instead, the annual payments go to the two protected areas to fund their operations.
Instead of receiving an annual coupon, the private investors receive a “conservation success payment” at the end of the bond period. The payment, which is funded by the Global Environment Facility, depends on the population growth rate of rhinos in the two protected areas. The payment is zero if the population fails to grow, 3.7% if the rhino population grows by up to 2%, 7.3% for growth up to 4%, and 9.2% for growth exceeding 4%. This structure seems to put the financial incentive for rhino conservation with private investors rather than with the protected area managers. But I think the idea is rather to place the performance risk on private investors rather than on the protected areas. And perhaps the protected area managers would try as hard as possible to grow the rhino population with or without direct financial incentives.
If more biodiversity bonds are created, their transaction costs may decrease. If they become a more mainstream asset class, like “green bonds” for climate change spending, which were bespoke when they were first created two decades ago (with the World Bank also playing a leading role), then more private investors may be willing to purchase them.
Debt-for-nature swaps
Debt-for-nature swaps are a more-established method of increasing conservation funding. Instead of raising new money from investors, they allow a government to spend money on conservation that it would have had to spend on debt servicing. An NGO, rich-country government, or bank arranges for some of a country’s debt to be bought back and retired or refinanced on better terms. In exchange, the debtor government promises to spend some of the money on conservation.
This paper by Alexander Dryden compiles a database of 169 debt-for-nature swaps in 45 countries and groups them into three “generations”. First, NGOs like The Nature Conservancy purchased small quantities of distressed debt and converted them into local-currency funding for conservation. The average transaction was just $3.5 million, though with 91% of transactions occurring during domestic economic crises, the NGOs were often able to purchase debt at a deep discount.
The second generation involved bilateral government deals. These deals were larger, with an average transaction value of $40 million, and also strategically timed, with 51% occurring during economic crises. But a smaller fraction of the repurchased debt was used for conservation, compared to first-generation swaps. For example, over 40% of second-generation swaps allocated less than half of the nominal debt value to conservation projects, compared to about 10% for first-generation swaps (Figure 3 of the paper).
The third generation of debt-for-nature swaps involves commercial banks, development finance institutions, and institutional investors. These deals are much larger, with an average transaction value of $636 million. But the average proceeds used for conservation are only $162 million (Table 2). Seven out of the eight third-generation swaps dedicate funds to marine conservation, rather than terrestrial (on land) conservation.
Lend first, conserve later
In addition to high transaction costs, the timing of debt-for-nature swaps is awkward. Debt relief happens up front, while the government’s conservation spending occurs over the following years. Some safeguards against countries failing to honor their conservation spending commitments include placing funds in conservation trust funds, requiring monitoring and reporting, and embedding the commitments in legal agreements. But the basic problem remains: the debt relief cannot easily be taken back if the government later loses interest in conservation.
One idea I like, which I don’t think has been tried in the real-world yet, is “Conservation by Lending”. Instead of retiring debt first and hoping for conservation later, the debtor country receives a loan in exchange for a conservation commitment. If the country reneges, it has to repay the loan (or else default and risk losing access to foreign credit markets). Harstad and Storesletten contrast their proposed instrument with flow payments, like those under REDD+ for reducing deforestation, but I think the instrument can also be considered as an alternative to the usual structure of debt-for-nature swaps.
Both of these papers leave a big question unanswered. Conservation by Lending is theoretical, and Dryden's debt-for-nature swaps paper is descriptive—it tallies the dollars flowing toward conservation but not the conservation those dollars buy. Would it be possible to estimate the casual effect of debt-for-nature swaps (or biodiversity bonds) on conservation outcomes?
One approach would be to use swaps that were seriously considered but never finalized as a control group in a difference-in-differences analysis, though these failed swaps likely differ on unobservables from completed ones. Another option is to exploit the fact that completed swaps take years to negotiate and are often delayed for idiosyncratic reasons, making the precise timing of completion plausibly exogenous. That would open the door to an event study, or to a comparison of treated and not-yet-treated countries. The challenge is that conservation impacts probably take at least five years to materialize—likely longer than the window over which timing is plausibly exogenous.
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