Broadly defined, conservation finance is the raising of capital to support the conservation of land, water and resources. This concept started with "debt for nature" swaps during the 1980s and 1990s whereby developing countries agreed to protect ecosystems using revenues freed up by sovereign debt relief (such deals usually being arranged by international environmental groups). Recently, there has been an increasing focus on cash generating investments in this area, thereby excluding certain philanthropic and grant based activities. Market commentators note that, ideally, conservation finance should capture both elements. For example, in two reports (2014 and 2016), Credit Suisse and McKinsey suggest that "cash flow" should "in part remain with the ecosystem to enable its conservation" and also, in part, be "returned to investors". In Ecosystem Marketplace's assessment of the current market, it was emphasised that the key focus should be on "conservation impact" and that this should not be a "by-product of an investment made solely for financial return". The difficulty appears to lie in striking the right balance between the conservation of the environment and financial gain.

Against this shifting landscape, a wider range of investors are being drawn to conservation finance projects. For example, "impact investors" such as high net worth individuals, family offices or foundations are increasingly attracted to this area as they place a greater emphasis on the environmental or social impact of their investments. They are often prepared to take on high risk projects or accept lower returns in exchange for these positive impacts. In addition, private sector investors (clients of banks, asset management firms and beneficiaries of public pension funds) are looking into investment products in this area, drawing into sharper focus the shift away from traditional philanthropic element of conservation finance. As Ricardo Bayon, a partner at Encourage Capital (an investment management firm offering conservation finance funds) notes, high impact investments no longer means investors are giving up their returns – it is possible to "have your cake and eat it."

This widening of the investor pool coincides with an increased certainty in the investment product itself. Asset managers can now flag specific examples of how investments are structured as opposed to relying on conceptual models – it makes a material difference that investors can now see these projects in action. Investments are set up so that cash flows can create attractive risk adjusted returns, ranging from commodities such as carbon credits, ecosystem services or sustainably produced food. Interestingly, the most valuable and fastest growing area of the market is food/fibre commodities, driven by ethical consumers in part but mainly by multinational food processors and retailers who place a growing importance on ethical production techniques.

A recent example of conservation finance in practice is Mirova's market testing of LDN Fund, which will mix public and private finance by investing in agriculture, forestry and other projects which encourage sustainable land management. The European Investment Bank is also taking part in the development of this fund via an Advisory Group including senior representatives from international NGOs and academia. Other public institutions are also considering investing, which will assist in "de-risking" the fund for private sector investors. LDN fund is just one of a growing number of investment vehicles offering investors a range of opportunities in the conservation finance sector.

Despite these interesting developments, there are still reasons as to why private sector investors may be reluctant to invest. The majority of the investment products are long term (at least 8 to 10 years), have a low secondary market liquidity and uncertain revenue streams remain a concern. Essentially, investors want to see evidence of a track record and as this develops over time, it is hoped that more corporate investors enter this field, alongside the existing asset management boutiques that currently dominate this niche market.

This post was prepared with the assistance of Ei Nge Htut in the London office of Latham & Watkins.

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