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What do capital markets have to do with biodiversity? Until now, very little. This changed this week with the launch of a landmark Wildlife Conservation Bond or “rhino bond” that offers a payout linked to the protection of black rhinos, a critically endangered species whose health is essential to the ecosystems in which they live. The bond will support South Africa’s conservation of black rhinos in two of their strongholds in the country: the Addo Elephant National Park and the Great Fish River Nature Reserve.
The Wildlife Conservation Bond, issued by the World Bank with funding from the Global Environment Facility, is not just another financial product. It is a game-changing innovation that can direct funding to nature reserves and protected areas whose budgets have been stretched by the coronavirus pandemic, a drop in tourism, and recent fiscal strains.
While there is growing awareness about the need to protect wildlife for the health of the planet, most investment in nature today comes from national and sub-national governments and, to a lesser extent, from development banks, international NGOs, private foundations, and international agencies. Private sector actors, financial intermediaries, and institutional investors are absent. Large investors and financial institutions have largely avoided this space to date because of its risk/return profile. The business of protecting nature is long term and involves uncertainties that can be unfamiliar to investment managers. On top of it all, there is a perception that investments in nature may not be profitable.
The five-year rhino bond, which raised $150 million in its March 23, 2022 issuance, has changed this story. It is a combination of existing financial products – a bond with an excellent credit rating (AAA for World Bank issued bonds), paired with a performance-based grant funded by the GEF which results in a new financial structure that can successfully harness investment from capital markets to directly support endangered species conservation.
At the end of the life of the bond, investors will receive back the principal (by the safest type of issuer you can find) along with a variable payout depending on the rate of black rhino population growth in the two target areas in South Africa. That variable payout or success payment is financed by the GEF.
In the worst-case scenario, if the rhino population growth is flat or negative, investors will receive principal repayment at maturity, with no success payment. In the best-case scenario, if the rhino population grows above 4 percent, investors will receive the principal amount back and the success payment funded by the GEF. In intermediary outcomes, with population growth between 0 and 4 percent, the success payment will increase by fixed amounts over the life of the bond in a step-up fashion.
In all cases, the bondholders will be promoting efforts in biodiversity conservation. This is because, in exchange for the potential success payment at maturity, investors agree to forego the coupons a traditional World Bank Group bond would pay. Those foregone coupons are the source of financing for the conservation activities on the ground in the two parks selected for this project. These activities are designed not only to aim for black rhino population growth of at least 4 percent, but also to improve the management of over 150,000 hectares, reduce poaching and provide over 2,300 jobs for local communities in and around both protected areas – a welcome boost in a region severely impacted by COVID-19.
The bond issuance followed earlier work to identify suitable parks, explore the financial features of the bond, and establish the types of conservation activities that should be financed to meet the black rhino population growth goals. This product development phase work under the $4.5 million Rhino Impact Investment Project was funded by the GEF and led by UNDP in partnership with the Royal Foundation, the United Kingdom’s Illegal Wildlife Trade Challenge Fund, and the Zoological Society of London.
It also builds on the GEF’s support for other capital markets transactions, including the first sovereign blue bond issued by the Seychelles Government, issued in 2018 in collaboration with the World Bank to increase investment in marine protected areas and more sustainable fisheries. Another example is a project approved by the GEF Council in December 2021 to provide partial credit guarantees in collaboration with Corporacion Andina de Fomento for the issuance of two green bonds in the capital markets of Peru and Ecuador aimed at sustainable land use and biodiversity conservation in prioritized territories of the dry forests in these two countries.
These are among many efforts by the GEF to harness private sector financing for environmental protection through its Blended Finance initiative, also called the Non-Grant Instrument program, which aims to show how innovative finance can work to combat global environmental degradation.
The rhino bond is an example of how thinking out of the box and collaborating across institutions can result in an attractive investment opportunity that can be scaled for wide benefit. Donors can work jointly with financial institutions, corporates, or other entities with good credit ratings to package products that can achieve the risk/return profile needed for investors. Ultimately, this initiative could be replicated in other parks to protect additional rhino populations as well as other umbrella species whose threatened status is consequential for all of us.
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