What is Conservation Finance?

How Does Conservation Finance Help Scale Investment in Nature?

Traditional government and philanthropic funding for conservation, restoration, and stewardship activities will not be sufficient to stop and reverse biodiversity loss or meet climate targets by 2030. In Canada alone we require $15-20 billion US in additional funding annually to address the challenges at hand, about five times what is currently being spent.

Growing the pool of public and philanthropic funding is an important step in closing this gap, but to meet our financing needs requires broadening the spectrum of funders, which includes an important role for the private sector. Yet attracting private finance to nature is challenging, given that ecosystems do not lend themselves to traditional investment vehicles. The value of conserving, restoring, and sustainably managing ecosystems have up front costs whose benefits, such as increased carbon sequestration and flood mitigation, or improved air quality, are diffuse despite the costs that rise in their absence. Conservation finance helps address this challenge by offering the instruments that align and incentivize partners to invest in activities that generate financial returns alongside environmental, cultural and/or social benefits.

What Conservation Finance Instruments Exist?

There are several conservation finance instruments that create an incentive to invest in nature by defining and aligning benefits and outcomes to the participants. These instruments are context dependent, some apply better to agricultural landscapes, whereas others are more useful for large-scale conservation efforts. Specific needs must be examined to evaluate the applicability of various financial instruments on a case-by-case basis. The image below highlights several instruments plotted along a spectrum of generalized expected rates of return. Hover over them for more information, and for more details and instruments see the Smart Prosperity Institute's Invest in Nature report on our Third-Party Resources page.

  • -100%
  • -90% to -10%
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  • 1% to 7%
  • 8%+
Conservation Trust Funds

Conservation trust funds are large scale funding vehicles to provide sustained funding and support for conservation goals in a specific landscape.

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Project Finance for Permanence

A specific type of public-private partnership focused on long-term financial support for conservation initiatives where government or other financial inputs are mobilized as the initial funding is consumed.

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Biodiversity Credits & Offsets

Biodiversity credits and offsets are generated through conservation and restoration activities that result in enhanced biodiversity outcomes relative to a baseline. The difference is that credits are for enhanced protection, whereas offsets are purchased to compensate for damage elsewhere.

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Conservation Impact Bonds

Impact bonds are privately financed performance bonds in which a payout only occurs if the conservation project achieves its predefined goals.

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Forest Impact Investment Funds

Funds are in place to direct investment and management of a suite of sustainable forestry operations, generating returns from multiple revenue streams.

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Revolving Funds

A large pool of assets that allocate upfront capital to projects meeting specific criteria (such as coastal restoration) as a loan, to be paid back via cost savings over time.

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Species and Habitat Mitigation Banking

Legal instruments of compensatory mitigation that involves creation and sale of credits for a specific species or ecosystem of concern.

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Voluntary and Regulated Carbon Credits and Offsets

Credits are generated from additional (i.e. in addition to business as usual) carbon sequestration, including reforestation, avoided deforestation, soil management practices, and others. Credits are sold to voluntary buyers, rather than buyers seeking to meet legal requirements. Parties whose emissions are restricted by policy can purchase carbon offsets to compensate for excess emissions.

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Resilience Bonds

Resilience bonds are a specific bond type where the payout is by beneficiaries of restoration and conservation activities that enhance resilience.

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Best Management Practices Insurance

Best Management Practice Insurance programs compensate farmers for reduced yields or profits resulting from the adoption of specific on-farm practices.

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Payment for Ecosystem Services

Payment for ecosystem service programs provide a financial incentive from a public or private entity to reward farmers for positive environmental practices.

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Where Do Financial Returns on Investments in Nature Come From?

  • Direct revenue generation from a produced commodity (e.g., forestry, agricultural product), in which the investor has equity stake, or loan to, a business that produces the commodity
  • Reduced insurance premium payments due to investments in natural infrastructure that reduce the risk or impact of a weather-related event or natural disaster
  • Revenue generated from an investment in a thematic fund
  • Direct payments to landholders for improved management practices, such as payment for ecosystem services programs
  • Avoided capital or maintenance costs, such as the avoided water treatment costs associated with watershed restoration, or the reduced costs to cities or landowners associated with reducing the impact of extreme weather events
  • Interest from loans and revolving funds where an individual project, suite of projects, or organizations engage in an activity to produce ecological outcomes, and through the cost savings or revenue generated are able to pay back the loan
  • Direct revenue generation from offsets or credits
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Conservation Finance Is Not A Silver Bullet

It is important to acknowledge that conservation finance practices are not always the best way to fund certain types of activities. Funding species-at-risk, for example, is necessary regardless of a financial incentive. Conservation finance is also not intended to redirect existing donor streams. The intention is to attract new investors for revenue-generating projects and free up donor funds for nature projects that do not generate revenue.

Commodification of nature is also not the goal. The goal is to better understand all of the values of nature and conservation and have investments flowing in a way that reflects this.

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What’s Holding Conservation Finance Back From Taking Off in Canada?

Conservation finance faces several challenges that have hindered its widespread adoption and effectiveness in Canada. These include:

  • Limited awareness and understanding of when and how conservation finance can support the business case for investing in nature. 
  • Regulatory and policy barriers
  • Lack of market signals that incentivize nature investment

The Nature Investment Hub wants to help overcome these challenges and promote conservation finance. Read more about the Canadian context in our Explainer.

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