From rhino bonds to debt-for-nature swaps: Can these financing instruments protect Asia’s biodiversity?

The novel mechanisms promise to mobilise more private financing for conservation, but risk distracting developing countries from addressing underlying debt issues and could ultimately be exploitative, say experts.

Tiger walking in dry river
Today, wild tigers only live in 10 countries, mostly in Asia. To fund their conservation, some of these countries are exploring innovative financing instruments like "tiger ecosystem bonds" with the United Nations Development Programme (UNDP). Image: Soumyajit Nandy, CC-BY-SA-4.0, via Wikimedia Commons.

Despite being one of the world’s most biodiverse regions boasting many unique ecosystems from tropical forests to coral reefs, Asia has lagged the rest of the world in its conservation efforts.

Under the current trajectory, researchers estimate that almost all Asian countries will fail to meet a landmark target adopted at the 2022 United Nations biodiversity summit to protect 30 per cent of the world’s lands and oceans by 2030. That is, unless governments start establishing protected areas up to six times faster – an endeavour which will require biodiversity spending as a share of national budgets to increase beyond the current regional average of 0.3 per cent.

To close Asia’s trillion-dollar investment gap by 2030, there has been a strong push for the private sector to invest more in biodiversity protection in recent years.

At last year’s COP28 climate summit, the Asian Development Bank (ADB) launched a nature financing hub which aims to attract at least US$2 billion into nature-based solutions for the region. Earlier this year, over 130 publicly listed Asian companies pledged to be early adopters of the Taskforce for Nature-related Financial Disclosures (TNFD) framework, which launched last September.

Innovative financing instruments promising private money flows into biodiversity causes have started to emerge, from the World Bank’s inaugural “rhino bond” to the world’s first debt-for-nature swap for marine conservation in Seychelles.

In this explainer, Eco-Business examines whether these new private financing schemes can credibly protect Asia’s landscapes and wildlife while easing national debt burdens and producing returns for investors.

What are some of these emerging instruments?

1. Biodiversity credits

The UN has mooted biodiversity credits as one of the innovative schemes to stimulate private sector investments to realise Target 19 of the Global Biodiversity Framework. 

At COP15, a UN-backed voluntary alliance called the Biodiversity Credit Alliance (BCA) was launched to define the nascent asset class and develop new market standards. Shortly after, the United Kingdom and France set up the International Advisory Panel on Biodiversity Credits (IAPB) to design a framework for an international biodiversity market, which they plan to unveil at COP16 in Cali, Columbia later this year.

However, many observers  including the BCA  have cautioned against rushing to implement a biodiversity market without learning from the mistakes of the carbon market, which has been aflush with cheap, low-quality offsets and lax social safeguards.

Jennifer Morris, who heads up the United States (US) conservation outfit The Nature Conservancy (TNC), recently ruled out preserving nature through internationally traded biodiversity credits, saying that “an international tradeable unit of biodiversity” does not make scientific sense.

Former investment banker Frederic Hache who is now a lecturer in sustainable finance at the Paris Institute for Political Studies and founder of think tank Green Finance Observatory (GFO) also warned that the environmental integrity issues plaguing the carbon market will be magnified in a biodiversity market, given there is no single metric for biodiversity credits unlike carbon credits, which each represent a reduction in a tonne of greenhouse gas emissions.

These concerns have not stopped some countries like the UK and Australia from establishing their own compliance and voluntary markets in the past year. The early excitement has led the World Economic Forum (WEF) to estimate that the market for such credits could reach US$2 billion by the end of the decade – the current size of the voluntary carbon market – and nearly US$70 billion by 2050.

2. Debt-for-nature swaps

Debt-for-nature swaps have been pitched as a win-win solution that provides debt relief to cash-strapped developing countries, while funnelling private capital into local conservation. 

The first-ever agreement was signed between US-based environmental non-profit Conservation International and Bolivia back in 1987. Since then, some 140 swaps amounting to US$3.7 billion have been struck in countries including Belize, Barbados, the Seychelles and Gabon. 

Debt-for-nature swaps over the past 35 years

Around 140 debt-for-nature swaps have been done in the past 35 years. Many International Capital Market Association (ICMA) warned that many “are using the blue bond terminology, but doing something completely different”, leading to “regrettable confusion”. Image: Reuters

While this is a mere fraction of the US$1.1 trillion external debt held by some of the poorest countries, these deals have increased in pace and scale in the past few years.

In 2015, Seychelles launched the world’s first ocean-based debt-for-nature swap, which laid the groundwork for the biggest “blue bond” transaction on record in Belize in 2021.

In 2023, Ecuador sealed the world’s largest deal to date, converting over US$1 billion of the nation’s debt into a “marine conservation-linked bond” that will channel at least US$12 million annually over 18 years to protect the Galapagos Islands. 

But debt swaps tied to “blue bonds” or debt instruments to fund marine conservation projects, have been criticised for overstating their environmental impact, leading TNC – which brokered the Seychelles and Belize swaps – to ditch the misleading label after reports revealing that only a small amount of proceeds were going into ocean conservation

The International Capital Market Association (ICMA), an influential standard-setter in debt markets, has clarified that bonds should only be labelled as “blue” if all the money raised goes towards marine projects. 

3. Wildlife conservation bonds

In 2022, the World Bank launched a “rhino bond”, the world’s first bond targeting species conservation, where US$10 million of coupon payments, which would have typically been paid out to investors, went instead to two South African areas protecting critically endangered black rhinoceros.

After five years, an additional success payment of up to US$13.76 million could be paid out by the Global Environment Facility (GEF), a multilateral financing facility funded by governments, if the sites achieve a 4 per cent growth in the rhino population.

Gopalasamy Reuben Clements, a Malaysia-based sustainable finance specialist with conservation charity Zoological Society of London (ZSL), which helped to design the rhino bonds, said there is no reason these wildlife conservation bonds cannot be applied to Asia’s context. 

However, the challenge is that a lot of the land in emerging economies are zoned for development, unlike South Africa where the conservation sites are ringfenced, which allows the main threats to be narrowed down to poaching and for more “straightforward” key performance indicators (KPIs) to meet, like an increase in the numbers of rhinoceros, said Clements.

“In a developing country, it can be done, but it’s a bit more complex because of the added threats from development,” he said. For instance, proxy KPIs such as the number of patrolling hours might need to be used in a rainforest where the variables might be hard to control. 

Last year, the UN Development Programme (UNDP) announced that it was exploring the issuance of “tiger ecosystem bonds” with four Asian countries  Cambodia, India, Malaysia and Thailand  to raise as much as US$200 million to protect and restore selected tiger ecosystems. But the financial structure of the bond  be it a sustainability-linked bond, a special purpose vehicle, or a mix of both – and conservation KPIs have not been agreed upon yet.

Who really benefits?

Chienyen Goh, a legal advisor and researcher with the Third World Network, a global non-profit advocating for developmental needs of the Global South, believes that brokers, financiers, credit rating agencies and highly-specialised lawyers involved in structuring the deal, rather than debt-ridden states and their natural ecosystems, have the most to gain from these innovative schemes. “You don’t have to be a cynic. Just look at the money.”

All these so-called innovative schemes are more for signalling, to demonstrate that this is a growth market and an emerging opportunity for impact investing.

Chienyen Goh, legal advisor and researcher, Third World Network

In the case of the rhino bond, which has a coveted “AAA” rating given the World Bank is the issuer, institution investors led by Nuveen, a global investment manager which is the bond’s founding signatory, would get a return of about 3 per cent per year if the success payment for GEF gets awarded. This is “a very good return” when benchmarked against the 5-year US Treasury yield over the same period, said Goh.

Meanwhile, the US$142.2 million raised from private investors will go to regular sustainable programmes run by the World Bank’s International Bank for Reconstruction and Development (IBRD), which is then lent out at commercial rates to developing countries, said Goh. Therefore, none of the private financing from the bond issuance actually flows directly to rhino conservation, since GEF  which is essentially public money  forks out the initial US$10 million payout and the potential success payment.

“So you have a case where public money has been mobilised for private financial interests,” said Goh, adding that the protected areas could have simply gotten the money from GEF as a direct grant, instead of going through an unnecessarily complex financing structure, which incurs extra charges for financial and legal consultants.

Debt-for-nature swaps have proven to be equally lucrative. In the case of the Belize deal, Credit Suisse and TNC earned US$28 million in legal and advisory fees, rivalling the US$24 million loan provided through the swap to set up a national marine trust fund. 

Such swaps also complicate the already messy debt restructuring process by creating divisions among different classes of creditors, instead of getting the wide participation needed to achieve effective debt relief, said Goh.

The International Monetary Fund (IMF) has similar echoed that it is more efficient “to de-link the restoration of debt sustainability from fiscal support of climate action”, where climate investments should be additional to the debt relief required and “ideally come in the form of conditional grants rather than debt-climate swaps”.

“All these so-called innovative schemes are more for signalling, to demonstrate that this is a growth market and an emerging opportunity for impact investing. You need to create a supply for these things and demonstrate some kind of track record,” said Goh.

Therefore debt-ridden countries may have to “play along” with these schemes, or fear being locked out the market to pay back their debt more affordably, said Goh. 

As for biodiversity credits, which the UK and France have been actively promoting, Hache argued that “the goal is primarily for rich, industrialised countries to delay any meaningful action.” The secondary goal is to “grab a share of the pie for the financial sector.”

ZSL’s Clements shared similar concerns about involving the private sector in these financing schemes, as they inevitably expect a certain amount of returns. He also agreed that a biodiversity market will allow companies to continue polluting while offsetting their impacts.

“But on the ground as a conservation scientist working here in the last 18 years, I do not see a more sustainable and promising way to fund conservation,” he said. “You’ve got to start somewhere and offsetting could be the first step, even though it’s not ideal. Once there is more awareness at the C-suite level and across the board, eventually people will understand they can’t just use offsets and need to save nature for their very survival.”

You’ve got to start somewhere and offsetting could be the first step, even though it’s not ideal. Once there is more awareness at the C-suite level and across the board, eventually people will understand they can’t just use offsets and need to save nature for their very survival.

Gopalasamy Reuben Clements, sustainable finance specialist, Zoological Society of London

No substitute for environmental regulations

The narrative that the private sector is the sole domain of problem-solving has allowed financial institutions to “exploit” these new instruments “to generate fees under the guise of environmental stewardship,” Goh said.

Given that nature conservation is a public good, it should be funded fiscally, said Goh. For instance, governments should consider taxing companies that benefit the most from degrading nature, getting rid of subsidies for economic activities harmful to nature and enacting clear regulations around the extraction of natural resources, he added.

But for developing countries facing a debt crisis, they should first focus on making their public debt more sustainable, in order to free up resources for biodiversity conservation, said Goh.

The Secretariat of the Convention on Biological Diversity, the body charged with assisting governments in achieving global biodiversity targets, similarly noted that “countries will likely benefit by integrating biodiversity considerations more systematically into their national fiscal and budgetary strategies, for instance in their efforts to strengthen their revenue bases.” 

Hache said the fundamental question to ask is this: “On what basis do we believe that transferring conservation policies to financial markets will yield superior outcomes?”

“There is simply no evidence to back that. On the contrary, history has shown that environmental regulation is by far more effective,” said Hache, citing how the Montreal Protocol was effective in repairing the ozone layer as it banned the production of ozone-depleting substances.

On what basis do we believe that transferring conservation policies to financial markets will yield superior outcomes?

Frederic Hache, lecturer in sustainable finance, Paris Institute for Political Studies and founder, Green Finance Observatory

But in developing countries, it all boils down to enforcement of these regulations, which requires better engagement with conservation non-governmental organisations and local communities, said Clements.

“If regulations are being developed without working together with landowners, then you sometimes get a disconnect,” said Clements, adding that sometimes governments end up outsourcing the work of policymaking to “expensive consultants”, which makes the process “very elitist”.

Even if governments start collecting penalties from enforcing regulations, the penalties do not necessarily go back into conservation, he said. “History has shown that the flow of finance from governments to NGOs is not significant. By the time that happens, it will be too late and we would have lost a lot of biodiversity.”

“The hard truth is that most of the money is in the private sector and it has to play a greater role in investing in nature,” said Clements. “Ultimately, if you have this market demand to invest in nature, it’s more effective than just waiting for regulations.”

Most popular

Featured Events

Publish your event
leaf background pattern

Transforming Innovation for Sustainability Join the Ecosystem →