Can this new blended finance model work for conservation goals?

In a move to address the chronic underfunding that plagues conservation efforts, a strategic partnership between an environmental NGO and a climate finance organization aims to raise long-term financing for conservation initiatives in the Galapagos Islands and its surrounding areas — while providing a blueprint for scalable, sustainable funding. Shifting away from funding approaches that prioritize short-term projects, the partnership between the Charles Darwin Foundation and Oceans Finance Company will use money from commercial markets to unlock larger funding pools and help with long-term conservation planning. “Most funders like to support something that has a tangible result … and then they want to move on to the next thing. But the reality in conservation issues is you often need decades to understand the dynamics,” said Rakan Zahawi, executive director of CDF. OFC describes itself as a company that “bridges the gap between natural capital management, nature-based solutions and large-scale blended finance.” Essentially it mobilizes funds to help governments make money from and improve their natural resources by using new financial mechanisms. By designing financial strategies that appeal to investors with varying risk appetites, OFC has put together a blended finance model that combines grants, fixed-income investments, and higher-risk capital. This new approach aims to overcome the limitations of existing financing tools and support debt-for-nature swaps — which forgive or refinance countries' debts in exchange for environmental commitment — with the goal of making it easier for more investors to fund conservation projects. The program is already active, and will last 16 years — and shows promise to be highly scalable, Erik Wandrag, OFC's CEO, told Devex. The partnership will initially concentrate on directing resources into four key research and conservation programs aiming to help build resilience in the Galapagos: marine biodiversity, bird conservation, sea turtle protection, and forest restoration. However, there is some skepticism about the effectiveness of relying solely on private sector funds to achieve meaningful and sustainable conservation solutions. Moving beyond debt-for-nature swaps The Galapagos debt-for-nature swap – which closed in May of 2023 and was the biggest transaction of its kind to date – turned $1.6 billion of existing Galapagos’ commercial debt into a new $656 million loan to help fund conservation. As reported in Devex Invested, Credit Suisse facilitated the swap by purchasing Ecuador's debt and issuing a marine conservation-linked Galápagos Marine Bond to finance the new loan at a reduced rate. Additionally, the U.S. International Development Finance Corporation and the Inter-American Development Bank provided crucial political risk insurance and guarantees. The swap meant over $1 billion was saved in debt repayments, allowing Ecuador to allocate $17 million annually to conservation initiatives during the 18-year project duration. OFC helped develop the transaction and led the commercial and financial structuring. They are also responsible for ensuring the project delivers on the social and environmental impacts throughout the lifetime of the transaction. While the Galapagos debt-for-nature swap demonstrated an effective way to secure large-scale, long-term funding for conservation, it took three years to close the deal. During this time, ongoing environmental degradation continued, Wandrag said. Funds generated from the swap also had to be used within the specific confines of the Galapagos Marine Reserve. This restricted the ability to address broader environmental issues affecting species that migrate beyond these boundaries, Wandrag explained — all of which points to the challenges of lengthy structuring processes and limited flexibility inherent in the Galapagos debt-for-nature swap. How the new financial strategy works Having seen some of the downsides of the debt-for-nature swap model, OFC wanted to create a new financing model that could avoid some of those challenges. It set about to do so with CDF in a partnership facilitated by CDF’s longtime funder, the COmON Foundation, and OFC’s main shareholder, Climate Fund Managers, a climate-centric blended finance fund manager and its Climate Investor Two, or CI2, Fund. CDF does not generate revenue directly, Wandrag explained, so it explored alternative revenue streams: government bonds. Wandrag told Devex that they used $90 million in capital from shareholders to purchase government bonds, including Eurobonds — a type of foreign bond issued and traded in countries other than the one in which the bond is denominated. These bonds generate returns, which they then use to repay the initial investors and fund conservation programs. Wandrag explained that as long as the bond is paying more to them than they have to pay their investors, there is cash to fund projects like the partnership with CDF. Wandrag said they receive payments every six months, with the first payments being received in June 2023. “What we've been trying to test with this was: Can we get to the impact faster and better? And can we find a different funding mechanism to fund it?” Wandrag believes they can. By creating a funding structure that appeals to commercial investors — i.e., one that guarantees returns from government bonds — OFC can attract funding from “entities that typically wouldn't have participated in conservation programs,” Wandrag explained. Being able to appeal to a broader pool of diverse investors means they are able to secure more money. OFC’s capital is based on a blended finance structure that combines funds from diverse sources with varying risk appetites. This includes grants from donors like the European Commission and the Dutch government, fixed-income investments from pension funds, and higher-risk capital from private equity funds, Wandrag explained. This approach aims to work alongside debt-for-nature swaps by securing funds to repay investors, enabling quicker mobilization of resources, and supporting a broader range of conservation activities. The total amount of funding generated through OFC’s complementary structure for CDF’s conservation is $81 million. While it is not an even split over the 16 years, it averages to around $5 million yearly, OFC told Devex. So far, the new strategy has proved successful, OFC said. “We dispersed the first funds to CDF and already we've received the first two bond repayments under the payment structures. We’ve made payments to our investors in line with the agreed repayment schedules and tested it for a year to make sure it's going to work as we envisioned,” Wandrag said. Long-term impact For investors who seek impact, it can be difficult to standardize metrics related to conservation and natural capital management, Robin Ivory, a senior associate at Convergence, said. “For something like mitigation, it’s a lot easier to point to the amount of [carbon dioxide] removed from the atmosphere or prevented from entering it.” In biodiversity, however, ecological equivalency is difficult to establish, she said. Each research and conservation program funded by this CDF-OFC partnership operates through a rigorous process: it begins with establishing a baseline to understand the current conditions of the ecosystem. Then, future goals are set, and a budget is created to achieve these goals. Wandrag emphasized the importance of setting clear, measurable goals, from the start. The outcome “needs to be an increase in biodiversity and an improvement in the lives of people who rely on those ecosystems,” he said. Continuous measurement and reporting against the baseline ensure the projects are meeting their intended impact, CDF’s Zahawi said. Another aspect that the new funding mechanism provides is flexibility, which is crucial in conservation, Zahawi explained — particularly the ability to reallocate resources as needed. This flexibility allows for adjustment of funding based on emerging priorities or the entry of new funders. “If another funder comes in and says, well, I really want to work on marine bird conservation, we can actually submit a different proposal the following year to OFC and say this project is now being covered by another organization,” he said. Will it work? OFC is looking to finance conservation projects in a way that appeals to a much larger pool of commercial capital, Wandrag said. But relying solely on private sector incentives to address global problems won’t work, according to Daniel Ortega, who served as Ecuador’s minister of environment and is also a former member of the Charles Darwin Foundation Board. While private sector involvement has potential, it requires rigorous frameworks for transparency, reporting, and governance, he explained. For Ortega, government engagement is essential to achieve meaningful and sustainable solutions to solve the underlying issues. Overall, governments must also have the capacity to operate effectively, he said, which can be achieved by reducing their debt burden through measures like cancellation or restructuring. According to Ortega, questions also remain as to whether this approach has the potential to serve countries themselves or align with domestically defined sustainable development priorities. Debt swaps aim to lower the debt of debtor countries. For Ortega, OFC’s approach, instead of reducing Ecuador’s debt, redirects payments from Eurobonds into conservation efforts within the debtor country. This approach, he said, is less beneficial for countries that need to restructure their sovereign debts because it does not actually reduce their overall debt burden. Additionally, transactions like OFCs do not need the consent of the debtor country — which for Ortega can raise concerns about transparency. “Who will disclose details of the investments made by Ocean Finance Company, and what are their holdings of Ecuador’s Eurobonds?” Ortega said. In terms of checks and balances, while a system like the EU Sustainable Finance Disclosure Regulation provides a framework with clear definitions of sustainable investment and disclosure requirements, “these new operations and operators will not have equivalent rules to follow or oversight bodies to report to,” he warned. Other concerns Ortega raised include the obligations of independent financial organizations, such as who decides how much of the profit in these deals goes to conservation, what is taken as profits for intermediaries and facility agents like OFC, as well as what is preventing deal promoters from spending the money earned in other countries or for other financial purposes. In response to some of the concerns, OFC’s Wandrag told Devex that the amount of funding that goes to conservation is agreed upon upfront with the investors, as well as what the funding will be applied to. He also explained that funding for intermediaries is only for legal costs related to investor contracts or for banks assisting with raising funds — these costs are minimized to ensure maximum funding for conservation, Wandrag said. Similarly, he said that OFC’s fees cover the costs of setting up and maintaining the structure, managing, monitoring, verifying, and reporting on conservation projects, and handling contractual obligations. Wandrag also said the funding could be applied in other countries, but only if agreed to by the investors.