Market economies usually give tradeable goods and services a price, based on supply and demand, and at the same time allow for the providers of these goods and services to be paid. There does not exist, as yet, a regulatory framework that enables biodiversity and ecosystem services to be valued and traded.

As a consequence, what has for long appeared without an economic value, and as such has been easily overused, or destroyed, is now quickly becoming scarce. So scarce, that the trend is reversing: in some parts of the world, biodiversity is suddenly becoming extremely expensive. That is, for example, what is occurring with the wetlands in the United States of America.

Two components are needed to change this state of play. First, the stick: to create a system where those that destroy nature must, in one way or the other, pay for it. Second, the carrot: to create a system where optimal nature protection is an essential part of the value proposition, where products accrue a value through their sustainable production and where the actual protection of biodiversity — nature stewardship — is a marketable service. In collaboration with other financial institutions and other partners, such as non-governmental organizations, IFC is actively researching and developing new financial products that can protect biodiversity by giving it a value and a payment mechanism.

Where destroying nature gets expensive
Since April 2006, IFC includes in the environmental and social conditions it imposes to its clients a performance standard on biodiversity (1). The standard provides for the protection of ecosystems and habitats, regardless of whether they are legally protected or not, or how much they may have been modified from their pristine status. The message to client companies is clear: no financing without proper protection and conservation of the fauna, flora and ecosystems.

Beyond IFC, more than 50 international and local financial institutions have taken on similar conditions in the shape of the Equator Principles. Today, nearly all project finance taking place in emerging markets applies the same environmental and social conditions.

Key actors have joined forces to raise the bar. The hope is that these standards spread to most financial institutions and all kinds of investment modes so that it soon proves impossible for companies to obtain financing without respecting biodiversity.

Similarly, NGOs, producers, buyers and financiers like IFC are working together in formally organized “roundtables” to agree on best practices in the production of commodities and throughout the value chain. The Roundtable on Sustainable Palm Oil (RSPO), for example, is working on standards to avoid deforestation in the production of palm oil (2). Once those standards become widely accepted, fewer financiers will accept to finance unsustainable commodity production, buyers will prefer certified products, and careful producers should be in a better position to handle careless competitors.

The financial instruments for sustainable resource management
The main challenge that sustainable enterprises currently face is the lack of access to long-term finance, an option that would make finance more in tune with the delivery of biodiversity benefits, which can take several years to several decades, and in turn, would allow its valuation and monetization. This is the case, for example, in sustainable tropical forest management. To support that industry, IFC, in partnership with the United Kingdom Department for International Development (DFID), HSBC and Forum for the Future, is working on sustainable forestry bonds which would generate long-term income payments in return for investment capital (3).

The objective is to provide forest operators with access to the up-front finance required for the implementation of sustainable forestry. The issuing organization builds up a diversified portfolio of fast-growing plantations and slow-growing natural forests across a number of operators and countries to balance risks and stabilize revenue flows. The future income streams flowing from this portfolio are securitized to form a bond. Although the concept is not new, its application to tropical forests and ecosystem services is a novelty.

IFC is also supporting entrepreneurs that sustainably collect, produce, transform and commercialize goods and services derived from native biodiversity. The niche of “naturals” among the cosmetic, food and pharmaceutical industries has grown considerably over the last two decades. New product categories have emerged such as natural food supplements, nutraceuticals and cosmeceuticals.

In Africa and Latin America, IFC is developing a number of pilot projects where the natural products include cosmetic oil, herbal teas and medicinal plants. IFC facilitates access to finance for start-up companies, communities, and trade associations that do not qualify for regular bank loans. IFC helps small producers identify and access new markets and join forces to produce the quantities and qualities required by the markets. IFC also helps producers and buyers use certification as market differentiator and verification mechanism.

Value for the future
Over the past 10 years, IFC and its partners have pioneered a number of financial instruments that help companies market biodiversity-based products and services. Despite considerable efforts by businesses, financial institutions and others, biodiversity and business is still a nascent marriage. But IFC is committed to continuing its activities in standard setting, quality assurance, opportunity seizing and knowledge sharing, and to collaborating with the CBD Secretariat, business and NGOs to find innovative and profitable ways to conserve and protect biodiversity.

Rachel Kyte is Director of Environment and Social Development, International Finance Corporation (IFC).

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(1) Performance Standard 6 Biodiversity Conservation and Sustainable Natural Resource Management
(2) http://www.rspo.org
(3) http://www.ecosecuritisation.com