With growing consumer awareness about the origin of products and the concern over impending global environmental crisis there are increasing opportunities to make money — making lots of green as they say on the street — by being green. Yet, finding the financial backing for the development of biodiversity businesses in emerging economies is still a major challenge.

Biodiversity and a dual financial sector
The banking sector has been consolidated in many markets, resulting in fewer, but more solid banks. Competition is hard, leading to decreasing loan margins and increasing selectivity in lending operations. So for financing to flow to SMEs and rural micro-enterprises in emerging economies, biodiversity businesses need to be highly competitive.

The financial sector in many emerging economies may be characterized as a dual system consisting of: (i) commercial banking and other financial institutions catering to the large and medium-sized enterprise and consumer sectors, and; (ii) an emerging non-banking sector catering to the needs of micro-enterprises and community-based activities. A great majority of the small and medium businesses fall within a gap in loan sizes between the micro-financiers and commercial financiers. Furthermore, where there are microfinancial institutions they tend to focus on urban areas with highest concentrations of clients so that rural enterprises fall into a gap in geographic coverage.

Banks tend to rely heavily on collateral as part of their risk management and mitigation measures to the extent that the financial status of the client is considered as the primary concern for the lenders, rather than the intended use of the loans and the merits and cash flow of the proposed investments. The banks’ credit officers are oriented toward analysing client risk and not project risk and often have not been trained in project-oriented and revenue-based lending, nor in project appraisal techniques. This is a problem for the majority of biodiversity based businesses that operate in agriculture, silviculture, aquaculture, small scale processing and artisan businesses, trading and services. These entrepreneurs typically possess neither sufficient fixed assets, nor financial assets, to provide the collateral presently required by the formal banking institutions, particularly for medium and long-term lending. Furthermore, many groups looking for financing for biodiversity businesses will be first time borrowers and hence face another disadvantage of not having personal connection to the bankers.

Non-banking institutions provide alternative sources of financing and often have vast sets of clients, particularly institutions catering to the grassroots level financing needs of individuals and micro-enterprises up to small enterprises. However, as the bulk of the lending takes place without fully bankable collateral (e.g. with group guarantees) and, because the average loan size is small, the interest rates charged by the institutions tend to be high in order to cover the larger transaction costs and risk exposure. Entrepreneurs involved in agriculture, cottage industry and related fields have difficulties in creating cash flow sufficient for loan servicing, and are thus excluded from this system.

Based on extensive work on biodiversity business development by UNDP’s portfolio of GEF supported projects, I think we have identified a good understanding of the main challenges faced by the sector and lessons learned for future activities to better connect local biodiversity friendly producer groups and entrepreneurs with the financial sector.

Lessons and challenges
Financing as part of a package of technical assistance — The provision of financial services to biodiversity businesses should be structured as part of a package of technical assistance and development of green markets. Provision of finance by itself will still have limited impact across the micro and SME sector as there are several outstanding and significant barriers in terms of consumer demand and business capacity within micro-enterprises and SMEs. Prior to the provision of credit and also after loan approval many enterprises will need assistance to build their managerial capacity and their understanding and ability to adopt best practices within their business for biodiversity conservation. There is also work to be done at the national level to promote marketing campaigns to increase consumer demand and government introduced fiscal incentives for biodiversity friendly SMEs so they are more profitable and hence attractive clients to financial institutions.

New lending programmes and incentives — Financial institutions, whilst often reticent to lend to biodiversity businesses can be motivated through a variety of incentives (credit lines and partial risk guarantees) and support to look more closely at this sector. Additionally, real sustainability and scale up of credit provision will only occur once national banking sectors and rural financial institutions are on board and building their client base of biodiversity businesses. Therefore donor lending programmes should look more to work through the financial sector, not in parallel, i.e. with credit being delivered through banks and not through independent investment funds, so that local lending capacity is developed. Access to additional credit, particularly if supported by a partial risk guarantee, is proving, for some financial institutions, sufficient to get them interested and bring them to the table. This is particularly being seen with rural credit and saving cooperatives and national development banks, whom could be considered first generation FIs to provide credit to biodiversity businesses.

Defining what a biodiversity business is — When considering a lending programme for biodiversity businesses the first challenge is to define what is the intended biodiversity impact of such a programme and what defines a business as having a sufficient positive impact on biodiversity to qualify and be eligible for such a programme. So an important question to ask is what indicators will best define biodiversity impact — species types conserved, population numbers, ecosystem conditions, threat reductions, hectares of land not deforested, hectares of land under improved production systems? However, in thinking about impact three major complications arise. Firstly, it has to be accepted that an individual business, particularly an SME, will likely have limited biodiversity impact by itself but will contribute to a better environment and ecological state of the broader landscape. Secondly biodiversity indicators should only really be measured at a landscape level and not at the level of a small business operation because of the scale at which ecosystems function. So the third critical and complex question becomes how landscape level impacts can be attributed back to an individual enterprise, particularly in landscapes fraught with a variety of influencing factors. This leads to the need for indicators to focus more at practices of businesses at the site level than on impacts and to develop guidance on what practices should contribute to biodiversity conservation.

Sectoral best practice guidelines — As business practices vary enormously between sectors (e.g. tourism, fisheries, agroforestry commodities), developing guidelines on best practices at a sectoral level to define eligible businesses for a biodiversity lending programme, is then the next step. However, these best practice sectoral guidelines too are typically complicated to put into practice. If a guideline for coffee calls for on farm tree diversification, how much diversification and which species is sufficient to warrant the farm as biodiversity friendly? Whilst such questions are critical for biodiversity, if the guidelines are eventually to be used directly by FIs they will put credit officers off using them — they need fast and simple tools. So these need to be well balanced between straightforward and streamlined for the bankers, but also sufficiently detailed so that the practices are scientifically robust so real biodiversity impact actually happens. The applicability of the guidelines to businesses also raises an important question as to whom, in reality, will and should use the guidelines.

Investment clustering — Because biodiversity impact can only occur if land use is managed across a landscape and not just one business unit, it can also be useful for an investment strategy to identify areas and ecosystems in countries of operation where it will be most important to target for investment proposals. Whilst FIs will not target specific areas as they are demand driven, the complementary technical assistance can be focused on businesses in key geographic areas to build the number of viable biodiversity businesses across a landscape.

Outreach and investment identification — How to find potential BD SMEs for training, support and possible financing will be challenging and important. A well defined outreach programme with suitable partners who can help identify possible beneficiaries will be an important early step.

Cost effective biodiversity monitoring of loans — Monitoring biodiversity impact for individual loans would be costly and time intensive and would not be part of banking business practices. Just developing monitoring criteria is sufficiently challenging without then also having to go the field to measure change and impact at enterprise and landscape level. Biodiversity monitoring of a loan programme might be undertaken at the portfolio level, outside of the credit department by a bank’s Corporate Social Responsibility team for reporting purposes to external stakeholders. It would be most likely carried out by a third party conservation specialist. And if the cost was borne by the CSR department and not the bank’s business unit, then such monitoring would not be seen to be a burden on the cost of the loans.

Sharing roles and responsibilities on biodiversity lending between FIs, donors, NGOs and government — It is clear that there are many elements that are needed to bring a business opportunity to the stage of being bankable and an FI positively appraising and approving a loan. FIs cannot be expected to get involved in many of these elements and hence donors, NGOs and governments need to plan their involvement upstream of lending to support and subsidize the overall current costs of developing a biodiversity business and investment opportunity. The extent to which non commercial support is required will depend on the maturation of the sector, the country, the FI and the businesses with regard to profitability, case studies and environmental awareness. Particularly during this phase of piloting and development there may be a significant need for NGOs to play a role in service provision to FIs to assist them in assessing biodiversity eligibility (using the sectoral guidelines) as well as working with the businesses to get them ready for financing.

Landscape planning to complement market based investments — In addition to sharing responsibilities on development and monitoring of bankable projects, governments still will need to play a role to guide land use within any given landscape. Whilst the market and private investment capital are powerful forces to stimulate growth, where biodiversity and fragile ecosystems are concerned, growth needs to be managed to ensure even well intentioned businesses do not lead to the over exploitation of natural resources (for example the proliferation of ecolodges around a specific protected area cumulatively may have adverse impacts on the site). But it should not be the role of banks to determine cumulative environmental impacts and turn down investment opportunities: this should lie with the permitting departments of government based on sound land use planning.

Andrew Bovarnick (andrew.bovarnick@undp.org) is UNDP’s Biodiversity Economist.

See also: UNDP's Global Environment Facility (GEF)