Innovating Environmental Finance
Mar 20, 2001
Ricardo Bayon

There are at least three types of financial tools, or more aptly put, finance and policy tools, that will permit the protection and development of environmental goods and services. They are:

  • 1) those that help protect environmental areas as providers of "public goods or services"
  • 2) those that help protect environmental resources as providers of "private goods or services" (as businesses)
  • 3) those aimed at correcting the incentive structure to encourage the conservation of biosystem resources.

No discussion of conservation finance is complete without a discussion of the mechanisms that might be used to distribute the money once it is raised. After all, conservation is not only about raising money, but also about using that money effectively. One of the tools that has recently emerged as an effective mechanism for channeling money for conservation is the Environmental Fund (or EF). Discussions on conservation finance often refer to environmental funds as if they were yet another source of finance for conservation, when in fact they are not sources of funds at all, but rather ways of managing money raised from a variety of other sources.

The principle behind environmental funds is simple: rather than seek small sums of money on a case-by-case basis to carry out environmental activities, EFs seek to obtain large sums of money up-front, invest it, and either use the interest on the money for conservation, or else draw down slowly on the fund to finance the desired activities. There is no typical Environmental Fund. The structures of each fund, its scope of activities and procedures for managing money all vary according to the purposes for which the fund was created, and the situation in the country where the fund operates.

This report coincided with a conference sponsored by the Milken Institute, "Financing Our Global Economic Future," on March 22, 2001.