Invest in nature: Biodiversity financing for cities and regions

Dr Eszter Mogyorosy, Innovative Finance, and Barbara Riedemann, Communications both from the World Secretariat of ICLEI – Local Governments for Sustainability World Secretariat, shed light on biodiversity financing for cities and regions, providing a roadmap to invest in nature

While it is widely accepted that biodiversity should be conserved, financing projects, especially in local and regional jurisdictions, can sometimes become a challenging task. How do we fuel these initiatives?

A new Guide funded by the German Government and developed by ICLEI – Local Governments for Sustainability aims to be a one-stop shop for developing urban biodiversity projects. The Guide lays out the resources, tools, and steps to find tailored finance solutions to help local authorities unlock this complex puzzle of ecology and economy.

Uganda protects biodiversity

In Uganda, deforestation is estimated at 1-2% per year. When it occurs, the carbon from the trees retains releases into the atmosphere as CO2, one of the big culprits of climate change.

The loss of forests also affects the habitat of species like chimpanzees, whose natural sanctuary has shrunk due to indiscriminate logging. Curbing deforestation is one of Uganda’s goals for protecting its biodiversity. But how can they finance this goal?

Inspired by the success of Costa Rica almost two decades ago, Uganda began offering payments to private forest owners to refrain from clearing trees. This is known as Payment for Ecosystem Services (PES). In this market-based instrument, the people who own, manage and use natural resources – farmers and forest owners in Uganda’s case – are incentivised to implement actions toward biodiversity conservation and protection.

With funding provided by the Global Environmental Facility (GEF) in 2010, Uganda’s four-year PES project reduced the rate of deforestation and firewood collection while encouraging the conservation and restoration of private forests outside protected areas, which are the home of some of Uganda’s largest chimpanzee populations.

Biodiversity financing methods vary

Many places face similar problems to Uganda. However, the biodiversity financing methods vary. Latin America provides some other examples. One is Brazil’s Ecological Fiscal Transfers (EFT) programme, established in the 1990s to promote biodiversity conservation and watershed protection. EFT compensates local governments for lost agricultural revenues when they prioritise conservation efforts.

The amount of compensation is based on the percentage of protected area in a municipality – the more area protected, the higher the compensation. This encourages municipalities to expand these natural reserves. Peru has implemented Debt-for-Nature Swaps, which reduce or forgive a portion of a developing country’s external debt in exchange for investments in local environmental conservation measures.

And Colombia has established Conservation Trust Funds (CTFs). These institutions receive funding from various sources, such as international donors, private sector contributions, and government funds.

Financing biodiversity projects

For local and regional governments to finance biodiversity projects, we must familiarise ourselves with the PESs, ETFs, Debt-for-Nature Swaps, or CTFs. The list of acronyms and definitions is indeed long. These are all innovative financing instruments, and mechanisms that solve problems that the market alone cannot address. They are not necessarily new, but they are called ‘innovative’ because they unlock unique solutions for biodiversity conservation. These tools are vital for catalysing market change and often require collaboration between the public and private sectors.

Innovative financial instruments add to the landscape of traditional local financial tools, which are well-known in the public administration arena. They include own-source revenues (such as local taxes and tourist user fees), biodiversity-relevant subsidies, and intergovernmental transfers.

The problem arises when local and regional governments (LRGs) have exhausted their traditional resources and must search for external funds to achieve biodiversity and sustainability goals.

Guide to Biodiversity Financing for Cities and Regions

In response, intending to enable LRGs to navigate this complex subject and find solutions, ICLEI presents a Guide to Biodiversity Financing for Cities and Regions within the INTERACT-Bio project.

The INTERACT-Bio project is funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety and Consumer Protection (BMUV) through the International Climate Initiative (IKI). INTERACT-Bio, led by ICLEI, is designed to improve the utilisation and management of nature within fast-growing cities and the surrounding regions.

The Guide to Biodiversity Finance outlines the critical steps for project development, introduces the most commonly used financing instruments, and presents a structured collection of resources, definitions, and case studies. From project identification to implementation and monitoring, the Guide provides seven critical stages of the project development cycle and explains the necessary activities at each stage.

Further refine financing choices

Besides the Guide, local and regional governments can use the accompanying Biodiversity Finance Decision-making Tree to refine their financing choices. Let’s look at a hypothetical scenario. A project aims to develop eco-tourism infrastructure in a national park. This project is identified as having a high tourism potential and also contributes to conservation efforts.

However, the national and local law protecting the environmentally sensitive area is weak; there is limited local financial support, inadequate taxation system, and the project developers cannot access international funding. The decision-tree prompts to assess if the LRG is eligible to apply for a loan. If yes, they could consider a green loan provided by private investors or commercial banks or explore Public-Private Partnerships (PPPs) and equity instruments.

The Decision-making Tree is a simplified tool and operates by considering the specific characteristics, conditions, and constraints of a project and then directing the user toward potential financial solutions that are feasible and effective for their needs.

All sectors step up for nature

What’s next? Once the financial solution has been identified, the Guide provides a Catalogue of funding and technical assistance opportunities to help LRGs navigate the biodiversity-relevant funding architecture. The Catalogue focuses on the regions of East Asia, Latin America and Africa, but many initiatives and funds listed have a global scope.

Overall, the successful selection and implementation of these financial instruments is a collective effort to ensure that investments are effectively mobilised to conserve biodiversity. As the world rushes towards urbanisation, ensuring that a solid commitment to the conservation and restoration of nature accompanies this growth is necessary, and that depends on all sectors to step up for nature.