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Taking Conservation Finance to Scale

November 18, 2016 |


This article was originally posted on McKinsey & Company

Environmental projects are woefully underfunded. Improving their risk-return profiles and structuring larger investment products could unlock private capital to narrow the gap.

“Environmental-conservation projects face a dramatic shortage of funds. Estimates indicate that $300 billion to $400 billion is needed each year to preserve and restore ecosystems but that conservation projects receive just $52 billion, mostly from public and philanthropic sources.1Some asset managers and conservation experts have suggested that private investors could close more than half the gap by profitably funding enterprises or projects in areas such as sustainable food and fiber production, habitat protection, and water quality and conservation.2

This is an attractive prospect—except that conservation can be a slow and risky business. It can take decades to realize, verify, and capitalize on conservation benefits; only the most patient investors will wait that long. Some projects are derived from compelling but unproven concepts that investors are understandably reluctant to back. Many more are based on proven concepts yet still operate in challenging circumstances and generate unreliable revenues. We routinely hear about conservation projects for which the investment risks and expected returns are misaligned: imagine an equity investment for which the level of risk is comparable to venture capital but the returns are closer to those of a stake in a successful, established company.

These conditions make it hard for project developers and fund managers to attract private capital. The good news, though, is that developers and fund managers have techniques at their disposal for creating projects with the size, stability, and potential that mainstream investors seek. Here we look at some problems that discourage private investment in conservation and offer our ideas for how to overcome them…”

Read on at: McKinsey & Company.

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