Financing biodiversity and nature amidst debt distress in Sri Lanka

This week’s 16th Conference of the Parties (CoP) to the Convention on Biological Diversity is crucial for global ambitions on nature conservation. Looking to advance progress towards the Kunming-Montreal Global Biodiversity Framework (GBF) goals and targets adopted by almost 200 countries (including Sri Lanka) at the last CoP in 2022, all attention this year is on the 700 billion dollar question, “So where will the money come from?” $ 700 billion is the annual biodiversity finance gap, identified in the GBF and analysed in detail by The Nature Conservancy. Recognising the urgent need to fill this gap, Target 19 of the GBF commits to “mobilise $ 200 billion per year for biodiversity from all sources”. As Conservation International’s Chief Strategy Officer remarked ahead of the summit in Cali, Colombia, “...negotiators cannot leave Cali without deciding where some of that funding will originate, when it will be delivered, and what groups will receive it”. 

Amidst Sri Lanka’s acute fiscal constraints alongside rising risks to nature and biodiversity, the outcome of this global conversation will certainly matter. But what we do here at home may matter even more – not just for biodiversity conservation, but also for the wider state of the economy, growth, and people’s basic wellbeing and livelihoods.

Sri Lanka and biodiversity financing

Sri Lanka has been a contracting party to the Convention on Biological Diversity since 1994, and in 2022 we adopted the GBF. So, we are also committed to the GBF targets, including reversing nature loss and conserving 30% of the world’s land and sea by 2030. The GBF calls for a whole-of-economy approach that involves shifting to new ways of producing, consuming and investing. In August 2024, the Sri Lankan Government launched a special ‘30x30’ program to draw renewed attention to the agenda.

Estimates for Sri Lanka by UNDP back in 2018 (based on work by Vidanage, et al.) showed that the financing to achieve biodiversity targets between 2016 and 2022 was already short by US$ 190 million, on top of the resources allocated by the government budget between 2018 and 2024. These were pre-COVID and pre-crisis numbers. With the sharp fiscal cuts since then, it is clear that the financing pressures have greatly intensified. There are no new official figures on the financing gap, or to what extent the previous figures are relevant today. 

The looming threats require us to accelerate our efforts. Biodiversity is in decline, with economy-wide impacts on ecosystems, livelihoods, and human health, that we haven’t even begun to comprehend yet. It is estimated that one-fourth of our bird species, half of our freshwater fish, over half of our mammals, two-fifths of our reptiles, and two-thirds of our amphibians are under threat. Among keystone species, we have lost over 700 elephants in under two years. Between 2001 and 2023, the country lost 222,000 hectares of tree cover. 

These issues matter not only from a pure conservation perspective, but also from a socio-economic one. The dependence of the Sri Lankan economy, key export sectors, and rural livelihoods on biodiversity, as well as the critical role that natural ecosystems play in securing clean and regular water supplies, pollination, disaster risk reduction, climate adaptation and other key services, is poorly appreciated by mainstream stakeholders in economics and finance. Moreover, there are lucrative new markets and return-generating investment opportunities that are emerging in relation to sustainable supply chains and nature-positive business. As yet, we have barely started to tap into these valuable economic opportunities.

Improving understanding, reorienting priorities 

In recent years Sri Lanka has taken some steps that improve policy conditions for financing nature. The Central Bank’s sustainable finance roadmap and green finance taxonomy are now well-anchored in the financial sector. A sovereign green bond framework is being finalised. And multi-stakeholder discussions around revising targets contained in the National Biodiversity Strategic Action Plan (NBSAP) relating to financing and private sector involvement, disclosure and reporting have been active. 

Yet, CSF’s work in this space – engaging with policymakers, financial institutions, conservation organisations, corporates, and environmental professionals – has shown that the understanding around biodiversity financing mechanisms is still nascent. 

At the policy level, conversations on financing of nature descend into narrowly talking about financing of climate change mitigation. There is a tendency for local stakeholders to conflate climate finance and biodiversity finance – although of course linked, the two are quite distinct. A small sub-set of climate finance – those relating to ‘natural climate solutions’ or ‘ecosystem-based’ mitigation and adaptation approaches – goes to biodiversity. But the rest is overwhelmingly focused on energy and transport sectors, not on agriculture, forestry, and other land use (AFOLU) and nature-based solutions. Indicative of this conflation is that at a World Bank biodiversity finance forum in April, the then State Minister focussed the majority of his comments not on biodiversity and nature conservation, but on the government’s plans for renewable energy. 

At the financial institutional level, our work has shown that bankers have a narrow understanding of green finance - primarily focussing on lending to clean energy projects. Although biodiversity has been emerging as an asset class over recent years, it is only just beginning to be incorporated into the credit lines and investment portfolios of our financial institutions.

At the level of conservationists and ecologists, there is often either a sharp distrust of innovative financing instruments, or a loose embrace of all and any concepts - from credits to bonds. Most conservation organisations are yet to fully embrace the important economic and financial opportunities that exist to not just support biodiversity conservation, but at the same time strengthen the economy.

Budgeting processes in Protected Areas (PAs) remain underdeveloped, making estimates of conservation financing needs difficult. CSF’s work in the Vidaththalvitu Nature Reserve (in partnership with Blue Resources Trust) revealed that PA management plans and financing plans are not fully-aligned, that there is under-estimation of costs and cost-bearers. We also observed substantial capability gaps in modern conservation finance planning among conservation mandate holders in government. 

Looking at financing mechanisms critically

Sri Lanka needs to become much more open to, and informed about, the new sources and mechanisms that are available for biodiversity financing. These range from environment fees and levies, biodiversity credits and blended finance mechanisms, to blue bonds and nature-themed insurance. All offer opportunities to better finance conservation and strengthen our natural ecosystems (which in turn improves our economy), as well as to kick-start new and sustainable sources of income and livelihoods. As part of a much-needed shift of our post-crisis economic recovery to a more nature-positive path, these biodiversity financing mechanisms are important allies. 

Over the last year, CSF has been guiding stakeholders in this space on the options that exist, how to think about their relevance and practical application, and what cautionary notes to look out for. While nature-linked sovereign debt instruments (like blue bonds and debt-for-nature swaps) are often spoken of, there are many critical considerations for Sri Lanka, as highlighted in a recently published Analytical Note by CSF. Without due recognition of global capital market trends, domestic debt management weaknesses, and the need for inclusive approaches in identifying credible and impactful projects, such sovereign biodiversity finance can only add to the country’s debt troubles. 

Meanwhile, attempts to establish small, site-specific Conservation Trust Funds (CTF) - as some projects have mooted - may be futile. It would be more compelling to global funders to have a marine seascape-wide CTF for Sri Lanka, and structure it as a special purpose vehicle for mobilising a mix of funding (bilateral, multilateral, philanthropic, and commercial) over a longer term. This resonates with the advice shared by the international Conservation Finance Alliance’s CEO David Meyers during a webinar hosted by CSF earlier this year. 

There is also a growing recognition of the role of corporates in financing biodiversity efforts, and in benefiting from the new nature-based markets and investment opportunities that have been emerging over recent year. There is also a responsibility for businesses and enterprises to better factor biodiversity into their business, with an increasing attention on (and requirement for) nature-related disclosures and reporting. At this year’s CoP16, discussions on advancing the Taskforce on Nature-related Financial Disclosures (TNFD) and Science-Based Targets Initiatives (SBTI) will be quite prominent. Sri Lankan corporates would also find IFC’s recent Biodiversity Finance Reference Guide useful in understanding how to practically mobilise investment and identify credible projects.

Readiness of domestic financial institutions

Sri Lankan financial institutions (FIs) provide a vital bridge between international funding sources, and domestic financing needs, across sectors, and at all levels of scale. Whether it is new foreign credit lines that fund nature-positive projects, blue bond issuances that have a window for lending to reef-positive businesses, the domestic financial industry will have a role to play. But still there is some progress needed to shift their thinking and prepare them to take a wider perspective. Two recent studies by CSF reinforce this view. An assessment of ‘Environmental Integration by Sri Lankan Financial Institutions’ showed that very few Sri Lankan lenders systematically assess environmental impacts and risks in granting credit facilities – just 5 of 47 FIs. The research also uncovered that only two FIs quantify/measure environmental and/or climate risks in their portfolio. With many of Sri Lanka’s productive sectors heavily reliant on biodiversity and nature in some way (whether it is export crops like tea, rubber, coconut and spices, fish and seafood products, services like tourism or, indeed, any industry that requires clean and regular water supplies, or protection against floods, soil erosion and tidal surges), FIs that lend to these sectors need to urgently increase their attention to these considerations that have hitherto been ignored. 

Encouragingly, though, another CSF study on green finance maturity among Sri Lankan banks, showed that there is a growing prevalence among them in engaging with environmental organisations. Two-fifths of surveyed banks reported that they ‘Engage with environmental organisations to better understand environmental issues in the country’, and nearly half reported that they ‘Engage with environmental organisations to better understand risks and risk mitigation’. Unfortunately, none of them report that they ‘Engage with environmental organisations to introduce third-party checks and balances on our green finance practices’, and only one-third said that they have formal partnerships or collaborations with environmental organisations, not in a CSR capacity but specifically for informing and advising on green finance-related matters. These all point to a growing need to reorient Sri Lanka’s finance sector to look beyond the narrow field of view of mitigation finance, to adaptation finance - given Sri Lanka’s need to chart a nature-positive economic recovery.

Cautious engagement with international private capital

As for international private investment interest - there are some initial signs. A leading global firm, Anthropocene Fixed Income Institute, wrote to the financial industry in 2022 that, “Sri Lanka exhibits exceptional levels of terrestrial and marine biodiversity whilst having an economy highly dependent on nature and its services (for sectors such as fisheries, agriculture and tourism)”, and that, “there are a number of potential high impact target areas linked to biodiversity that could be considered in a sustainability linked bond and would be attractive for investors looking to participate and access the sustainable debt markets”. They highlighted forest conservation, marine biodiversity protection, and whale habitat protection specifically, as areas of interest. Additionally, over the past two years following the unilateral debt standstill, there have been visits from global banks and financial advisors seeking a mandate from the Government to proceed with sovereign green debt strategies. 

While being open to these, the government as well as civil society conservation stakeholders need to be acutely aware of the nuances of such instruments, including both potential gains and risks. This includes reviewing the ongoing global critiques of sovereign debt (notably, the lack of a multilateral architecture for sovereign debt workout for middle-income countries like Sri Lanka). Domestic policy and institutional coordination gaps - especially between state bodies handling public finance issues and those handling environmental issues - exacerbate the risks. 

Lessons and inspirations from others

As we strengthen Sri Lanka’s ability to access new finance for nature, we can look to other interesting cases. Through our research specifically in the marine finance space, we have unpacked examples ranging from Belize and Seychelles (on blue bond-financed debt-for-nature swaps), to Indonesia and Fiji (on blended finance mechanisms), Mikoko Pamoja and Vanga Blue Forest in Kenya (blue carbon credits), and Palau (small-ticket crowd-funding for marine protected areas). 

All of these point to the need for a) inclusive, multi-stakeholder approaches to designing mechanisms and monitoring impacts; b) the need for domestic stakeholders (government as well as civil society) to be open to including international partners in domestic mechanisms - not just as providers of capital, but also providers of expertise and accountability); c) the need for policy and institutional coordination, overcoming turf wars and risk-aversion; and importantly, d) the need for a pipeline of ‘bankable’ nature projects, that have been carefully vetted not only for their pure conservation objectives, but rooted in local community and livelihood realities. 

Concluding thoughts 

With the current mandate given by the GBF, there is currently a great deal of international interest in funding biodiversity. Amidst a problematic international financial architecture, bright spots for attracting conservation finance do exist – whether it is from global philanthropies, multilateral agencies, or via leveraging new nature-positive markets and investment flows. By the end of August 2023, Fitch put biodiversity-tied bond sales at a record $ 165 billion. About 16% of green, social and sustainability bonds issued in 2023 included biodiversity conservation as a use of proceeds, up from just 5% in 2020. According to Credit Suisse and McKinsey (2016), the total private conservation finance investment potential is estimated at $ 200-400 billion.

The world is constantly looking for success stories, amidst dire news about climate failure in many places. Sri Lanka can offer the world the next success story – a country that emerged from debt distress, to chart a more nature-positive economy that benefits rural communities, MSMEs, larger corporates, consumers, and society as a whole. 

With the right domestic mechanisms, a credible policy commitment, open-mindedness among government and non-government stakeholders, and a nuanced view of the financing options, Sri Lanka can rise up to meet the challenge. While the outcome of the COP16 is uncertain, and the commitment of the developed world to expand financing is yet unknown, Sri Lanka must work on putting its own house in order and get prepared.

(The author is Co-founder/Director of Centre for a Smart Future (CSF), an interdisciplinary public policy think tank. He is also a member of the Governing Board and Monetary Policy Board of the Central Bank of Sri Lanka. One of CSF’s key thematic pillars is ‘Nature, Climate, and the Economy’, advocating for an economic recovery that puts nature as a core consideration. The author acknowledges the valuable inputs received from Lucy Emerton (Environmental Economist), as well as from CSF colleagues. For links to references used in the article, visit www.csf-asia.org/knowledge-insights.)