This article, written by Elizabeth Stuart, earlier appeared on Morningstar.co.uk. Elizabeth is an associate analyst in sustainability research for Morningstar Europe.
Impact investing is a great way for investors to express their world views and put their money where their mouth is.
The space continues to increase in its size and complexity, with more products being launched to meet growing demand from investors. In particular, more thematic bonds are being issued, which allow investors to make a positive difference in the world.
A recent launch, which may also appeal to young investors, is the Rhino Impact Bond (RIB). Oliver Withers, head of conservation financial and enterprise at the Zoological Society of London, says the bond will be available only to institutional investors initially but there are plans to open it to retail investors if the model proves successful.
The Rhino Bond will direct capital to urgent conservation initiatives in Africa where the wild population of black rhinos has fallen from 65,000 in 1970 to just 5,500 today due to poaching and habitat loss.
Leveraging the expertise of groups such as Conservation Alpha and the IUCN African Rhino Specialist Group, the RIB aims to increase the population growth rate of rhinos across five sites in Kenya and South Africa by 65% over five years.
The RIB is the world’s first pay-for-results financial instrument for species conservation and has been in development for more than three years. Set to launch in the first quarter of 2020, the RIB follows the so-called "outcome payer model" whereby initial investors are reimbursed with an expected 3% interest by donors upon the success of the project.
The outcome payer model means that the donors - mostly wealthy individuals and other interested parties - are protected from risk should the project fail as they will only contribute relative to the project’s success in the event the ultimate target isn’t reached. All the risk in this instance, is absorbed by the initial investors.
The innovation here seems to be a philosophical one.
The RIB aims to leverage the discipline of the financial markets in order to better facilitate effective conservation. Rather than focusing on outputs such as the number of rangers trained or fences built, the project is outcome focused i.e. how many rhinos do we have now? This distinction may sound simple, but a single and salient target allows for the quick and efficient reallocation of capital to material issues.
There are 130 sites across Africa that contain rhinos, 18 of these contain 80% of the population so it stands to reason that these sites should receive greater resource. This leads to the concept at the heart of the bond: Biodiversity Return on Investment Metric (BRIM), also known as Species Threat Abatement and Recovery (STAR) which measures the contribution that investments can make to reducing species extinction risk. The project is looking only at those sites which have a potential for high population growth (net of poaching) thus encouraging both management and cost efficiency.
The project will allocate capital to five sites with the highest potential for BRIM. These five sites oversee 12% of the total rhino population. The sites will have total autonomy of management and using bespoke monitoring systems ZSL will track the progress of the project. The project will also be subject to third party verification in order to reduce the potential for corruption or misuse of funds.
Bonds such as this exemplify the possibilities afforded by innovation and collaboration in addressing our ailing planet.
The bond, however, carries a lot on its shoulders as myths surrounding impact and performance still prevail. Such an ambitious target may prove to be its downfall in a pay-for-results model. If there is something to be learned from the RIB, it is that investors would be wise to seek out the knowledge and experience held within non-governmental organisations and the academic communities, especially in the case of impact investing.
