Financing Business of Sustainable “Green” Enterprises

a) Business Opportunities

The main business opportunities related to biodiversity are found in sustainable agriculture, sustainable forest production (timber), non-forest products, and bioprospecting. The worldwide demand for organic agricultural products is estimated to be in excess of US$13 billion a year. In the United States the market is expected to grow from the current US$3.5 billion to US$10 billion by 2001 (NC-IUCN and TransGlobal, 1998).

Certification for products from sustainably managed forests is increasing in both the industrialized and the developing countries. The International Tropical Timber Organization (ITTO) is promoting green labeling aggressively. The greatest drawback, especially for small producers, has until now been the high cost of certification but low expected mark-up in the price of the products. Currently, less than about 2% of internationally traded timber from Latin America is certified (Simula, 1999).

Figure 5 indicates the size of world markets for various non-wood forest products (FAO, 1997). In Brasil their production grew at an annual rate of 9% in the 1980s (Richardson and Associates, 1995). The markets for organic foods and natural medicinal products are expected to increase strongly. The size of markets for organic foods in Europe is US$6.0 billion, in Japan US$4.0 billion, and in the U.S.A. US$3.5 billion. Figure 6 shows the current market size of natural therapeutic products in these three markets (NC-IUCN and TransGlobal, 1998). With the overexploitation of the world’s oceans, aquaculture is gaining ground. This activity, however, is controversial from the environmental point of view, possibly resulting in genetic manipulation and reduced water quality.

b) Difficulties in Commercial Funding

The supply of finances, particularly long-term and risks capital, dedicated to biodiversity-based businesses in Latin America and the Caribbean is relatively scarce or prohibitively expensive. This is because within this emerging sector, project development costs are high and biodiversity-based enterprises face non-typical problems of creditworthiness and risk. Moreover, the sector has only recently attracted more serious attention from entrepreneurs, businessmen, and the financial community, while market knowledge and experience are still limited and markets are relatively unproven or underdeveloped. Often there are economic policy and political constraints as well, such as perverse subsidies benefiting larger enterprises (NC-IUCN and TransGlobal, 1998).

Salazar (1998) has identified bankers’ perceptions on biodiversity and clean technology investments in Peru. Financiers tend to prefer “brown” environmental or clean technology (water sanitation and air-pollution-control projects, etc.) and have a hard time understanding “green” investments in biodiversity conservation. The main reasons are that clean-technology projects have more easily quantifiable benefits and mechanisms for the beneficiaries to pay for the environmental services provided. It is hard to find payers for services and goods provided by biodiversity conservation.

Profitability is easier to measure for clean technology than for biodiversity projects. The former are also more visible, located in population centers and affecting directly many of the 75% of the people of Latin America who live in cities. Biological conservation programs take place typically in remote areas; thus they are less visible and not politically attractive. The clean-technology projects tend to be big, and thus often have low administrative costs. Their technology is standardized and can be applied internationally, across borders. Biodiversity projects are typically small and site-specific. It is simple to establish guarantees for clean-technology investments, which usually incorporate infrastructure with market value. Natural ecosystems do not normally have value in the market. Property rights are well defined for clean-technology investments, while those for biodiversity are still evolving and not enforced effectively. This results in limitations on the use of the property as collateral for financing. The longer gestation period for the biodiversity programs increases risk. The opportunity cost is high, and thus financiers are attracted to other types of environmental projects (Salazar, 1998).

Despite the difficulties, new ventures with a focus on biodiversity business opportunities are being established in the region. These will address a critical demand for risk capital. Technology transfer and biotechnology funds would be welcome future additions. An example is the Colombian government’s Industrial Investment Bank, which has established a small venture-capital fund for biotechnology investments (NC-IUCN and Trans-Global, 1998). Section 5 below identifies environmental enterprise funds as potentially important sources of financing.

c) The GEF Small and Medium Scale Enterprise Program

The Small and Medium Scale Enterprise (SME) Program started with US$4.3 million administered by the International Finance Corporation (IFC) to stimulate greater involvement of private enterprises in addressing GEF’s biodiversity and greenhouse-gas-mitigation objectives through credit. The program has financed renewable energy, energy efficiency, sustainable forestry and agriculture, and ecotourism activities.

The GEF approved a US$16.5 million replenishment and expansion of the SME program in 1997. Six experienced SME institutions (banks, venture capital companies, or NGOs) selected by the IFC to act as intermediaries are receiving low-interest loans of US$500,000 to US$1 million from the program. The intermediaries in turn will provide debt or equity financing of about US$20,000 to US$200,000 to SMEs for the incremental costs of GEF-eligible projects. The total capitalization of SME projects leveraged by the program may be in the range of US$6 million for its first plan. To encourage the intermediaries to participate in the program, they may be able to retain up to 50% of all capital recovered from the SMEs. The intermediaries and the IFC will monitor and evaluate the financial and global environmental aspects of the program (NC-IUCN and TransGlobal, 1998).

Financial intermediaries participating in the GEF’s SME Program are attracted to it because it offers low-interest loans, credit guarantees, co-financing, and technical assistance; it also reduces their average cost of funds (because the GEF provides risk capital on a grant basis), which increases program viability (NC-IUCN and TransGlobal, 1998).

d)Securitization

Grouping small investment projects is potentially an important means of obtaining capital for biodiversity enterprises. Box 3 offers two differing views of this mechanism.