Environmental Funds

Public and private environmental funds have emerged as a promising instrument for environmental investments. Most of the public funds use grant financing, having been conceptualized as supporting projects that generate primarily public benefits. Only recently have some public funds adopted cost-recovery or outright credit mechanisms, assuming that the investments they finance also generate a high proportion of private goods. In addition, private funds (environmental enterprise funds) have been established to promote business opportunities in environment and natural resources). Of public environmental funds some 17 have been established in Latin America and the Caribbean since 1990, and another 15 have been proposed or are in the process of establishment.

The structures and purposes of environmental funds vary to some extent. In general they are independent foundations, governed usually by mixed public-private-sector boards, that manage capital investment funds, whose proceeds (and often a portion of the principal) support environmental and sustainable development projects. The implementers of these projects may be government agencies, private-sector and nongovernmental organizations, or partnerships of the two. Annex 1 describes the strengths and limitations of environmental funds.

To date, the major capital contribution for public environmental funds has come from national government payments resulting from bilateral debt-reduction agreements, from bilateral and multilateral aid agencies (in particular, the GEF, Canada, Switzerland, the Netherlands, Germany, and the United States), and from debt-for-nature swaps (see section 3, above). However, a few environmental funds have been capitalized by loan resources such as those provided by the IDB. The Bank has financed the establishment of public environmental funds in Brazil and Colombia. After a successful execution of the Brazilian fund, additional IDB financing was approved for a second phase in 1998. The Bank is also considering a loan to support an environmental fund in Argentina.

In addition, there are several environmental enterprise funds that explore increased business opportunities in sustainable natural resources management through equity investments and technical assistance. The investment funds could be efficient ways to channel funding and support for project development to small businesses focused on an innovative market while simultaneously supporting the efforts of nongovernmental entities to graduate from dependence on grant efforts by creating profit-generating activities. Over the past two years the IDB has supported four environmentally oriented venture-capital funds through the Multilateral Investment Fund (MIF).

An interesting case of aiding biodiversity-based businesses is the creation of the Terra Capital Fund, established partially with financing from the GEF, IFC, and MIF. The Fund will invest in sustainable forestry, agriculture, and ecotourism projects in Latin America (NC-IUCN and TransGlobal, 1998). Possible local and international private-sector investors will bring in further resources. Biodiversity conservation is a central theme in the objectives of this Fund. Therefore, the Fund is establishing a biodiversity advisory board for the appropriate project-selection processes (see Annex 2).

Environmental funds established in developed countries can also finance projects in Latin America. An example of these is the tax-exempt Dutch Green Funds, a potentially replicable instrument for mobilizing private financial resources for long-term investment at reduced market rates in environmental projects, including biodiversity. Until recently, financing with these funds was restricted to projects in the Netherlands, but they can now also provide resources to projects in developing countries, including those of Latin America.