There has be an increase in the number of animal species entering the endangered list. Last year the last male northern white rhinoceros went extinct, and now another species of the same animal family group – the black rhino – is on the verge of extinction.
Conservation of this animal species would however be very costly. It would require a lot of manpower and infrastructure to help protect this animal from poachers. Therefore, conservationists came up with an innovative way to raise funds for the protection of this animal. They decided to make use of the financial market and have started marketing a five-year rhino bond to raise the money necessary for implementing the measures to enable population growth of this species. This is the first time that the financial market has been utilised for conservation purposes and the rhino bond is the first financial instrument dedicated to protecting an animal species.
The rhino number game
The rhino population has been dwindling. Black rhino numbers have fallen from 65,000 in the 1970s to about 5,500 presently, which means that this animal species is now extremely vulnerable to extinction. This can be due to loss of territory because of deforestation and expansion of human activities. Human beings are encroaching into land that was meant for wild animals, resulting in difficulties for these animals to meet their daily needs. Another significant factor that is affecting the rhino population is illegal poaching. Poachers want the horn of the rhino as it is extremely expensive in the market. The uses of the horn of the rhino are vast. It has been used for décor purposes, jewellery, and also as an ingredient in alternative medicines, to name a few. The high price of this horn has incentivised poachers to target this magnificent animal, resulting in the declining rate of its population.
Protection of this animal is quite costly. It would entail high infrastructure cost, like fences and gated communities, armed guards, equipment for monitoring and medical treatment etc. These costs cannot be covered by measly donations, and therefore funds must be raised to stop the extinction of this animal species. It was to solve this problem, that Oliver Withers and his team at the Zoological society came up with an innovative way to raise the funds to protect these animals – rhino bonds.
Functioning of the rhino bond
The rhino impact bond is a five-year bond and the first form of a financial instrument aimed at species conservation. It is an outcome payment model which means that investors would receive financial returns only if the objective of the bond was attained – in this case increasing the population growth rate of the rhinos.
Investors in the $50 million bond will pay upfront the cost of buying the bond and will be paid back their capital and a coupon if the African black rhino population in five sites across Kenya and South Africa increases over five years. Once the five-year term is completed, an independent evaluator would investigate if the objective of the bond was achieved. The performance of the bond relative to its target determines the investor’s return. Thus, the yield on the bond depends on the population growth of the rhino; increased growth can result in higher yields.
However, this bond is assumed to be a loss-incurring one and expects investors to be willing to invest without the assumption of profitable returns. This bond will be transferring the risk of conservation from donors to investors by linking conservation performance to financial performance. It is a 5-year black rhino management strategy that has been designed to deliver an increase in the rhino population growth. The strategy will focus on habitat and biological management, counter poaching activities as well as monitoring protocols. This bond will give the opportunity to expand the limits of conservation funding and lower individual risk towards biodiversity upkeep. It would also allow conservation organisations and charities to be able to protect greater amounts of wildlife. This initiative is currently being supported by banks like Credit Suisse and UBS. Conservationists are hoping that it will set the precedent for greater interactions between the financial market and conservation of other animal species.
Pessimistic outlook towards rhino bonds
As novel as this approach to raise funds for animal conservation is, one cannot help but have doubts. First comes the question of how the funding would be hedged. If this bond is intended to be a performance bond, how would one ensure that work gets done? A suggestion would be that if this bond is performance incentive oriented it would be better to pay out investors if rhino populations fall. That way conservationists would be given more if they were successful. Similarly, investors should be paid less if the rhino populations rise. The current method of the bond payments does not make a lot of sense, where with rise in populations more money is paid out to investors in addition to more rhinos but if the bonds fail the investor loses out on his funds as well as on the increase in the population of the species.
This current methodology of the bond repayment is not clear in terms of the source of repayment. Pessimists can question the validity of this scheme and declare the rhino bonds to be like that of a Ponzi scheme, wherein the “conservationists” would spend all their money on conservation measures and armed guards. They would then sell more bonds under the intention of saving more rhinos and use the proceeds from these bonds to pay the initial investors.
The road ahead
Personally, I feel that this rhino bond can be a way to generate funds for the protection of the rhinos; however, more clarity is needed in terms of the source of repayment. Nevertheless, these rhino bonds will indeed make investments on rhino conservation more streamlined and reduce random investments on supposedly charitable organisations where the money would never reach the rhino conservation fund. With the rhino impact bonds, investors will be able to observe the avenues through which their money is spent which would bring in greater rigour and accountability to conservation spending. Conservation overheads can be quite difficult to calculate however, but with this model it would be easy to see where funds are spent.
Another issue with this rhino impact bond is that there is too much importance being given to facilitating the increase in the population of rhinos. Since growth of rhinos would result in greater returns, it is possible that people might end up tweaking the balance of nature to create environments suitable for rhinos to thrive, at the cost of other animal species. This would then create unexpected issues among ecosystems and put pressure on other animal species. But at the end of the day, it would take a very long time to increase the population of the rhino to such an extent that we would incur ecosystem damages.
The proposed rhino bond is a novel way of animal conservation. It can be a helpful method to advance large funds in order to help conserve this animal species. Using the financial market would be a way to generate awareness regarding the declining population of this species and hopefully tap the altruistic side of the investors by ways of investment. While this rhino bond does have some obvious challenges in terms of how bond repayments would work and who would be the source of repayment for investors, it is still a unique way of raising funds. Eventually with time these challenges could be smoothened out and there would be greater clarity with respect to how these rhino bonds work. But for now, it is imperative to focus on saving the rhinos and hope that this rhino impact bond will be successful in its objective of increasing the population growth of this species and maybe the idea of issuing bonds for animal conservation can be extended to other animal groups.
Picture Courtesy- Time Magazine