Chapter II. What is an Environmental Fund, and when is it the right tool for conservation?

Scott Smith, Monitoring and Evaluation Officer, Global Environment Facility

Key Points


Endowment fund: a fund that spends only income from its capital, preserving the capital itself as a permanent asset.

Sinking fund: a fund that disburses its entire principal and investment income over a fixed period of time, usually a relatively long period.

Revolving fund: a fund that receives new income on a regular basis - such as proceeds from special taxes, user fees, etc. - to replenish or augment the original capital.

Environmental Funds (EFs) have been set up in many countries during the past decade as a way to provide long-term financing for biodiversity conservation and other environmental activities. They are typically created in and managed by private organizations, and are capitalized by grants from governments and donor agencies, the proceeds of debt-for-nature swaps, and from taxes and fees specifically designated for conservation. They seek to provide more stable financing for national parks and other protected areas, or grants to private organizations and community groups for projects to expand understanding of conservation and to conserve biodiversity by using resources more sustainably.

A recent evaluation conducted by the Global Environment Facility, Experience with Conservation Trust Funds, found that the most successful EFs were more than just financial mechanisms. They were able to act as independent organizations to influence their environment to build effective, responsive, and focused programs. They were the product of broad consultative processes. They had governance structures that involved people from different sectors, credible and transparent operational procedures, and sound financial management practices. The creation of such a trust fund requires a substantial investment of time and resources, and long-term commitment to building a new institution.

One of the questions often asked about Environmental Funds is whether the advantages of creating a fund outweigh the costs of tying up capital to generate relatively modest amounts of income over a long period of time. However, the choice of approaches depends on what a program is trying to accomplish; it cannot be answered on purely financial grounds.

Key issues to address

Best practices and lessons learned

Environmental Funds are appropriate when the threats to the environment that are being addressed are long-term and require a sustained response over a number of years. EFs are not the solution when the environmental issue in question faces major, urgent threats requiring mobilization of significant amounts of funding in a short time.

Financially, EFs can be structured in three ways. Creating an endowment allows capital to be invested. Only income from those investments is used to finance a fund's activities. Sinking funds disburse their entire principal and investment income over a fixed period of time, usually a relatively long period, e.g., 10 years. Revolving funds provide for the receipt of new resources on a regular basis-such as proceeds of special taxes designated to pay for conservation programs-which can replenish or augment the original capital of the fund and provide a continuing source of money for specific activities. Any particular fund can combine these features as part of its mix of resources. Endowed Environmental Funds can be appropriate for ongoing activities such as basic protected area management costs. Shorter term projects may be better for immediate needs such as infrastructure development. Between these two extremes, sinking funds can provide predictable but medium-term support for activities that eventually conclude, are handed over to organizations whose capacities have increased, or develop other sources of recurrent funding.

An important question to ask when considering the creation of an EF is whether an existing agency can effectively manage the amount of funds and type of activities needed to address the problem. Environmental challenges often require new institutions to provide long- term financial stewardship and to pioneer participative, inclusive approaches to defining priorities and evaluating project proposals. In these cases, the public-private structures typically adopted by EFs can provide advantages, including the ability to time disbursements for effective use.

Another factor to take into account is whether there is a community of organizations able to implement the range of activities needed to achieve the environmental objective being sought. This includes not only organizations to conduct field-level activities, but also supporting institutions to carry out monitoring and data collection, raise awareness and provide environmental education, and offer management training to support local groups. EFs have shown an ability to work flexibly to build capacity in partner organizations. For example, some funds help potential recipient organizations plan their activities better and strengthen internal management skills. They also collaborate with others to improve understanding of threats to the environment, and expand environmental education efforts.

It is also important to ask whether existing operational procedures are appropriate for the kinds of conservation activities needed. Some EFs have been able to break administrative bottlenecks and develop alternatives to bureaucratic procedures that kept money from reaching the field in a timely manner. In several cases, government procurement and accounting systems are not appropriate for managing the types of disbursements typical in remote protected areas-many small expenses for which formal receipts are not available. EFs that function as private institutions offer an opportunity to bring to bear a more businesslike system of financial management and controls, while maintaining transparency and accountability to contributors and other stakeholders.

Where existing agencies already operate in participative and transparent ways, there may not be a need to create a new institution. However, when there is a need for a new kind of institution that will be accountable to its stakeholders and will bring in leaders from various sectors to create open and inclusive mechanisms, an EF can be an effective approach.

The GEF evaluation concluded that two conditions are essential for the success of an Environmental Fund. First, there must be active government support -- not just acquiescence or agreement -- for a mixed, public-private sector mechanism in which the government actively participates but that operates beyond its direct control. The most effective funds enjoy broad- based government support at all levels -- from senior political leaders to regional and local bodies, extending beyond environmental departments to include ministries of finance and planning. Second, there must be a critical mass of people from diverse sectors of society -- NGOs, government, the academic and private sectors, and donor agencies -- who can work together despite what may be different approaches to conservation and sustainable development. A common vision is needed for an EF to realize its many potential advantages. Developing this support and vision may require substantial encouragement through broad consultations and advocacy, often over long periods. When prospects for meeting these two conditions are bleak, an EF is not likely to be a viable approach.

Environmental Funds can provide a steady stream of resources only if their capital is invested prudently and managed well. Accountability to contributors and the public requires rigorous record keeping and regular, independent audits. Optimum performance depends on the fund's ability to have faith in and enforce contracts with project implementers, technical assistance providers, and others. Thus, a successful EF must be set in an environment with well established systems of banking, auditing, and contracting, including appropriate legislation and oversight. When these systems are absent or cannot be depended on, a project approach that includes other kinds of conditions and safeguards would usually be preferable.

Resources for further information

Global Environment Facility (1999a), Experience with Conservation Trust Funds. The report of the GEF evaluation, available in English and Spanish. Also available from the GEF Web site, and select the [Results and Impacts] link.

Global Environment Facility (1999b), "When is Conservation Best Served by a Trust Fund?", GEF Lessons Notes No. 5, January 1999. Available in English, Spanish and French. Also available from the GEF Web site, and select the [Results and Impacts] link. Based on the GEF evaluation, this short (6 pp) article summarizes the main questions to examine when considering creating an Environmental Fund. Contains two checklists: factors important for establishing a trust fund, and factors important for successful trust fund operations.

Mikitin, Kathleen (1995), Issues and Options in the Design of GEF Supported Trust Funds for Biodiversity Conservation. Washington, DC: The World Bank, Environment Department Papers, Biodiversity Series.

A chapter from:
The IPG Handbook on Environmental Funds
A resource book for design and operation of environmental funds

Edited by Ruth A. Norris

Based on Contributions by the
Inter-Agency Planning Group on Environmental Funds - IPG -

January 2000 Version

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