Rewarding Nature Performance in Pakistan

In the global public eye, Pakistan is rarely associated with pristine nature. With the exception of the high mountain areas, it is usually seen as arid and featureless - a land where environment is given short shrift. It is therefore surprising to see Pakistan emerge as a leading champion of Nature Performance Bonds – an innovative financial instrument that rewards countries that take strong action to protect and rehabilitate natural ecosystems by improving the conditions under which they are able to mobilise capital for their development priorities.

Nature Performance Bonds (NPBs) - developed by Finance for Biodiversity (F4B) - are an example of a new class of performance bonds often called ‘KPI’ bonds. In exchange for certified performance against agreed indicators, funding is released into the target economy, to be used in line with national priorities. Two features of NPBs are of note: first, that the financial benefit to the indebted country follows the achievement of the agreed targets (or agreed milestones towards those targets); promises and formal undertakings are insufficient. And second, unlike earlier ‘debt for nature swaps’, the funding raised through the bond is not earmarked for the environment but is available for allocation through the country’s normal budget process.

While several developing countries are toying with the idea of Nature Performance Bonds, Pakistan seized the idea from the start and has moved resolutely ahead. Indeed, on World Environment Day in June, Pakistan signed a declaration - in the presence of the Prime Minister Imran Khan - with three of its sovereign creditors (Canada, Germany and the UK) to launch a dialogue with a view to issuing a Nature Performance Bond in the near future. This is the culmination of a complex process undertaken by F4B, now in partnership with UNDP Pakistan. It has involved Pakistan’s environment and financial authorities, a handful of Pakistan’s sovereign creditors, experts in benchmarking and the design of monitoring, reporting and verification (MRV) schemes, UNDP’s Finance Sector Hub, third party organisations in Pakistan such as WWF and IUCN, and a range of technical experts.

Pakistan has put forward a set of performance indicators built around two of the leading elements of its Green and Clean Pakistan programme: the ambitious tree-planting programme known as the Ten Billion Tree Tsunami; and ecological rehabilitation in degraded parts of newly-declared National Parks. The NPB would reward the speeding up or extension of these government programmes, and would rest on a set of secondary development indicators such as rural employment, community participation, capacity building and others. Thus, the NPB would build on established government priorities, avoiding the conditionality too often imposed on developing countries in exchange for financial support.

With the signature of the declaration, a dialogue will begin with those creditor countries, and with others that have showed an interest in joining the pilot initiative. This dialogue will focus on refining the performance indicators, agreeing on the benchmarks against which this performance will be measured, and putting in place a robust MRV system, ideally based on the analysis of satellite imagery. Then comes the design of the financial instrument itself. With the focus on sovereign (country to country) debt, the agreements required involve only the two participating countries, and complications of normal debt renegotiation are avoided if the focus is on new debt issuance.

While all of these steps can generate obstacles, a serious hurdle has been overcome with the signing of the declaration on World Environment Day. With technical input from F4B and UNDP, the serious work of designing the bond can now begin in earnest. Pakistan may well be the first to issue a Nature-based Performance Bond and open the door for many similar actions in the future.