We're going to be talking today about Financial Innovation for Conservation and

Development.

And the challenge with these innovations is,

is that to solve the actual problems that we're facing with in conservation and

development will take trillions of dollars of investment.

This is substantially greater than the amount of money

around the world that's actually put for either development or conservation.

If we look at the total extent of funding for

conservation generally from year to year is about 10% of what we actually need.

The second problem is that we spent billions of dollars

to stem the loss of biodiversity to solve major challenges.

But despite these investments,

we are facing one of the biggest extinction crises we have known.

We continue to suffer from substantial problems in terms of development.

And the third is that there are few impact evaluations of whether these interventions

are actually successful.

And whether the interventions that were responsible for

the increases in the well-being of people around the world

were actually caused by the actions taken by development agencies.

When conservation itself started, private economic interest had to be thwarted,

not encouraged.

Profit, however, can be a sustainability metric of success.

And we can look at different elements,

we can look at different examples to see this, and one example, I think, is trash.

The one thing we realize is that most people are aware

that there's a desire to actually to recycle.

That it's good to recycle, that it'll actually help the planet.

It's good not to use plastic bags.

But with evolutionary biology, altruism is rare.

Moral obligation by itself is insufficient to actually change people's behaviors.

So what other tools do we have available to us?

One example is given to us by two people.

A guy named Patrick FitzGerald and

Ron Gonen who created a company called Recyclebank.

And they created it because New York City was planning

on actually canceling its recycling program, and they were dismayed.

And this was because not enough people were actually recycling to make

the program worthwhile.

And, in fact, the program itself was seen to lose money.

What Recyclebank and what the innovators realized

was that there was an inefficiency in the market and

inefficiency about how people were thinking about the market.

People were comparing the return and evaluating the recycling programs

based on the fact that the recycling programs themselves didn't

return sufficient revenue back to the city, they were costly.

But they weren't thinking about something else, a more important question,

which is how much was it costing the city to actually fill up garbage trucks and

send them out to the middle of Pennsylvania and then pay a tip fee.

These costs weren't calculated within the cost of recycling,

within the value that they were doing.

Recyclebank came up with an idea that was just fundamentally brilliant.

And it involved a behavioral innovation, a technological innovation, and

a financial innovation.

They understood that there was a market failure.

And what they decided to do was three things.

The technological innovation was that they had RFID chips impregnated in the garbage

cans, which were actually donated to the company for this experiment.

That then allowed you to identify each recycling bin to the homeowner.

They also had the arm of the truck, of the garbage truck itself, that would read

that RFID chip to know who the homeowner was, and then weigh the recycling bin.

When the homeowner actually was recycling more, they got paid more.

And in fact, this came through the financial innovation.

They actually paid people to recycle.

The third piece was that they also gave the homeowners, they didn't pay them in

cash, they used credit cards and gift cards to places like Amazon.

The elements that were involved in this were brilliant.

Because they recognized that they could actually save the city of New York money

from the tip fees.

They could make money off of the recycling, and

they actually made money because they were getting a discount on the gift cards that

they were giving to the homeowners themselves.

The recycling rates for some cities actually increased from 7% or

10% to 90% overall, and this was because it was financial innovation

that actually understood human behavior.

As we are thinking about how do we use financial tools

we can think of them in two ways.

The first is how do we actually increase funding for conservation and

development to solve that first problem that we saw.

The second is what are the tools that we have available to us to change behavior,

to actually solve problems overall.

So not just to increase funding but to use finance as a tool of behavior change,

to use finance as a tool of doing good.

So let's talk about the first example, increasing funding.

We're going to start first from talking about what large institutions can do

to tools and mechanisms to increase funding for

individuals and look at the entire spectrum.

One of the most powerful tools that are available are something called

Advanced Market Commitments.

And the tools we'll be talking about fall within a class of pay for performance.

We're not going to actually pay people until we see the outcomes that we have.

That solves the second problem that we're talking about,

how do you ensure that there's actually impact.

That you have a causality between the actions that you're taking and

the changes you want to see.

And one of the biggest challenges is the problem of orphan diseases.

These are what are also called neglected tropical diseases.

Malaria, Chagas, Leishmaniasis, African sleeping sicknesses.

They constitute 1.1 million deaths a year and

over 400 million cases, 3.5 billion people are at risk of these diseases.

Yet despite this, the Central Medicines that treat these diseases are expensive,

no longer produced, highly toxic or ineffective.

Of the 1,500 plus new drugs that were produced between 1979 and

2004, only 21 were specifically developed for tropical disease and Tuberculosis.

So there was a clear market failure in this case.

Even though these diseases constituted over 11% of the global disease burden.

People didn't see a value in terms of what these drugs would develop us.

And so institutions like the Gates Foundation and others decided to say,

how much would it cost science by itself to actually develop these new drugs?

But they realized that even if we provided more money in terms of scientific funding,

that would be insufficient.

And the idea was, because we still needed corporations to help with the testing,

the scaling, commercialization of these drugs, and

the distribution of these drugs around the world.

And they proposed a model that was called Advanced Market Committment.

The basis of advanced market commitments was a premise of a commitment

to pay in advance of a certain quantity of vaccines if they are actually developed.

And in fact what they calculated was this would cost $3 billion for drugs.

What they saw was that actually by having the vaccines for the drugs,

the actual cost of these diseases in terms of lives loss,

in terms of disability, in terms of lack of opportunity, education and

productivity, that it actually costs society.

We're far more than the $3 billion that they would actually incentivize to create.

This is not a prize, it's much more similar to a challenge In the way that it

is trying to create a market.

It is trying to create a community of companies that would try to

actually produce these drugs,

because they saw a commitment of $3 billion per drug by the major donors.

Pay for performance is another mechanism and there's other types within it.

Conditional cash transfers are based in terms of incentivizing individuals,

women to obtain pre-natal and postnatal healthcare and

send their children to school because, again, the class of them not doing so

were far greater to treat than actually the cost of paying the women.

Development and Environmental Impact Bonds, these are payments of achievements

of specific goals where the funding is actually put up by private

financial institutions which would financed the intervention.

And then upon achievement of a goal, whether it is access to clean water for

a community or access to sanitation,

the funder themselves would pay that financial institution.

Who, if they were efficient in providing that goal, could actually make a profit.

The amount of the payment may be actually based on the reduction of the harm or

the problem itself.

In conservation there's been a concept developed by Paul Ferraro, who is formally

a graduate student at Duke University, called Direct Payments for Conservation.

And the scope of direct payments ranged from everything from support for

direct purchase of extracted products from the environment

to performance based payments for biodiversity conservation.

A way to think of it is, looking from year to year for a group of elephants,

or a group, or a particular ecosystem, what would it actually cost

local stakeholders to protect that particular group of species.

What is the financial reward that would incentivize the type of behaviors

that was there.

And the reason was because there was a failure again in the system.

In the early 1990s, there was something proposed called

integrated conservation and development projects.

Where conservation organizations would invest in development

around local communities.

In exchange for conservation actions taken by the communities.

For those local communities, there was no causality between the development actions

taken in terms of improved sanitation or the building of the a bridge or

other types of investments made in the community, and

what they were expected to do in terms of conservation.

They saw them as separate activities.

Direct payments for conservation actually connects the outcome.

How an elephants population does against poachers from year to year.

Or how a forest does in terms of not being degraded,

to the payment directly to those communities.

And it solves again those problems we saw at the beginning of the lectures.

Conservation finance has taken this up to a much larger scale.

And what is important about conservation finance is it is

using tools of the private sector in a much more substantial way.

And there has to be a return.

And some of the more creative ways that people have been using it for instance

have been hedge funds that have actually bought up traditional commercial farms and

turned them into organic farms because they recognized that there's a higher

profit margin in terms of doing so.

Helping companies become far more buying companies.

Actually making them farm more sustainable in terms of their practices and there for

more profitable in terms of their practices.

So using finance as a tool of conservation.

Other models have included using regulatory tools

such as carbon credits and nutrient credits.

One example as actually combined is in the case of working with

combining development and conservation.

The example is LifeStraw.

LifeStraw set up a system where they actually made a distribution, LifeStraw

was a product of Vestergaard Frandsen, and it provided clean water to families.

What they recognized is that families that were currently getting clean water without

access to a filtration system were boiling water.

And that meant they were cutting down forest burning the wood

to boil the water to get clean water.

What Vestergaard Frandsen did was distribute 900,000 family water filters

for 900,000 different families, individual family units within east Africa.

And what they demonstrated through and intense monitoring and assessment process

was how much those families were now no longer taking wood out of the forest.

And they got carbon credits based on the value of avoided deforestation.

To fund the free distribution to those families

of those water filtration systems.

Another example is a great example from my home city, which is Washington D.C.

And in Washington, a city of about five million people,

every time we have heavy rains, our water systems,

the drainage that go into the streets which are combined with the sewage,

go directly into the Potomac, and from the Potomac into the Chesapeake Bay.

This happens every time rain exceeds more than a minimal amount.

The city of Washington actually got sued, and is forced to build

an extensive tunnel underneath the Potomac at the cost of $2.6 billion and

in fact they've used one of the biggest machineries actually used in construction.

It's called the ladybird tunnel boring machine, which is the equivalent of

one and a quarter football fields in size, to dig out this tunnel.

It weighs the equivalent of about 7.5 Boeing 747's.

What they thought that was actually an interesting insight, is DC is still 1% of

the nutrient effluents into, into the Chesapeake bay, and in fact most of

the nutrients are coming out of farming, and farming practices that are upstream.

And they suggested, rather than building steel and

concrete if we had actually set up a nutrient credit system

in the Washington D.C. area, they would've paid farmers to reduce,

take practices that were more sustainable for that watershed.

That would have a bigger impact than actually preventing sewage from going into

the Potomac that would've had a greater effect and that would have been far most

cost efficient for the taxpayers in Washington D.C. On the individual level,

there are new tools that are available to us to help raise money.

Crowdfunding is one example.

And crowdfunding ranges, depending on the laws and

the systems and platforms used, from donation to equity.

A crowdfunding donation is where someone merely provides a grant

to help support something you're doing.

A reward requires that you do something in return for

the investment that people make.

There are peer-to-peer lending models, such as Kiva, and

then there's actually equity investments.

And the states are developing new rules for these types of investments.

But perhaps one of the things that people have not realized about crowdfunding is

that it's a very effective market test, of whether there is demand for

your product that can actually open up new investment lines.

There's a great example of using drones to stop elephant and rhino poaching.

Where people benefit through a grant.

That is actually provided.

The development of an electric bike, which raised far more money than they had

originally asked for, I think they exceeded by a few thousand percent.

The people who actually invested in the bike got a bike in return.

Or got some other product in return.

Peer-to-peer lending allows you to actually get your money back.

But you're making a risky investment to support other individuals' social

enterprises.

And in some cases, in places such as Wisconsin,

you can actually invest in new bespoke businesses that

will help produce craft foods and craft liquors.

Another area and tool that can be used are program-related investments.

And these are investments available to foundations and

nonprofit institutions up to a certain percentage of the organization's budget,

where the primary purpose is to actually help the foundation's goals.

But there are investments that could be structured as loans or

as actual investments for returns that they expect to get back

that are different than the traditional grants that they give.

These are all ways of increasing funding for your organization.

But let's talk about how we can use innovative tools for conservation and

development.

One of the things to remember is that cost itself and the cost of

a particular intervention is a design criteria of that intervention.

People living in poverty are frequently priced out of the market for

new products and services.

But if we can think about costs creatively, we can find ways to actually

help people make purchases that improve their well-being in their life.

And a great example of this is laundry detergent.

While those families cannot buy a large container of laundry detergent,

they can buy single-use applications.

Because they're not paying the upfront costs upfront,

their finances don't allow it.

So thinking about costs is an important way to think about design.

And, in fact, many of the design principles that we apply to products and

technology are actually applicable to financial innovations.

This is thinking about the cost, the environment in which the innovation will

work, the education levels of the people that you're working with, the purpose and

the metrics that you'll use to determined the success of what you're trying to do.

How you will administer it, and whether or not the financial innovation will actually

do any harm, and whether it's sustainable and scalable.

And just like any other product,

we want to take these design considerations into use.

Mobile Money is an incredible new tool that has allowed for

new communities to get access to finances.

And, in fact, there are two great examples where it was used.

In Afghanistan, Mobile Money was used as a way of helping paying soldiers.

And, in fact, when they realized when the payments weren't going through there,

the superior officers, all the soldiers actually got 20% to 30%

increases in their salaries because some of that salary was being withheld.

In Haiti after the earthquake, Mobile Money allowed us to leapfrog the fact

that the entire financial institutions had broken down.

And so allowing people to use their mobile phones to process payments,

much like we do today with Apple Pay or Square, provided an entire way to

allow the unbanked to be banked and have access to those systems.

Africa is one of the leaders in Mobile Money usage worldwide, and

52% of global Mobile Money happens in Africa.

And among Africa, Kenya remains really the king, and

93% of Kenyans use Mobile Money on a regular basis through their mobile phones.

In terms of the actual value, the market was expected to reach about 500 billion

in 2014, and approach almost 5 trillion by 2019.

So this has been a platform that has actually directly expanded with

the expansion of mobiles phones the number of people who can get access to finance.

Other tools are tools of microfinance and microcredits.

These are small loans made to people at the bottom of the pyramid, and

to give them access,

who typically lack collateral, lack steady employment or a credit history.

But there are ways have actually opening up and getting individuals, women and

communities out of the cycles of poverty.

Although microfinance has scaled-up to reach the millions and and

it was originally pioneered by Grameen Bank,

it appears that access to capital alone is not enough to get people out of poverty.

But, in fact,

that borrowers need help to make sure that their loans actually lead to prosperity.

And that is part of the design process that we need to think about

when employing these tools.

Microinsurance is another type of microfinance.

And in particular, it has been used in agriculture,

because agriculture itself is a risky practice and perhaps becoming riskier.

Nearly 80% of farmers in Ethiopia cited harvest failure caused by drought and

other natural hazards as the event that gives them the most concern and

keeps them up at night.

And, in fact, if farmers didn't have to worry about weather risk,

profits in general will be 30% higher.

The result and the solution to this has been something called weather insurance,

it's actually based on rainfall.

There is no need to look at an individual farmer and determine whether or

not they deserve a payout, it happens automatically.

There is low fraud because it's a common payment.

If you have the insurance and

there isn't sufficient rain in an area, you actually get paid.

It can be combined with payments,

and it deal withs one of the most important challenges

that we actually see with microinsurance, which has been the administration costs.

There are other challenges as well.

It's really difficult to think ahead in the developing world

about a negative event when you live in a day-by-day situation.

And there are other use cases that we can actually use for this.

Crop insurance, we've spoken about, but livestock and

cattle insurance, insurance for theft and fire, health insurance, life insurance,

disability insurance, insurance against natural disasters.

And in a time when we are more worried about variability of climate and

variability due to environmental degradation, having this type of insurance

can build resilience among those who are, again, at the bottom of the pyramid.

Other innovations much like the example that we had of

the washing liquid can be applied to other services as well.

So shifting from buying a large container of laundry detergent to buying

a single use can be perhaps applied to how we get energy,

and there's a great example of a company called Gram Power that did exactly that.

In the United States and in other developing countries, we don't pay for

the energy lines that come directly to our house.

We actually pay for those lines

through the fees that we pay the power companies that are split up over time.

But in the developing world when we ask people to get solar power,

we're asking for them to pay those heavy infrastructure costs up front.

Gram Power actually leases to individual houses the solar power, and

then allows people to buy them through Pay As You Go card.

So as they actually need more power, they can pay for it incrementally.

And the leasing costs are built into those payments.

And it allows for solar energy and

other types of energy access to become more affordable.

Franchising is another way for us to think about, as another sort of financial

innovation that allows us to actually scale up the impact of our innovations.

And we spoke about Sanergy in other parts of the class.

Sanergy was a model that came out of the slums of Canberra,

and what it did was actually they franchised toilets.

Toilets for franchise to women entrepreneurs who then charge people for

access to clean toilets.

In those settings, people defecate on the streets and

defecate into plastic bags called flying toilets

which spread to disease in close-knit quarters of these urban slums.

Having a clean toilet, charging people for the use of that toilet and

then actually taking the waste to turn into fertilizer and

energy became a model which they were able to spread and

hope to reach 500,000 people across these slums in Africa using a franchise model.

Other forms include microwork.

There are new economies evolving that actually incentivize people

to work on specific products, projects or gigs.

And while this has been a practice for

those who have access to connectivity, in fact, it's been used to reach people in

the refugee camps to work on specific repetitive tasks.

Samasource is one example of those to try to bridge the global talent pool,

to reach those who have, and to separate work from geography.

Where you are shouldn't be limiting your options in terms of what you can work on.

And, in fact, their impact has been able to transform 26,000 lives.

These are all tools but they're important tools because there is

an incredible degree of creativity that we can use to solve global problems and

we'll talk about some of those more later.

Thank you.

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Financial Innovations for Conservation and Development

Innovation and Design for Global Grand Challenges

Meet the Instructors