Nature-based Solutions and projects have the potential to provide returns or repayment. They are, however, often unproven, small in scale, hard to replicate, and both challenging and costly to source and design.
As with any emergent market, there is a need for nature-based demonstrators to test and assess the possibility of creating desired environmental outcomes with simultaneous revenue streams that fit the needs of the finance community. Such trialing helps the market development of data sets for KPIs as well as standards.
Government or philanthropic capital can act as a catalyst in providing technical assistance or derisking more mature but still untested projects.
There are attempts by governments to develop the pipeline and crowd in private finance such as the UK Government’s Natural Environment Investment Readiness Fund, or the EIB’s Natural Capital Finance Facility, as well as green banks’ investments in NbS, or acting as first or last buyer of environmental credits to provide market support.
There are also several blended finance structures or public/private finance collaborative ventures such as the Tropical Landscape Finance Facility, Agri3 Fund, Land Degradation Neutrality Fund and the creative use of philanthropic capital in New Forests’ TAFF2 fund.
It would be beneficial to share learnings and build stakeholder collaboration and confidence through national knowledge and networking hubs. There already exist some global examples of knowledge hubs specific to financing conservation projects such as the Coalition for Private Investment in Conservation and the Conservation Finance Alliance.
In addition to providing technical assistance or concessionary capital, there are also other ways to encourage investment in nature-based solutions. For example, ensuring traditional engineering solutions (in infrastructure in particular) incorporate costing for nature-based solutions in addition to grey infrastructure may result in greater uptake. Indeed, there are many changes to policy or regulation at national or regional (State) levels that could serve to support greater ability of the private sector to use nature-based solutions as part of sound business practice.
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RECOMMENDATION IN PRACTICE:
It is aiming to fund a portfolio of 70 nature-positive investment deals, under different financing windows (seed, early venture and venture) and is addressing a current acute gap on the market – a lack of investable project pipeline – by seeding and accelerating smaller investment deals to a more attractive investment size.
An initial $8 million of risk-tolerant concessional financing is provided by the Global Environment Facility (GEF) as an anchor investor. From there the Fund is aiming to attract additional junior and senior equity to the fund of $42M and grow a total of $200 million of investment pipeline made of transformational and scalable investment projects with significant positive outcomes for nature and society.
The project pipeline will be sourced through an open application process and direct sourcing from project developer, and from the CPIC network. The fund will be piloting the use of IUCN’s STAR metric and IUCN Global NbS Standards on the investment portfolio.
Partnerships for Forests: Supporting Growth
Recognising that public funding and government regulations alone will not be sufficient, Partnerships for Forests (P4F) is working to unlock more private finance that protects forests, restores landscapes and transforms food and land-use systems in a way that delivers economic returns for businesses and communities.
So far P4F has mobilized almost £245 million in private investment. This has been leveraged at a rate of £4 private investment to £1 public investment.
One example of a medium-scale investment is Komaza which works to unlock the potential of small-scale farmers to solve Africa’s wood supply crisis. Based in Kenya, Komaza provides farmers with support across the forestry value chain, from seedlings to sawmills. P4F grant finance has helped prepare Komaza for growth. In particular, financial support was used to undertake key strategy planning, research and development, including; Eastern Africa expansion analysis, developing operational management procedures and standard operating practices to ensure consistent, high quality scaling and replication, supporting forestry R&D for smallholder farmers and helping to build scalable technology & data systems.
Komaza closed $28m Series B equity round in July 2020 and are in discussions to secure additional investment to support their growth and address the African wood supply crisis and regenerate degraded land.
At a larger scale, P4F provided grant finance and technical support to Royal Lestari Utama (RLU) to deliver a community partnership programme to help address community engagement and operational risks. RLU works towards the climate smart, wildlife friendly, socially inclusive production of natural rubber in Indonesia and is a joint venture between Barito Pacific Group (Indonesia) and Michelin Group (France).
In 2018, RLU successfully secured a $95m Sustainability Bond, the first in Asia, from the Tropical Landscapes Finance Facility (TLFF). Since then additional capital injections have been made by the partners to expand operations. P4F’s risk mitigation combined with first loss financing from USAid were critical in delivering the successful bond issuance.
AGRI3 Fund: Loans for Sustainable Farming
The AGRI3 Fund aims to mobilise $1 billion of financing by providing credit enhancement tools and technical assistance to enable a transition to more sustainable practices in agricultural value chains and avert deforestation. The Fund was born out of a partnership between UN Environment and Rabobank, who came together in 2017. The partnership has since expanded to include the Dutch development bank (FMO) and IDH The Sustainable Trade Initiative.
The Fund provides guarantees to commercial banks and other financial institutions, and subordinated loans to customers of these institutions, known as ‘partner-banks’, to mobilise financing by de-risking and catalysing transactions that actively prevent deforestation; stimulate reforestation; contribute to efficient sustainable agricultural production; and improve rural livelihoods.
A Technical Assistance facility has also been established to accelerate the development of investable opportunities and maximise their impacts.