Mobilising capital for nature-based solutions

Jessica Angkasa, Programme Manager, Fundraising and Investments at Partnerships for Forests, shares key takeaways from a panel of business and finance experts discussing how to unlock finance for nature.

“There is a lot of inertia in investment, to continue doing the same things that always worked before. It’s time to be brave, un-silo our thinking, stop seeking perfection and start acting towards climate-positive financing,” says Lisa Genasci, Managing Director, Sustainable Finance, ADM Capital.

Nature is key to a 1.5C world. Yet, nature-based solutions (NbS) are dramatically underfunded, receiving less than 3% of total climate finance. To achieve scale, public and philanthropic investors have an urgent role to play: proving out nature-based business models and catalysing private capital at scale.

To discuss how to unlock capital for NbS, over 100 public, private and philanthropic leaders gathered at the 2022 Partnerships for Forests Annual Forum, hosted by Partnerships for Forests (P4F) and the Blended Finance Taskforce (BFT), in London.

As Talia Smith (Co-Director of Knowledge Generation for the Food and Land Use Coalition) said at the outset of the Forum, investing in NbS is the most cost-effective way to capture and store greenhouse gases, crucial to limiting global warming,  to build physical resilience to increasing natural disasters like floods and extreme heat and to support livelihoods and strengthen food security, especially for the most vulnerable. “The science is clear: we cannot achieve climate targets and the UN Sustainable Development Goals without nature. We know ‘how’ to do this, but we need to shift from one-off, small-scale pilots to unlock investment at scale, to go from global to local.”

Shifting from talk to action

An investor panel at the Forum discussed how to shift from talk to action, moderated by Katherine Stodulka, Director of P4F Investments and Fundraising. “Around USD 133 billion a year currently flows into nature-based solutions. That might sound like a lot. But it is only a fraction of what is needed”, Katherine said.  To meet climate change, biodiversity, and land degradation targets that figure will need to increase four-fold.  Katherine added, “This could represent more than half a trillion dollars a year in nature-based investment opportunities by 2050”.

To capture the NbS investment opportunity will require an innovative use of different types of capital, especially to mobilise private finance. The prize is worth it. Over half of the world’s total GDP is dependent on nature and its services. Nature-positive industries can generate hundreds of billions of dollars of new economic opportunities each year while reducing the risks and costs of natural disasters, health crises, food insecurity and climate migration.

Development finance is key

The panel identified that Development Finance Institutions or DFIs will be key to unlocking capital for nature at the scale needed. DFIs are specialised development banks set up to support private sector development in developing countries. They are usually majority-owned by national governments and source their capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise money on international capital markets and provide financing on competitive terms for high impact sectors like nature. 

DFIs can therefore play an outsized role in mobilising capital for NbS, proving out new business models and providing catalytic finance (e.g. longer tenor loans), de-risking instruments (e.g. guarantees) as well as expertise and partnerships to mobilise additional capital, especially from the private sector. Government shareholders should push DFIs to make nature a priority, embedding it in their climate targets and designing financial products to respond to the unique needs of nature-positive businesses (including carbon-linked solutions, mechanisms to aggregate small-scale projects and ways to de-risk untraditional counterparts like smallholder farmers and fishers).

Acting as “promoters of nature”

Nature-based solutions are complex, but also the answer to maintaining temperatures below 1.5°C warming. If DFIs act as “promoters of nature”, then Alex MacGillivray, Former Director at British International Investment (BII), reiterated that we can get investment in NbS to scale by mobilising private capital.

The good news is that investors are keen. Nature is the oldest asset class but is relatively new to investors, so shifting capital requires a holistic approach. “We need to collaborate and develop common structures and models, vocabulary, standards, and frameworks that are understood by all nature and finance actors,” said Floor van Oppen, Fund Manager at FMO, the Dutch DFI. “With blended finance you need to build partnerships. Historically, these partnerships have been with like-minded partners (horizontally) but we need to build vertical partnerships, ranging from local project developers who work with communities, through DFIs and up to commercial and institutional financiers.”

DFIs can also support invaluable intermediaries – connecting larger capital players to communities who would otherwise struggle to access the financial system. “We need capital at fair and reasonable terms that allows for the creation of ecosystems that are inclusive and have positive impact, for people and planet. Financing in nature-positive entrepreneurship means investing in inclusive economic growth for gender equality and underprivileged communities,” stated Helianti Hilman, founder and executive chairperson of Javara Indonesia.

Deploying capital at scale

The panel concluded that coordinated leadership and bold action from DFIs can break down the barriers to investment, thus creating the environment in which institutional and corporate investors can deploy capital with an ever-growing confidence, while grant programs like P4F continue to create and support pipeline. “Across FCDO we do have various tools, like the Partnerships for Forests programme, that play a crucial role in supporting bankable projects for nature-based solutions – but those aren’t sufficient alone. We need to leverage all our instruments – including the UK’s DFI, British International Investment (BII). We understand the urgency, so FCDO is providing BII with concessional capital to take on more risk to invest in nascent climate solutions. Different tools are needed for different solutions,” concluded Anna Gibson, Private Sector Advisor, UK Foreign, Commonwealth & Development Office – FCDO, which is the sole shareholder of BII, the UK’s DFI.

As Christian Del Valle, Co-founder of Colibri Catalyst put it, “The amount of subsidies that industrial (and climate-damaging) agriculture practices receive globally shows that governments and financial institutions know how to incentivise the private sector. And the private sector knows how to invest. We need to work together and find blended structures that can more efficiently allocate resources to deliver on the Paris Accord and the SDGs”.  Only then will we get enough capital into nature and be able to reap the benefits.

*Talia Smith presented the forthcoming work of a report from the Food and Land-Use Coalition (FOLU) on financing NbS which will be launched in September and will present a range of projects, opportunities, and guidance on how different actors can support natural-based solutions.

* The investor panel consisted of key players; Edoardo Cavallo (Investment Manager, Impact Investing, AXA IM), Christian Del Valle (Co-Founder, Colibri Catalyst), Lisa Genasci (Managing Director, Sustainable Finance, ADM Capital), Anna Gibson (Private Sector Advisor, UK Foreign, Commonwealth & Development Office – FCDO), Alex MacGillivray (Director, Development Impact Evaluations, British International Investment – BII) and Floor van Oppen (Fund Manager, FMO), moderated by BFT’s Director Katherine Stodulka (Partner, SYSTEMIQ) and with open remarks by Helianti Hilman (Founder & Executive Chairperson, Javara Indonesia).

* Watch this space for future events and news, and follow @Blended_Finance, @P4Forests and @FOLUCoalition.

Read the original article published by SYSTEMIQ.