19 December 2019
Mirova's Natural Capital Platform is looking to generate attractive returns and positive impact from investments in sustainable agriculture, fisheries and conservation. CEO Philippe Zaouati talks to Environmental Finance.
Environmental Finance: How does Mirova define natural capital investing, and why do you consider it important?
Philippe Zaouati, Mirova: We define it as investing in nature-based solutions, in sustainable economic models based on production from natural systems, whether from land or oceans. It covers sustainable agriculture, forestry and fisheries, as well as investments in conservation and biodiversity protection.
Natural Capital investing is new asset class that is absolutely key for a number of issues, particularly fighting climate change. Naturebased solutions represent 50% of the nearterm mitigation opportunity (by 2020). It also captures a lot of other social and environmental problems: feeding a growing population, avoiding conflicts and involuntary migration.
EF: What was the thinking behind Mirova's Natural Capital Platform?
PZ: There is clearly insufficient investment in this area, because we lack knowledge, structures and appropriate financial tools. Most of the financing in agriculture and land use is very short term. There is a lack of longterm financing in the sector because these sorts of investments are considered very risky. To answer that need, we thought we could leverage the financing tools we have used to help the renewable energy market emerge, for example, and adapt them for natural capital.
Specifically, if we can understand the future cashflows of these nature-based investments, we can apply project financing tools and use blended finance, mixing private and public capital in order to create products for investors that are market-based in terms of their riskreturn profile. This creates an investment case that institutional investors can understand, assess, and eventually support.
EF: What sort of investors are you targeting?
PZ: Institutional investors are increasingly interested in impact investing and are allocating small parts of their portfolios to impact investments. As a first step, we are looking to offer attractive products for this bucket. As a second step, we would like to see these kinds of investments become mainstream. In a matter of years, we think all institutional investors could invest in natural capital.
There is also a growing number of private wealth investors, family offices and high net worth individuals showing interest; we expect to see significant flows from these kind of investors over the coming years, because the asset class speaks to them.
EF: What enterprises does the platform invest in, and what sort of impacts does it seek to generate?
PZ: Usually, when we think about this space, we think about smallholders in emerging markets or big conservation projects at the national level. But in between there are lots of very interesting opportunities, with entrepreneurs in a range of small and medium-sized enterprises applying new technologies and new economic models. These enterprises need a lot of finance, and this is the sweet spot where we think we can be very useful.
Our investments aim to generate a mix of social and environmental impacts. Number one is carbon storage: less deforestation means lower carbon emissions. Our investments also deliver positive impacts in terms of biodiversity protection.
In terms of social impact, land degradation is one of the key causes of involuntary migration and conflict. Social impact also takes the form of economic impact – this is often forgotten. We are investing in regions that need economic development, in people who need to generate greater value from what they do. Currently, the percentage value from commodities that flows to farmers in emerging market is often very low.
We are very optimistic, as we observe a big shift underway in the food value chain which creates significant opportunity. Producing healthier and more sustainable products, labelled as such, can generate a premium that farmers could benefit from.
EF: What are the main concerns that potential investors in natural capital solutions raise with you?
PZ: Because the asset class is new, the perception of risk is high, whether in terms of country risk, currency risk, or the credit risk involved in working with small enterprises. We need to build a track record where there currently isn't one. Fundamentally, this perception of risk is higher than the actual risk involved.
The first step is to hedge risk, using public investment to structure layered funds involving senior and junior shares. That's an important means of reassuring large investors that the payoff between risk and return is acceptable.
The second step is to explain that these investments are underpinned by sound economic models. Investors often assume that nature-based solutions are philanthropic, or that the returns from agricultural enterprises are very low. However, if you build businesses and structure investments properly, moving from traditional farming to using new techniques and technologies, you can increase productivity, create higher quality, labelled premium products, and capture more value for the enterprises on the ground. Doing so transforms the economic case for these investments.
EF: What barriers do you face deploying capital to natural capital solutions?
PZ: There are lots of opportunities, and we have started to deploy capital, although many enterprises are not yet investible. As part of the platform, we have a technical assistance facility which helps investees to better financially structure the project and thus become investible propositions.
We are working with a large number of partners. We have partnered with international organisations, such as the UN, including the UN Convention to Combat Desertification and UN Environment. We work with NGOs, such as WWF, with whom we have a partnership.
We also work with specialists such as IDH, the Netherlands-based sustainable trade initiative, and we have created a large network of actors in emerging countries, with people on the ground in Peru and Brazil and, from next year, in Asia. We are also talking to multinational corporates: understanding the value chain, and the needs of large international companies, is very important in uncovering new opportunities.
EF: You've pledged to invest $1 billion in natural capital solutions by 2022. How close are you to that goal?
PZ: We are growing quite rapidly. By the end of the year we will reach €400 million in assets under management on the platform. We are on course for the €1 billion objective – it's definitely achievable in the next three years.
Bringing natural capital to the Amazon
The fate of the Amazon rainforest is the subject of fierce debate. On the one side are environmental activists, climate scientists, responsible investors, communities that depend on the forest and western governments, calling for greater enforcement of laws to halt deforestation and action to protect this unique and vital natural resource. On the other, the Brazilian federal government, agricultural, mining and logging companies, and local Brazilian settler communities who call for alternative, legal economic livelihoods for Amazon communities as a more appropriate means of halting deforestation.
However, there is a way to bridge the two positions, argues Nick Oakes, investment director, Brazil, at Mirova Natural Capital. "It's possible to invest in enterprises that allow both sides of the debate to achieve their goals," creating economic opportunities and development while simultaneously protecting the rainforest, even in protected areas such as conservation units or indigenous areas.
Through a number of investment vehicles, Mirova is supporting conservation enterprises and projects in the Amazon region that are restoring degraded lands, reducing threats to standing forest, and which are replacing illegal, unsustainable practices with legal, sustainable alternatives. In doing so, it is creating investment opportunities that generate attractive risk-adjusted returns alongside measurable environmental and social impacts, Oakes says.
"Our overall objective is to improve biodiversity in the Amazon and improve livelihoods and well-being within local communities," he says. To do so, the company has identified four thematic areas for investment.
The first is conservation and community livelihoods, such as carbon projects, or sustainable, non-timber forest product projects. The second is smallholder production systems, such as restoration of degraded land using agroforestry systems, where additional crops are introduced to supplement a major cash-crop. The third is sustainable farming and reforestation, combining the intensification of agricultural production with zero-deforestation commitments. The fourth set involves investing in companies offering innovative biodiversity-linked services, such as companies providing technology, finance or technical assistance to smallholders seeking better conservation outcomes.
Unquestionably, investing in small enterprises in the Amazon region can be risky. Mirova is working with third parties to provide risk mitigation tools. Specifically, USAID, the United States Agency for International Development, provided a portfolio-level credit guarantee as well as a grant to CIAT, which then invested as the cornerstone investor buying junior shares. In addition, investors can invest at different points in the capital stack, with varying levels of risk and return.
"Our overall objective is to improve biodiversity in the Amazon and improve livelihoods and well-being within local communities" Nick Oakes, Mirova Natural Capital
Oakes also says that Mirova can point to a track record of successful prior investments in the region. He gives, as an example, its investment in Pecuária Sustentável da Amazônia (PECSA), a sustainable cattle ranching business that provides farms with finance and expertise to increase the productivity of their pastureland – using rotational grazing, technical assistance to restore soil quality, fencing, etc. – by three or four times on condition of zero-deforestation and restoration of riparian areas.
In most cases, the means of monetising these opportunities are relatively conventional – providing equity or debt to companies, NGOs or cooperatives. However, Mirova is also participating in environmental markets, notably for carbon credits earned for projects that protect standing forests, known as reducing emissions from deforestation or forest degradation – so-called REDD+.
The challenge, in Brazil, is ongoing disagreement between government ministries about whether carbon credits earned in the Amazon region can be exported out of the country and used to offset emissions elsewhere. While exports are unlikely in the nearterm, Oakes says, he notes that the environment ministry is trying to introduce a national payment for ecosystem services system under the provisions of the Forest Code, which could stimulate an internal market for ecosystem services including carbon: "Given the size of Brazil's economy, such a market could be transformational," he says.