30 May 2017
Numerous initiatives to finance conservation projects have been launched in recent years. This roundtable, organised by Environmental Finance with the help of Conservation International, explores how such projects could be scaled up and how more private capital can be attracted to such initiatives.
Graham Cooper – Editorial consultant, Environmental Finance
Paul Herbertson – Director, Fauna & Flora International
Rupesh Madlani – CEO, Global Sustainable Capital Management
Lisa Wong – Head of impact, Affirmative Investment Management
Herbert Lust – Vice-president, Conservation International Europe
Daniel Rossetto – Managing director, Climate Mundial
Joe Walsh – Staff writer, Environmental Finance
Lisa Walker – CEO, Ecosphere+
Agustin Silvani – Vice-president, Conservation International
Abyd Karmali – Managing director, climate finance, Bank of America Merrill Lynch
Tulio Andrade – Diplomat, Embassy of Brazil
Richard Burrett – Partner, Earth Capital Partners
Lisa Genasci – CEO, ADM Capital Foundation
Edit Kiss – Director of business development & operations, Althelia
Phil Cottle – Head of agriculture, Pardus Underwriting
Agustin Silvani: Green finance seems to have taken off. Look at the green bonds space – it is growing exponentially. But less than 1% goes to conservation. We want to make sure that conservation is not left behind because if we do not take care of the ecosystems, all of these other efforts are going to be for nought.
There have been some success stories over the last few years but we are still far from scale. The funding gap is billions of dollars. At CI, we are sure that private philanthropy and public funding, although critically important, will not be enough. That is why we are interested in figuring out how we can crowd-in private capital and scale-up investment.
At CI, we have experience of using different sources of finance since the 1990s, beginning with debt-for-nature swaps. We have had in-house loan funds and then public-private partnership funds like the Eco-Business fund. Recently, with the IFC, we launched a $152 million forestry bond.
There is a lot of appetite for these sorts of deals. But there is not enough of a track record to say: “This approach works, go and scale it.” One of the things we want to learn is: How far are we from institutional investor requirements?
Graham Cooper: Following up on the REDD+ bond that you did with the IFC and BHP Billiton, do you expect to replicate that?
Agustin Silvani: Yes, hopefully. But a key thing in that deal was that BHP decided: “We want to do this because we think it is in the interest of the company and shareholders.”
But how many BHPs are there? That is what we are testing. It has not yet reached a point where it is mainstream and just another bond.
Lisa Wong: It was certainly a very innovative structure and I think there is potential. There are already green bonds that can finance conservation projects among broader aims. Supranationals and states have been issuing them, and even some corporates.
They have embedded capacity to invest in biodiversity-type projects, but I think there is still quite a lot of education needed to guide investors around the subject. In the IFC case it was very helpful that it is for a very specific project, because we know there are a lot of risks around forestry projects, including impact on indigenous and local communities.
Abyd Karmali: BAML was one of the placement agents on this bond and we spent a lot of time talking to different investors – corporates as well as institutional investors – to test the appetite. Some of you may know that I was involved in a previous attempt to launch a forestry bond in 2009. What has changed since then?
Investors are still not comfortable taking forestry project risk per se. You still need to have maybe not triple-A, but certainly a strong investment rating. Secondly, BHP Billiton’s role was crucial. Back in 2009, we were trying to offer investors a coupon that was linked to potential REDD+ credits. But investors do not feel comfortable with a market that has no track record. Unfortunately, REDD+ is still languishing. So BHP was a key part of the de-risking.
Another innovation was that each year investors could elect to take cash or carbon credits. That meant that some investors could say: “I will take cash this year, but maybe if I feel more comfortable later, I will switch to the credit income.”
Lisa Walker: I think it was critical having somebody from the fossil fuel sector, in this case BHP, that believed investment in emissions reductions from avoided deforestation was in their shareholders’ best interests. We have to really prove the investment case. If you are an emitting sector with high transition costs and you look at the carbon budget, then it makes a lot of sense to invest in forest carbon as cost effective emissions reductions can be achieved immediately and deliver lower ‘net’ emissions .
A lot of the focus for low-carbon economic transition is on the energy sector. We are not focusing so much on what is happening with carbon sinks – terrestrial and ocean – and the crucial role they play in the shift to a low-carbon economy; they are a key counterfactual in assumptions around a global or sectoral carbon budget. There is a lot that can be done. The land use sector can go from being a net source of emissions to a net sink with the right focus and actions.
A carbon price in a forest goes a long way. It is not well understood yet, but I believe it is becoming better understood within the oil and gas sector.
Richard Burrett: I think that reveals a big problem. Institutional investors do not have the time, knowledge or appetite to take the risks involved in this. You need to work with organisations that do. Most people who buy bonds make relatively quick decisions, largely based on rating and price.
What BHP is effectively doing is saying: ‘We have a responsibility for that carbon budget and we are prepared to put our balance sheet behind it.’ The price signals are not there otherwise to enable investors to make that sort of decision.
There is not a natural revenue stream of any material size coming from carbon. Valuing a forest for carbon alone is like valuing a chip for the amount of silicon in it. We are missing all the other benefits, the water, biodiversity etc. We have to find a way of putting a value on those.
Rupesh Madlani: Institutional investors are actually very good at coming to terms with new sectors and making investments. But the thing that drives them to do that is returns. If there is a way things can be structured to get higher returns, the market will work really well.
Tulio Andrade: The experience that we have had is that offsetting approaches for forest conservation, or REDD+ credits have many environmental integrity concerns.
One of the main mechanisms Brazil has in place for promoting conservation and preventing deforestation is the Amazon Fund, based on positive incentives. It provides results-based payments and has a structure that can mitigate risks, engage local communities and governments and allow the private sector to jump in.
Lisa Genasci: The situation is similar in Indonesia, in terms of the scale of emission reductions that need to happen to meet the country’s commitment under the Paris Agreement.
Similarly, with biodiversity and water credits, and other natural capital credits. Our approach has been to take a pretty straightforward project finance approach to drive in private sector investment at scale, then securitise on top of that. You could certainly capture carbon value in the future, but it is not the driving force of what we are trying to do.
Agustin Silvani: Brazil has been extremely successful in reducing deforestation over the last decade or so. What was the role of private finance in that?
Tulio Andrade: So far, the results came mainly from Government-led enforcement and control activities. But now, in order to implement Brazil’s Nationally Determined Contribution (NDC), there is no way the Government can do it alone. It will require every landowner to engage in conservation activities, in particular in the context of Brazil's new Forest Code. Following the Paris Agreement, the private sector has been called on to engage in an unprecedented manner.
Lisa Wong: I am not sure if you are aware of the recent French sovereign green bond. The framework allows France to support forestry projects. It is a great example of a sovereign using its capacity to access private investment to help implement national strategies. Sovereigns and sub-sovereigns are an exciting area of the market to look at for conservation investment.
Richard Burrett: We are talking about ways of getting finance to have a positive impact, in terms of financing conservation, but we must not forget about stopping financing businesses that have a negative impact on conservation. Unless we do that as well, it will probably undermine what we are trying to do positively.
An example is the work of the Consumer Goods Forum with banks and the Banking Environment Initiative. They tried to get banks only to finance businesses and projects that use various certification standards around forestry. This work is critical.
Daniel Rossetto: To achieve that, you really need to make the positive financial signal for conservation to be greater than the opportunity cost of the destructive activity. For example, some conservation activities – such as agriculture, reforestation, and agricultural waste to energy – are certifiable mitigation activities and could be rewarded under the carbon market. This would allow those activities to become more financially attractive than logging.
Lisa Genasci: I think if you look at supply chains, that is already starting to happen. There is consumer pressure on a lot of companies to do better and to not deforest as part of their supply chain.
Abyd Karmali: The key is getting clarity on the returns. We all know ecosystem management is very complex. The uncertainties are huge and uncertainty is kryptonite for investors. We need to crystallise much more clearly where the returns are coming from. One of the stakeholders that could play a key role is the insurance industry.
One thing we are looking at is – can you develop bond structures where you can quantify the improvements in resilience? It is a different approach to conservation. It is basically looking at enhancing resilience through watershed management, through reducing flooding risk, for example. Then you could potentially see municipal bonds that focus on local resilience.
Agustin Silvani: Green infrastructure, essentially? Do you think that requires education as well? For all this work, as soon as it is tagged ‘sustainable’ or ‘green’, people assume it is riskier and that the returns are lower.
Lisa Genasci: I don’t think people have that view as much any more. I think there has been a remarkable shift and there is a lot more trust and understanding.
Daniel Rossetto: Could resilience, or the adaptive capacity, actually be the commodity that is delivered as part of these investments? With climate mitigation, it is a lot more straightforward to quantify what is being delivered. With adaptation, if you speak to ten different people, you will probably get ten different opinions about what is being delivered.
When you deliver conservation through creating positive financial incentives for alternative activities, you are effectively enhancing adaptive capacity at the same time.
Adaptive capacity is something we need to be able to measure, verify and certify. We also need to create mechanisms, preferably through the UNFCCC system, that allow the private sector to have their activities financed with certainty that not only can the benefits be delivered, but importantly – that the benefits claimed ex ante can actually be enforced.
Richard Burrett: The issue is who pays? Who values something not happening? That is the resilience argument. The insurance sector clearly places a value on things not happening, but who pays for resilience of land, of coastlines, of forests?
Tulio Andrade: We think that sometimes forest conservation is too much linked with action on climate change. There are ways to support forest conservation without linking to a carbon result. One aspect of the Brazilian plan to prevent the deforestation of the Amazon is the promotion of sustainable livelihoods.
When people talk about conservation of a forest, they sometimes have an image of the forest being isolated in a fence and nobody will touch it. That is not what forest conservation is about. It involves a range of projects that can gain scale and can provide returns for institutional investors.
For example, the Amazon Fund has approved projects that promote sustainable livelihoods, such as those based on rubber, tourism, and nuts, which have been very successful. The challenge now is to give scale to isolated initiatives.
Lisa Genasci: That is exactly what we are looking at. How to link rural livelihoods. How to scale these different projects, and how to tie in the conservation benefits.
Paul Herbertson: That is one of the biggest challenges we face as a conservation organisation. There are lots of small, quite profitable, sustainable enterprises within forests doing amazing work in terms of conservation. But they have no access to normal financing. How can they start moving forward and with what mechanisms?
That is why we have been so interested in Lisa and her work in Indonesia. ADM is trying to address exactly that question of how you get large-scale finance into smaller-scale projects and help them to get the capacity to start taking on serious private finance.
Edit Kiss: As an impact investment fund manager, we focus on conservation and sustainable land use. We channel institutional capital to projects on the ground.
Typically, the projects vary in size, scope and geography. Our mission is to incubate them and ensure the business model is viable and can be scaled up. And we agree that sustainable livelihoods are key. I do not think anybody today seriously thinks of conservation as simply building a fence around a forest.
We have developed some sustainable livelihoods programmes based on high-value commodities. We trialled coffee and cocoa alongside forestry and also have a very successful sustainable cattle project in the Amazon. There are models that can work.
In Brazil, the carbon credit system is still quite uncertain. So we have made an investment in a production-protection system that is collateralised through the agricultural commodity (sustainably raised, forest-friendly cattle in our case) without any certainty about the carbon; which, however, was an important enabler of the investment decision.
If carbon finance was more readily available, there would be more security and we could scale projects much faster. We trialled this new method on 400 hectares. It works. It is still quite risky. But we believed in it and went to 10,000 hectares. After two years, it is very successful. Now we are looking at 100,000 hectares and plan to launch a new vehicle for it.
Lisa Walker: I think those of us that have been in the climate change sector a long time, use the term ‘carbon finance’ as a proxy to deliver a range of environmental and social benefits. Of course, we do not just value a forest for the carbon it stores, but carbon accounting is the most advanced system we have. It is very challenging to value, financially, all of the other benefits.
We have a system that works with carbon finance. It is not perfect. But at least there is something there that we know, from experience, you can use in a positive way. Without that kind of mechanism, it is very difficult to scale-up globally and go beyond the small projects.
Daniel Rossetto: We are working on a project in southern Mali where, other than logging, there are few other profitable business activities that one can undertake today. However, there is a lot of residual bio-waste that could be used as an energy source and would reduce methane emissions.
If there were an attractive price for carbon mitigation in the order of €15–€20, like there was in 2008, carbon-reducing activities – like those certified under the UNFCCC's Clean Development Mechanism (CDM) - could provide a positive economic signal for these activities that would lead the local community away from logging. Why would you log if you had a more attractive economic alternative?
Tulio Andrade: Just to be clear, Brazil is not against carbon credits in general. The CDM, before prices collapsed, was so successful in Brazil that if considered as part of the country’s export portfolio, project activities under the CDM would be ranked as the 16th most relevant export item. The problem of REDD+ offsetting schemes is with respect to permanence and environmental integrity.
Daniel Rossetto: I agree. The permanence and environmental integrity of REDD+ credits cannot be guaranteed, so therefore they cannot be incorporated into an emissions trading framework without bringing into question the certainty of the environmental target or cap.
Lisa Walker: We are using carbon finance in land-use projects to deliver conservation, sustainable livelihoods, and economic activity. It is not just about climate change.
Edit Kiss: If Althelia is successful with cocoa farmers, transforming their livelihoods, then they are not likely to go back to cutting the forest.
The goal is to avoid that, after a ten-year intervention, there may be no real transformation. The people just go and cut all the forest back. That is why we need to focus on the effectiveness of the programme and how it makes things change on the ground. We are not financing projects that have no transformational element.
Tulio Andrade: My point is that offsetting schemes for REDD+ are not the best solution. The legal framework that we have in place now gives the private sector transparency. We have a true business model that will allow for returns to come in. REDD+ credits are not a business case.
Agustin Silvani: But carbon can be a means to an end. The end is transforming production systems into something more sustainable. But there is a cost associated with that. If Parliament is not paying that cost, then who is?
Tulio Andrade: The main driver of deforestation in Brazil now is not for meat or soy production, but land grabbing. The agricultural sector in Brazil has been extremely successful in increasing productivity without any additional land, because of new technologies. That is a business case. That ultimately provides environmental benefits and it makes sense financially.