The risks and rewards of mainstreaming sustainable land-use finance

While money has long been said to make the world go ‘round, climate change is seeing the need rise for money to be directed not around the planet but into it – into its soils, ecosystems and agricultural supply systems.

“It’s not an investment if you destroy the planet,” said Carole Dieschbourg, Luxembourg’s Minister for the Environment, Climate and Sustainable Development, in the opening of the Global Landscapes Forum (GLF) on 30 November 2019. Held in Luxembourg’s capital, a global hub for sustainable finance, directly after the two-day UNEP Finance Initiative (UNEP FI) Regional Roundtable on Sustainable Finance, the GLF was the fourth annual iteration of its finance-focused Investment Case Symposium, which this year focused on how to bring landscape investment into the mainstream financial sector.

The European Union (EU) succinctly defines sustainable finance as “the provision of finance to investments taking into account environmental, social and governance considerations.” While certain instruments and sub-sectors of sustainable finance, such as green bonds and the carbon market, have grown in recent years in parallel with more political action on climate change, direct investment into land-based projects, such as sustainable plantation management or agroforested farms, has remained a niche.

Roughly USD 800 billion is needed to restore 350 million hectares of degraded landscapes – a drop in the bucket compared to the USD 5.2 trillion given annually to fossil fuel subsidies, pointed out Tim Christophersen of UNEP. Yet real and perceived investment risks, such as land-grabbing or crop failure; an extended timeline for returns on investment; and a lack of financial instruments to ease the movement of money often keep investment in land-use projects at bay – even those that could turn high profits. This is coupled with land-users and smallholders often struggling to receive potential investment due to lack of collateral and insecure ownership of their land.

“Even if we lost money in agriculture, it was strategic,” said Juan Carlos Gonzalez Aybar of his time working in forested landscape projects in South America with impact-driven asset manager Althelia Funds, highlighting that job creation and livelihood improvement of local communities were at times valued higher than financial profitability. Aybar now works in the sustainability branch of Total energy group.

“The current system does not take in, does not fit the work we’re doing today,” said Jennifer Pryce, president and CEO of Calvert Impact Capital, a pioneering impact investment firm founded in 1988. “We need the system to change. But this is easy to say, harder to do…. the system is not built for purpose.”

There was a reiterated consensus that this systemic change begins with expanding the notion of wealth to include both natural and social capital. Natural ways of mitigating climate change – referred to in the sustainability lexicon as ‘nature-based solutions’ – can help countries save increasingly significant portions of their GDP from being lost to the impacts of climate change, taking into account benefits from biodiversity and sustainable agriculture as well.

Underpinning the success or failure of all investments, stressed director general of World Agroforestry (ICRAF), Tony Simons, is the welfare and benefits of people.

“Investment is first the will of farmers and local communities to engage in transformation,” said Bernard Giraud, president of Livelihoods Funds, which links private companies to smallholder farmers for investment. “If we don’t have a strategy so [they] have direct interest in transformation, the risk is very high.”

This long-term transformation and restoration of landscapes must inherently be preceded by a transition period of global supply and financial systems, and it can be said that the dawn of this period is the present. More consumers and societies are demanding sustainable and ethical products, and businesses are reacting; but the catch-up time to transform global markets – namely consumer goods, energy and transportation – requires risk-taking, significant spending, policy change, close monitoring of the development processes and climate change mitigation efforts.

Blended finance, in which public institutions and governments absorb financial risks in order to attract private investment, continues to be regarded as one of the most successful de-risking methods while also helping shield the integrity of projects from global market pressures. “There’s danger in bankability, on turning social or environmental projects into return-on-investment projects,” said Sara Löfqvist, a PhD candidate at ETH Zurich. “Public support and blended finance can help ensure the core of these projects is retained.”

While blended finance might be one of the most commonly utilized tools in sustainable land-use finance, other innovations are sprouting up in different funds around the world that were shared at the Forum in a bid for wider adoption. Many of these developments address smallholders and the communities that form the base of global food systems.

Ugandan conservation NGO EcoTrust, which is partnered with USAID in a blended finance model, is helping households monetize their landholdings through carbon credits that can be sold on the global carbon market for profit. Althelia Funds is structuring carbon sequestration as collateral for communities with few other assets, in order to help them attract financing.

Ensuring or setting a secure carbon price can further diminish risks for both farmers and off-takers, said Giraud.

Banking group Crédit Agricole du Maroc, which provides finance to 35 percent of Moroccan farmers, has developed a mechanism to fund farmers with no collateral, in turn proving that a credit institution can continue to grow while financing farmers traditionally perceived as “unbankable.” Crédit Agricole du Maroc, which is structured as a web of banks, has also made efforts to stay aligned with traditional banking systems, in order to ease cooperation with other local banks in Africa and channel money from international banks down to the ground.

Larger companies, and particularly those in energy and fossil fuels, have a longer runway for transitioning into less emissions-intensive models – involving massive shifts in both supply and demand – and meanwhile must invest in carbon offsetting and long-term land-based carbon capture. “We’re not a party to the Paris Agreement, but we’re adhering to it,” said Aybar of Total’s efforts, which include an annual budget of USD 100 million for landscape-based carbon sequestration.  

Private companies, such as Total, holding up their risks to the light of global warming and efforts to limit temperature rise to 1.5 degrees Celsius above pre-Industrial levels, could trigger a massive shift in the private sector as well, said Justin Mundy of the World Resources Institute.

But the ‘clock is ticking’ narrative shadowed the conversations around the current transition period, with speakers stressing the importance of speeding up investment processes – given that project development and due diligence phases often take years of time and significant investment – and, more importantly, accelerating the growth of sustainable land-use finance and buy-in of private and commercial banks.

In part, this must come from regulatory support. “What I would like to highlight, if we really want to achieve scale, we need to change some of the enablers out there, and one of them is banking,” said Hans Loth, who leads the partnership between UNEP and Dutch multinational financial company Rabobank. “You really need to change the regulatory environment of banking on a global scale.”

Pierre Rousseau of BNP Paribas noted that “huge sums remain unemployed each year” due to difficulties in unlocking public finance to serve as bait for private investment.

But the power of the individual was not overlooked in the day’s conversations. Pryce of Calvert Impact Capital began the Forum by reminding the audience that personal assets count as voice in financial institutions, and that one’s own investments can “activate different conversations” in financial institutions, slowly healing the “disconnect between what is happening in glass towers and what is happening on the Earth,” she said.

“We are not efficient at all in what we do at the moment,” said Minister Dieschbourg. “The question is not if we move, but the question is if we are able to move quickly enough, if we are able to move together and create the right alliances of the willing.”