Over the past 12 months, Clarmondial has worked on a number of mandates to assess opportunities for environmental finance in collaboration with companies, tied to themes of conservation, Forest Landscape Restoration (FLR), agroforestry and climate change mitigation, adaptation and resilience, among others. We spoke with investors, donors and corporates (including some who have partnerships with NGOs and foundations) to identify and scale up initiatives to promote environmental goods and services, and who are seeking to leverage additional investment into such initiatives.
Alongside our work with companies and conservation organizations, we also co-authored a report with Credit Suisse and the Climate Bonds Initiative (CBI): “Levering ecosystems: A business-focused perspective on how debt supports investments in ecosystem services” (available here).
These engagements led to an internal discussion about how best to introduce the “impact” dimension into the risk-return equation of different stakeholders. Introducing new sources of capital and responsibilities usually leads to parties taking on additional costs or risks, compared to the business as usual (e.g. additional verification of “impact” or “green”).
Thus, one re-occurring question we are faced with is: Who pays?
The payee might be:
The risk-return equation discussion must be seen both in terms of magnitude and certainty of factors, as well as their timing. These must also be seen in the context of the fiduciary duties and opportunity costs of each stakeholder. This also impacts the suitability and willingness of different stakeholders to modify their behavior. For example, in the case of many large corporates, we confirmed that the internal cost of capital, and capital allocation processes, make it difficult to align financial targets with environmental investments, even when they are profitable. The profile of many environmental investments (e.g. in the watersheds of a particular supply chain) may be profitable at an absolute level, but it may be too low to justify significant budget allocation. However, the returns generated by these initiatives may be suitable for specialized investors and public interest organizations, who may accept lower returns in exchange for some form of measurable impact.
While this may seem to be an opportunity for many corporates, the public interest organizations and impact oriented investors we spoke with had concerns about financing a specific project tied to a specific corporate, as they do not want to be associated with providing advantages (e.g. low cost capital) to a specific corporate: so they want these funds to be ring-fenced and independently monitored, for example. They also seek scale, which typically requires aggregation across a number of corporates tied to a specific theme, such as Forest Landscape Restoration (FLR) or conservation.
While the projects themselves may be of interest to such financiers, there is a structural problem in how to ring-fence and target such funding. In response, we suggest the creation of a “Sustainable Supply Chain” (SSC) Note, which aggregates these initiatives from a range of different institutions into an impact fixed income product suitable for institutional, professional and private investors alike, including Program Related Investors (PRI) – and mission-oriented investors.
We have been exploring such a product with public interest organizations (DFIs, Foundations, NGOs), as well as impact oriented investors and believe that there is sufficient interest to warrant a $20-50m note. The question is, are corporates ready to step up and participate? And, are they willing to accept greater transparency and a commitment to environmental improvements in exchange for additional, ring-fenced, funding and market awareness?