With New York Climate Week still resonating, the environmental finance community is already focusing on the upcoming climate and biodiversity meetings – including UNFCCC’s COP27 in Egypt in November and CBD’s COP15 in Montréal in December. These seem particularly significant due to the realization that the global community faces a polycrisis: multiple crises in multiple global systems become causally entangled in ways that significantly degrade humanity’s prospects. These include food and energy insecurity and inequality, and the climate and biodiversity crises. We would like to share our thoughts on how some of the current challenges could be used to turn billions of dollars’ worth of commitments into action.
Rising interest rates may delay corporate action on nature – blended finance could be a solution. Many corporates have made, or are making, nature-related commitments, including Science Based Targets (SBTs) to address greenhouse gas emissions (GHGs), and a record number (ca. 20’000) are disclosing. However, few companies have considered how these will be financed. Achieving the commitments will require additional short and long-term financing for corporates and their suppliers. With increasing financing costs, there is a danger that corporates delay critical investments. But this also means that corporate interest in exploring nature and SBT funding programs that attract and diversify financing sources, share risk, and help mitigate borrowing costs become more attractive. Given the direction of banking regulations, specialized funds that target positive climate, nature and local livelihood impacts alongside financial returns – for example using established and emerging frameworks like the Taskforce for Nature-related Financial Disclosures (TNFD) – may increasingly be relevant financing partners for corporates and supply chain stakeholders embarking on nature-positive transitions.
The Food Securities Fund, developed by Clarmondial, is harnessing the demand for credit to promote more accountability in agricultural value chains. By engaging with the Fund, borrowers have also managed to attract additional impact-minded lenders. Borrowers increasingly see the value of accessing more flexible, pre-harvest finance that can, among other benefits, help them engage with farmers to address the environmental and social targets of their customers, including consumer facing goods companies. The Fund has already financed specific supply chains of large global consumer goods companies across 6 sourcing landscapes representing over 40’000 smallholder farmers on over 50’000 hectares of land and gathering localized quantitative and qualitative impact information. The Fund is open-ended, thus able to reach significant economies of scale and impact. Its current investors include the Global Environment Facility (GEF) and the ASN Biodiversity Fund. Conservation International and WWF US are represented on the Fund’s governance.
Voluntary carbon markets: moving from offsetting to local benefit creation and insetting. The carbon markets, and in particular the voluntary carbon markets, have seen a surge in investor interest, including speculation. While exciting, it is also worrying given the number of deep-pocketed entrants with limited technical expertise or background. There is a danger that the “hot money” will result in “carbon cowboys”, and subsequently in a (rightful) backlash by local people and governments with respect to benefit sharing, and in a mismatch between marketed, projected, and actual carbon credit values. Corporate buyers are increasingly balancing short-term off-setting needs with net zero, SBTs and living income commitments, including through insetting: “interventions along a company’s value chain that are designed to generate GHG emission reductions and carbon storage, and at the same time create positive impacts for communities, landscapes and ecosystems”. There is confusion about the need for corresponding adjustments, and links between emerging national and jurisdictional initiatives and the voluntary carbon markets. This is of particular concern when it comes to Scope 3 emissions – and why Clarmondial is participating in the Verra Scope 3 Initiative Working Group. Approaches that more systematically internalize environmental and social costs and drive a wider range of climate investments, beyond carbon offsets, must urgently be encouraged and financed.
A growing funding gap, and few products to address it. Considering the challenges listed above and others, funders are increasingly open to a wider range of approaches, as investors or donors. Our hope is that this will include not only earlier-stage pre-financing of wider range of climate and Nature based Solution (NbS) projects, but also investment in a wider range of approaches, including financing carbon claims, insets, ITMOs (Internationally Transferred Mitigation Outcomes) and jurisdictional approaches. Can these be developed in a manner that suits large investors, to catalyze change at the scale required? Proponents should consider the regulatory requirements of major pools of capital – from Sustainable Finance Disclosure Regulation (SFDR) reporting to distribution channels, for example – but we see few examples and the product menu available to institutional investors remains limited.
Clarmondial is designing a new fund to help meet this challenge: the Biosphere Integrity Fund. This is a new investment fund being developed by Clarmondial with the support of USAID and in partnership with Rainforest Alliance, CDP and Conservation International under the Business Case for Collective Landscape Action initiative. The Biosphere Integrity Fund will finance corporate and landscape action on climate and nature, including integrating opportunities for climate finance. Clarmondial is designing the Biosphere Integrity Fund with input from institutional investors, corporates and other landscape and value chain stakeholders.
Harness the global debt crisis – for nature. Many emerging and developing markets are under pressure due to a stronger US dollar and higher interest rates, which has caused their borrowing costs to increase significantly and puts them at risk of default – these include Ghana, Kenya, El Salvador, Tunisia, Pakistan, and Egypt. This creates opportunities to restructure sovereign debt, improve governments’ fiscal space, and secure longer-term resources for nature conservation. The Nature Conservancy (TNC) has led the way on these approaches , and there is plenty of room for other groups to engage. The International Monetary Fund (IMF) has also developed new tools – notably the Resilience and Sustainability Trust (RST) that harnesses Special Drawing Rights (SDRs) to finance climate change resilience – including nature-based resilience. Barbados, Costa Rica, and Rwanda have already signed up to this program. Sovereign approaches could also be used to support investment in government-supported programs, including Article 6 transactions. However, many of these initiatives depend on catalytic funding to get started. Clarmondial is working with a range of partners that understand the opportunity that the current macroeconomic situation offers to develop initiatives that link sovereign debt restructuring programs to Nature based Solution and food security investments.
Edgar Mora (Clarmondial), Tanja Havemann (Clarmondial), Arturo Tovar (Rainforest Alliance – LandScale), Kaspar Baumann (Clarmondial) at GIIN 2022.