Private finance is necessary to scale forest and landscape restoration to deliver global commitments, yet finance levels remain insufficient. To understand why funding remains low despite growing interest, we conduct semi-structured interviews with financial actors and restoration finance practitioners to examine what incentives and barriers corporations and asset managers experience in financing restoration, and what type of restoration projects and regions different finance actors are likely to fund. Next, we assess how current financial barriers might be overcome. We find that there are market incentives for corporate entities to finance restoration for carbon drawdown, sustainable branding, and to promote sustainability in supply chains. Conversely, asset managers face strong barriers as projects are deemed high risk and with low prospects for sufficient return on investments. Through enhanced markets for restoration benefits, complementary public policies, and financial instruments, private finance for restoration can be scaled for a wider variety of restoration projects.
Article
Unlocking the potential of private finance for forest and landscape restoration
https://doi.org/10.21203/rs.3.rs-1851634/v1
This work is licensed under a CC BY 4.0 License
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published 08 May, 2023
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Restoring the world’s degraded forests and landscapes is imperative to safeguard ecological processes and livelihoods for current and future generations. Restoration is also acknowledged as a nature-based solution to climate change, though uncertainties remain around the scale of emission reductions that restoration can provide1. In recent years, there has been a growth in national and international policy attention towards restoration. Numerous commitments and pledges have been agreed upon to catalyse restoration globally, such as the Bonn Challenge aiming to restore 350 million hectares of land by 2030, and the One Trillion Trees Campaign aiming to conserve, restore, and grow a trillion trees by 2030. The United Nations has launched the Decade for Ecosystem Restoration (2021–2030) and most recently the Glasgow Climate Pact highlighted the importance of protecting, conserving, and restoring nature and ecosystems to meet the Paris Agreement temperature target. Yet, only around a fifth of land pledged to be restored by 2020 had been brought under restoration as of 20192.
Prior restoration studies have focused on assessing ecological aspects of restoration3–5, mapping the potential for restoration in different regions6–8, and investigating the social processes that influence and are influenced by restoration outcomes9–13. Some studies have also explored the cost structures and how market mechanisms may incentivize restoration14–18. All these studies provide crucial information on the potential of restoration and its possible sustainability outcomes.
There has been considerably less attention on the global pull factors needed to promote restoration. In particular, lack of finance is one of the key barriers to upscaling restoration to meet global targets19. Most finance for restoration currently comes from public budgets20, but these funds are too limited to support restoration needs, as they also need to cover a wide array of other public commitments. Since private actors hold strong influence over landscape changes through their investment decisions21, they have a potentially large role to play in complementing public sector activities to improve and enhance global restoration efforts.
There is a growing interest from asset managers to invest sustainably 22 . To date 113 banks from 41 countries, holding in total US$ 68 trillion (around 40% of global banking assets), have committed to the industry-led and UN supported Net-Zero Banking Alliance aiming to align investments to carbon neutrality by 205023. The Principles of Responsible Investments, outlining commitments to Environmental, Social, and Governance (ESG) standards (where consistent with fiduciary duty), has 3000 signatories which in total manage assets with a value of over $103 trillion 24 .
Financial instruments such as green bonds can unlock investments for environmentally sustainable assets, but these have not yet released substantial finance for restoration. Only 5% of green bonds are allocated to investments in land, as compared to more established sustainable asset classes such as renewable energy (35%), sustainable buildings (30%), and sustainable transport (18%)25.
For corporations, restoration is increasingly gaining attention as a means to address carbon emissions and meeting (often net-zero) emission reduction goals 26 . Carbon credits traded in the voluntary marketed exceeded a value of US$1 billion in 2021, which was more than double the value of credits traded in 202027. Furthermore, it is increasingly recognise that unsustainable behaviours can lead to reputation risks, especially for companies with consumer-facing brands 17,28,29 , and growing public concern for environmental issues makes sustainable actions beneficial for marketing purposes 16,30 .
Despite this growing interest, actual funding from private actors in restoration projects remains limited 19,31 . It is estimated that funding for nature based solutions globally needs to increase by on average US$ 700 billion a year, from current levels of US$ 130 billion per year, in order to halt and reverse land degradation, biodiversity loss, and mitigate climate change 31 . Finance for agriculture was 15 times the scale of finance with a forestry objective in countries with high levels of deforestation in 20192, which illustrates the magnitude of financial counter pressure restoration faces. This lack of restoration finance stands in stark contrast to a growing interest from private actors to fund restoration, especially for carbon offsets 27 . To date no study has (to our knowledge) explored why these funding shortfalls persist.
Here we examine private financial actors’ and restoration practitioners’ perception of funding potential and barriers in restoration, in order to increase understanding on why the gap between restoration finance ambition and reality persists. We focus on both asset managers, investing with the purpose of gaining return on investments (ROI), and corporations, profit driven entities producing products or services for consumption by other corporations, public actors, or individuals. We ask: a) what incentives do private actors have to finance restoration? b) what restoration project types and regions align with these incentives? c) what barriers do private actors face when financing restoration? and d) how can these barriers be overcome? We investigated these questions through 30 semi-structured interviews with corporations, investors, NGOs, environmental consultants, a foundation, and an agroforestry initiative using a snowball sampling approach until saturation across key themes was achieved. The data were analysed in NVivo through thematic analysis in which key themes across respondents were identified inductively.
Increasing market incentives for corporations to finance restoration
We identified three partly overlapping incentives for corporations to finance restoration. These are: i) as a means to mitigate climate change and adhere to net-emission reduction commitments, ii) to enhance sustainability of supply chains, and iii) for impact and sustainability branding.
Finance to adhere to net-emission reduction commitments
The potential for restoration to yield net-emission reductions that could be counted towards internal climate commitments was stated as a key incentive for corporations to finance restoration either within supply chains or externally through intermediary organisations. When companies had value chains linked to landscapes, these types of projects were often conducted within the supply chain through insetting, e.g., by integrating trees into agricultural landscapes. When restoration was driven by a net-emission reduction agenda outside of the supply chain, active restoration and tree plantations were generally favoured, as such projects were perceived to be simple to quantify and communicate. All in all, the drive for emission reductions were perceived to be a crucial funding stream for restoration “Right now carbon is the only currency we have that directly finances restoration, besides donations. So it's a huge role, it really can't be overseen. And this year has been tremendous in the uptake especially around nature-based solutions, tree planting, reforestation and so on. (...) some businesses have this year shown as much interest in it, as the last 12/13 years combined” (EC1).
Despite evidence for a substantial growth in interest, several barriers were noted when restoration is financed for carbon objectives. Notably, there is a lack of knowledge around how different restoration interventions relate to emission reductions. There is also a lack of quantification systems for many associated benefits such as biodiversity and livelihood benefits. This makes it difficult for corporations to capitalise on the broader array of environmental and social benefits from projects. As uncertainties remain around what type of restoration projects result in what type of benefits, it is difficult for corporations to know where to channel funding. Furthermore, because some benefits cannot be properly verified, it is difficult to count them towards any existing targets. “I think the idea is, under the Science Based Targets, that we reduce and avoid emissions and there might be an option that planting trees, at least in your supply chain, can come with carbon drawdown opportunities that may in the future be counted towards your climate or your emission reduction strategies. It's not entirely clear yet how that can work. There are no accredited methodologies to do this. So it remains a bit of a grey area at the moment” (CP4).
Some actors noted the risk that the strong corporate focus on carbon could crowd out other objectives linked to biodiversity and livelihoods. “All of the net-zero companies are driven towards the carbon side of things. And they need a return of carbon. And the other returns kind of don't have the same weight. So everyone races to develop carbon projects, and the other ones get left behind potentially” (NGO5).
Finance to promote sustainability of supply chain
For corporations with supply chains linked to landscapes, such as those acting in the coffee, cocoa, or dairy industry, it was perceived that restoration can be a direct business opportunity to enhance productivity of landscapes, increase functionality of the ecosystems that farmers depend on, and be a way for the corporation to support farmers. When restoration was executed within agricultural supply chains, it was primarily done through agroforestry and regenerative agriculture, for example focusing on restoring soil function.
While this type of restoration sometimes provides a justifiable business case, a lack of knowledge and quantification systems of benefits resulting from such a project poses a barrier, just as when restoration is financed for off-setting.
It was noted that restoration benefits are largely public goods where financial benefits sometimes cannot be internalised or secured. High upfront costs linked to, for example, capacity building and infrastructure, can thus inhibit action if the business case of such investments is unclear. There is high competition to search for the cheapest possible suppliers, regardless of sustainability attributes. And if a company invests in agroforestry within a farming landscape, they have no guarantee those farmers will continue selling to them, rather than seeking other buyers.
Some interviewees referred to the hesitancy of farmers, who might not trust the new practices, or that promised finance will meet their expectations. Furthermore, unclear tenure makes financing of restoration risky, as land could be claimed by other actors after investment. This is tied to a weak political environment and land use policies, often reflected by frequently changing laws, and lack of transparency or enforcement of the law. Some policies, including subsidy schemes, incentivize other land uses, making farmers less willing to engage in restoration, or threatening permanence if such policies are not aligned with corporate restoration interests.
Finance for impact and sustainability branding
Corporations noted the value of financing restoration for its social and environmental benefits alone, and for associated branding benefits. With growing public environmental concern, communication of restoration can allow corporations to position themselves as being sustainable and through that gain market benefits. These motivations draw corporations towards projects with storytelling potential (to better communicate sustainability credentials), for which agroforestry or tree planting initiatives were noted to be especially amenable. Conversely, lack of storytelling potential and quantification systems for benefits was a barrier to financing restoration approaches, such as natural regeneration, which did not have clear pathways linking intervention to outcomes.
Asset managers face strong barriers to finance restoration
In addition to improving their sustainability profile, restoration investments can provide an avenue for asset managers to hedge risks against both more unsustainable investments such as oil and gas, which can turn into stranded assets and incur reputational risks. Investments in resilience can also hedge risks from natural disasters threatening assets in landscapes. Yet, none of these incentives alone will drive investment finance for restoration if the project lacks a clear return on investment (ROI) profile, which is required for impact investors and traditional asset managers alike.
To attract investments from asset managers, restoration projects must provide a business case with risk-adjusted ROI. This would translate into projects from which a commodity can be derived, such as timber or agricultural products, or carbon offsets.
The sustainability aspect of restoration was perceived to be a fundamental reason for why asset managers could imagine engaging in restoration. This emerges from intrinsic motivations from asset managers, as well as pressure from investors and the general public which are increasingly concerned about the climate. “Particularly at the time when we were setting up, we were just coming out of the Paris agreements, and it was feeling that we all should be doing something. It was a very concrete tangible thing to do. So I think it's a bit of external pressure, and more genuine interest of people in these organisations. I would say it's a mix.” (I1)
Hedging risks were also identified as a possible incentive for asset managers to invest in restoration. This was both linked to hedging reputational risks from more unsustainable investments, but also to investments that are vulnerable to natural disasters, and to diversify the portfolio when being at risk of ending up with stranded assets. “For some investors and banks, where they're highly exposed to extracted markets, oil and gas or non-sustainable markets, they want to hedge that risk. But again, from a PR perspective, but also from a pure value perspective. If those markets get severely regulated it all goes bad, then that hedge will be offset if they're invested in this sustainability sector as well.” (I4)
Despite a budding interest, we found little current activity from asset managers in the restoration finance sphere, and strong barriers are hindering this group from engaging in restoration at scales. Fundamentally, restoration is a unique and nascent asset class that tends to have high risk with too low ROI to offset those risks. There is a mismatch with fiduciary duty, in which an investor is obliged to make the best financial decision for their investees. Both the financial and non-monetary benefits from restoration require a long timeframe making restoration an illiquid investment, and many projects are too small to make associated transaction costs worthwhile. The current reality is that the benefits of restoration are largely public goods, and there is a lack of bankable restoration projects that fit investment criteria. “There is stuff available, but it has not been de-risked enough for the likes of our fund or our big institutions to get involved in, so that it passes their internal sort of investment committee and risk criteria and solvency tests. And I mean that's the problem that - these banks are not set up to invest in these sectors” (I4).
There is, additionally, a lack of standardisation and knowledge around what works and what does not. This uncertainty increases the risk of restoration investments. An impact investor developing business cases for restoration stated: “We’re very small and very experimental. Nobody invests in us because we have nothing. We have no track record. We don't know whether these models will work financially or not. I mean, we need to be honest, and that is the case for the majority of these restoration business models” (I1). When there is a track record, it is not always sufficient to meet investment standards. Upon discussing timer projects in African countries, a representative for a forest equity firm stated “The return profile hasn't been there. And there has been too many failures” (I9).
Finally, restoration largely takes place in emerging markets, in which weak institutions, poor governance, and lack of rule of law are perceived to create a difficult operating environment for any type of investment. “I think, wanting to start landscape restoration in the tropics is probably a non-starter, because it's too much risk” (I6). Changing political priorities pose another risk, as it is difficult to change project design when it is set up to match one set of legislation, for example linked to foreigners' right to buy land. Weak institutions and governance also lie behind uncertain tenure issues that represent another risk for restoration investments, as land can be claimed by other actors after an investment has been made. There is also a reputational risk that comes from not being able to control that investments are happening in a way that aligns with humanitarian rights.
Public policies and green finance instruments are needed to scale investments in restoration
There is growing interest for corporations to change their sourcing behaviours and engagements with local communities, and for asset managers to invest more sustainably22. Yet this interest has not translated into sufficient activity in restoration. Corporations state that they are held back by lack of knowledge and a lack of financial incentives for many types of restoration. Cross-competitive collaborations and private-public partnerships can increase confidence, but these are insufficient without broader changes in policy. Asset managers perceived even greater barriers to finance restoration. Restoration is deemed a high risk, unknown asset class with too low ROI to justify those risks, and competes with other sustainable asset classes with a proven track record and better risk-adjusted ROI profile, such as renewable energy and sustainable transport. There are fundamental differences between restoration and other sustainability asset classes such as renewable energy. Even though both renewable energy and restoration produce positive externalities, the outcomes from restoration are not always marketable, unlike energy. Restoration also often competes with food and income production for some of the poorest communities worldwide. Without efforts to de-risk restoration, increase their ROI, or otherwise incentivize investments, asset managers activity in most restoration activities is likely to remain low. Below we outline three strands of public and civil society interventions that can help improve the conditions for investment and corporate finance in restoration.
Expanded markets for restoration benefits: The creation of wider markets for restoration benefits together with improved systems to quantify a broader array of restoration benefits can increase incentives for corporations and asset managers to invest in restoration and steer private finance towards projects without a traditional economic business case. Both improvements to carbon markets and the creation of new biodiversity markets are needed to encourage more restoration investments.
Existing carbon trading systems are a good basis, but still suffer from scale issues and there are uncertainties as to how they will develop in the future. The European Emission Trading System (ETS) is prominent, but has faced challenges linked to the price volatility of carbon credits and strong pressuring from lobbying organisations that led to excessive emission allocations32. These processes have weakened the climate change mitigation outcomes of the system. Smaller local initiatives have also been developed, such as the Scottish peatland code which quantifies and sells carbon credits from peatland33. Though many of these initiatives are in their early stages, they indicate a growing movement towards these markets, further reflected in the fact that the EU ETS price rose from €18 price in 2020 to €50 in May 202134.
Green finance instruments and public finance: Blended finance mechanisms and green bonds can help spread the risk associated with restoration and increase the overall investment size. One such example is the Forest Resilience Bond, a blended finance mechanism worth $25 million developed by World Resources Institute (WRI), Blue Forest Conservation (BFC), National Forest Foundation (NFF), US Forest Service (USFS), Yuba Water Agency (YWA), and the North Yuba Forest Partnership (NYFP), aimed at leveraging private finance for restoration projects that promote forest resilience and post-fire restoration projects in California 35 .
Public involvement in restoration offers two major advantages, a long-term perspective, and the potential for social safeguards. Public finance can cover start-up costs linked to infrastructure and capacity building in restoration, and decrease risk for asset managers by, for example, providing first loss guarantees in blended finance schemes. Public support can also help ensure that private profit objectives work with, rather than against, the desires of the billions of people that live in restorable areas, many with below average levels of income, health and education36, and who are dependent on these landscapes for food production and to meet other basic human needs37.
Regulations and subsidies for restoration investments: Similar to the process of promoting investments in renewable energy38, trustworthy policy signalling will be important to mobilise finance in restoration. Policy mechanisms similar to the feed-in tariffs for renewable energy39 can provide long-term price certainty and cost guarantee for actors developing quantification systems and restoration benefit markets. Regulatory establishment of markets with a cap-and-trade system for biodiversity offsets can increase momentum around restoration projects with stronger biodiversity profiles40.
Without these three sets of interventions there is a significant risk that restoration efforts left to the private sector alone with not only be insufficient, but will bias towards projects that focus on carbon, with uncertain or negative impacts on other sustainability outcomes. When restoration is financed for green marketing there is a risk that funders leave after the marketable activity – often tree planting – has been completed, leaving no funding available for maintenance that is crucial for permanence. Improved quantification and monitoring systems will be important to increase investor confidence in restoration, but also to hold private actors accountable to deliver on their commitments. If a wider variety of benefits can be quantified and monitored, this can unlock finance for an expanded array of restoration projects and increase the chance that desired restoration benefits are realized. Accounting for social aspects adds another challenging element to restoration. It remains unclear what form markets for restoration livelihood outcomes could take and such metrics could never be all-encompassing of the diverse outcomes of restoration. Yet, including metrics that reflect the income and equity outcomes of restoration is crucial for signalling the importance of these factors and also likely to be important for the long-term effectiveness of restoration projects36.
Engaging private actors to finance restoration is crucial if we are to meet global restoration targets. In this paper we assessed why finance remains limited despite growing private interest in restoration. We find that corporations perceive existing market-driven incentives to engage in agroforestry, regenerative agriculture, and active restoration to comply with emission reduction commitments, improve the sustainability of their supply chains, and enhance their branding. Key to this is a clear business presence and case in the target region. However, asset managers perceive mostly barriers, including the fact that restoration is a nascent, high risk asset class, with too low a return on investment to justify those risks. Asset managers favor projects in low-risk environments where there is a clear product that can be commercialized. No actors exhibit notable interest in natural regeneration. Three strands of public intervention can help overcome these barriers: expanded markets for restoration benefits, development of green finance mechanisms and support from public finance, and regulations and subsidies for restoration investments. Yet, it is also important to acknowledge the limits for private finance for restoration, even in the context of public support. Private finance largely lacks accountability to public goals, and public and civil society involvement is needed to ensure private finance is leveraged towards restoration that is both equitable and ecologically sound.
2.1. Development of interview guide
A literature review in combination with attendance of relevant conferences (such as the GLF Luxembourg 2019 and Innovation Forum 2019) and around 20 exploratory interviews were held with people working in restoration finance as a basis to identify key gaps in knowledge to explore.
2.2. Sampling of interviewees
In this project we assessed funding potential stemming from two types of private funding actors: asset managers investing with the purpose of gaining return on investments (ROI), and corporations as profit driven entities producing products or services for consumption by other corporations, public actors, or individuals.
To answer the research questions, we conducted 30 in-depth semi-structured interviews within 6 categories presented in Table 1. The interviewees were sampled using existing networks, snowball sampling, and from attendee list from relevant events (such as GLF Luxembourgs’ finance session 2019). These actors hold diverse expertise in the topic of restoration finance, and the diversity of interviewees gave us a well-rounded understanding of the topic of restoration finance.
2.3. Interviews
The interviews were conducted over zoom. Interviewees were contacted via e-mail, where the interview request was submitted together with a one-pager explaining the project as well as an information sheet for participants which had been approved by the ETH ethics committee. The interviews were recorded, subject to interviewees permission to do so. If permission to record was not given, notes were taken throughout the interview. We mixed thematic analysis with inductive methods, meaning that we started out with a conceptual framing of relevant components and interaction, but then made smaller adjustments to the interview guide as the interview proceeded and new themes emerged. The aim with this method was to gain a rich and nuanced understanding of the issue we study, given the lack of prior research that has been conducted on this topic.
2.4. Data analysis
Our interviews were transcribed using the transcription software Otter. We used the program NVivo to code our collected data, which is a software for analysis of text files. The data was analysed using inductive methods mixed with thematic analysis,41 where key themes are identified in transcripts of the interviews. Thematic analysis is an approach within qualitative data analysis that allows for the researcher to find themes in raw qualitative data. With thematic analysis the researcher can identify and analyse patterns within a data set, to organize and describe the data in detail42. To do this, the researcher will first closely study the transcribed text to look for themes that come up repeatedly. A theme is identified as something in the text that captures something of relevance in relation to the research question42. It could be something repeatedly mentioned by several interviewees, but it could also be something strongly emphasized by a few. This aspect of thematic analysis allows for flexibility, which is a strength of this method. It also comes with potential biases as it relies on the scientist's own judgement. We followed a 6 step process41 to analyze our data with thematic analysis: 1. Familiarization with the data: 2. Generating initial codes: 3. Searching for themes 4. Reviewing themes 5. Defining and naming themes 6. Producing the report.
2.5. Ethics
The study was conducted with approval from ETH Zurich’s ethics committee.
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- SupplementarymaterialUnlockingprivatefinance.pptx
Table with codes for statements presented in article + example quotes