Demand for Natural Climate Solutions is catching up with supply
For some time, the chatter in the climate and land-use space has pointed towards the demand outweighing the supply for high quality, natural capital investments, but now I’m a firm believer that this is beginning to take place. When I started The ForestLink 15 months ago, the clients I was working with were mostly characterized by project developers seeking funds. Now, however, the tables are turning and most of the new clients I engage with are investors looking to build out an investment strategy for nature-based solutions. There are many investors that are new to the space, and in broad terms “the space” can be categorized as Nature-based solutions (or NBS), Natural climate solutions (or NCS), Natural capital investments, Forest and Agriculture investments, AFOLU investments, Climate-positive investments, Nature-positive investments. The list goes on – but the common thread, whatever you want to call it, is that these investors are looking for opportunities where their funding can both generate a market-rate return while improving land-use, and generating non-financial climate, environmental and social impacts.
Don’t expose yourself to these land-use investment risks
Naturally, one of the first things investors want to do is build a pipeline of opportunities that fall into the nature-based solutions bucket of alternative investments. However, as I have engaged in discussions with investors, I’m finding that a lot of important questions regarding their investment strategy have not yet been clarified. The risks of not having a clearly defined investment strategy are several. Some of these include:
- Long investment process – You may enter the space with hopes to deploy capital quickly, but without a clear strategy, it may take you a long time to appropriately assess opportunities. You won’t have clear criteria on what to look for and you won’t have a benchmark for comparison across the different assets you are considering.
- Agreeing to unfavourable terms – Urgency to place capital into what may be a solid investment opportunity from a market, climate and nature perspective may mask unfavourable investment terms already established from current investors, jurisdictional or legal constructs, or adverse long-term supply agreements. You run the risk of locking yourself into a long-term investment with unfavourable terms.
- Not understanding investment risks – There are several different assets you can invest into under the umbrella of a NBS or NCS strategy – commercial forestry, agriculture, agroforestry, forest conservation, mangrove restoration, regenerative agriculture, and so on. Though there are many similarities across these different asset types, there are significant differences – also in the risk profiles. It is important to clarify your own risk profile to appropriately design your investment criteria among these different asset types.
The building blocks of a Nature-based solutions pipeline
Whenever I start a conversation with an investor who is interested to build a NBS pipeline, the primary questions I ask in order to understand their strategy are more or less the same. I thought I would share some of these with you, so if you are looking to develop your own NBS pipeline, you can gain some clarity on where you want to go. This will assist you in weeding out uninteresting projects and help you from falling prey to the risks mentioned above.
What are your objectives? If you could write your investment strategy in one sentence – how would it look and what key words would you include – for example:
We invest into low-risk forest and agriculture investments that improve carbon stock on the land we invest into.
We invest into nature-positive land-use investments that generate local employment and deliver immediate cashflows.
What natural capital assets are interesting for you to invest into? Some examples are below:
- Forestry (commercial, conservation)
- Agriculture (agroforestry, regenerative agriculture, climate-smart agriculture)
- Wetland preservation or restoration
- Mangrove preservation or restoration
What geographies do you want to invest into? Developed geographies, emerging economies, frontier geographies? Do you have specific countries in mind?
At what stage in the investment lifecycle do you want to invest – early stage or greenfield, or later stage or brownfield? Do you want to invest into processing or other value addition to the raw natural resource?
What are your financial return expectations? Are you looking for risk-adjusted market rate returns, or is the nature or climate impact more important or as important when compared to financial returns?
Are you looking to access traditional markets – forest and agricultural products, and/or rising ecosystem services markets (carbon, biodiversity, water)? Do you have a preference?
Carbon markets & claims
Do you want access to the carbon credits and claims yourself, or are you interested to sell the credits, and have them be a source of revenue for your investment? Or a combination of both? How quickly do you want your investment to be generating carbon credits? Are you willing to pay for the upfront certification costs in earlier stage projects?
What impacts are most important to you? Consider the UN SDGs as metrics, which would you most like to contribute to? Considering the most obvious impact characteristics of NCS investments, can you prioritize among the following:
- Climate benefits (CO2 emissions removed through storage/sequestration, avoided CO2 emissions through avoided deforestation and forest degradation)
- Land-use improvement (forests and other ecosystems brought under improved, sustainable management)
- Nature benefits (biodiversity improved, biodiversity protected)
- Sustainable production (renewable wood products, high-emission substitutes for steel, concrete, plastic, agriculture approaches that restore soil and water integrity)
Are you interested in direct investments or investing via funds? With what vehicle would you like to invest (equity, debt, convertible debt)?
What is your time horizon to hold the investment – Less than five years, five-ten years, 10-20 years, 20+ years? When do you expect to be generating cashflows – Immediately, 2-5 years, 5-10 years, 10-20 years, 20+ years?
If you are interested in equity, are you looking for 100% ownership, a majority, or a minority stake? Do you have a preference for the types of investors you like to invest alongside (or not)? (Institutional investors, DFIs, Multilaterals, HNWIs, family offices and foundations, boutique funds, corporations)?
Do you require carbon and forest certification? Do you prefer particular standards?
Should your investment own the underlying land, or is a lease or land-use concession or other sound tenure agreement applicable?
Do you only want to invest with a corporate implementer/executor, or are you comfortable in investing in a model where smallholders are central to the delivering the business case?
Do you have any “no-goes”
Are there any clear exclusions within your investment strategy? This could relate to land-use, co-investors, particular risk exposure, geographies, etc…
Set-up your Nature-based Solutions Investment Strategy Exploration Call
If you are new to investing in Nature-Based Solutions and you are not sure how to best identify your priorities and how to position yourself for developing a profitable and impactful natural climate solutions investment strategy, I am offering a 2-hour exploration call, to bring clarity to your NBS strategy. I can help you save time and money, so that you can build a targeted pipeline, deploy capital quickly and with the confidence to meet your financial, climate & nature positive investment objectives.
If you would like to learn more about this offering, please write to me and I will send you the information.