New funding aims to catalyze innovative climate finance tools

By Adva Saldinger 25 January 2017

A view of Seychelles Islands. Photo by: Charly W. Karl / CC BY-ND

A new set of grants are turning to private capital to tackle one of the great challenges in implementing the Paris climate agreement: finding ways to fund climate adaptation, conservation and mitigation efforts.

Convergence — a platform designed to help create blended capital deals to tackle social or environmental challenges — awarded two grants last week to help usher new financing vehicles through proof of concept and into implementation. The grants are part of 10 million Canadian dollars ($7.6 million) of funding Convergence will distribute, but it is not releasing specific award amounts.

The grants to ADM Capital and NatureVest, the investing arm of the Nature Conservancy, were made with the hope that the new products they’re designing can be replicated and become part of the arsenal of financing tools necessary to tackle climate change.

The ADM Capital Foundation is creating the Tropical Landscape Financing Facility to provide loans and grants to large scale projects that improve access to electricity or improve farmer production while reducing greenhouse gas emissions, limiting deforestation and enhancing farmer livelihoods in Indonesia.

The facility will fill a particular hole in long-term, patient capital that is willing to accept a time lag before seeing returns. It will partner with the United Nations Environment Program, The World Agroforestry Center, or ICRAF, and the bank BNP Paribas.

For its part, NatureVest will use the grant to develop a blue bond fund, which would buy back the sovereign debt of small island developing states at a discount, restructure it under more manageable terms and use the proceeds as the government repays to address three key areas: coral reef management, fisheries management and climate adaptation.

Funding livelihoods, environmental protection in Indonesia

The Tropical Landscape Financing Facility emerged from ADM Capital’s 15 years of experience working in Indonesia. Many farmers there struggle to survive on the low crop yields and need to seek more land — often forest land. In some cases local governments, under pressure, have been handing formerly protected forest land to mining or other companies to help support community livelihoods, Lisa Genasci, CEO of the ADM Capital Foundation told Devex.

Now, ADM Capital Foundation, along with ADM Capital, will seek to finance solutions that capitalize on commercial opportunities and tackle critical development challenges while furthering conservation efforts.

ADM Capital identified two key areas where traditional development work presented a commercial opportunity and conservation benefit. First, improving agricultural efficiency through training and access to better inputs would help smallholder farmers get the most out of their land. In tandem, a business would work with, for example, large scale palm oil purchasers to buy from the farmers. The second opportunity was in providing additional access to power through wind solar, mini-hydro and methane capture projects, Genasci said.

In addition to a commercial loan fund, the facility will have a grant fund run by UNEP and ICRAF that will be used for early stage development work that’s necessary to pave the way for business opportunities, for example supporting agriculture extension services.  

The main facility will look to finance projects worth tens of millions of dollars. The first, which is being finalized, will likely be about $50 million and target palm farmers, helping them access financing from the facility through funds distributed to local banks. The project will fund extension services and connecting farmers to a mill or company that will buy their crops. The loans the farmers take from local banks to finance their growth may have specific environmental restrictions written in, for example to prohibit them from expanding into forest lands. The facility is partnering with a local NGO and a company focused on using degraded land for agriculture on the project.

“The idea is to get to scale with projects,” she said. “We’re trying to operate efficiently completely as a commercial fund with a development and environmental agenda.”

As the facility is built out, it will need some support of development banks, likely through loan guarantees to help mitigate risk, Genasci said. The facility will lend to local banks that can then lend to farmers tied to the business or project at reasonable rates. She added that ADM is careful to ensure that the the financing does not undercut local banks or distort markets, as has happened with other projects.

ADM encountered few previous examples as they constructed the new facility. So the project plans to be fully transparent about how they design the project and have a monitoring and evaluation and learning component built in. The hope is to show investors that this type of project can produce and bring in more private sector funds to address environmental and social challenges, rather than just relying on philanthropy, Genasci said.

“What’s exciting here is we have an investment manager, ADM Capital, with long experience in Asia in fully commercial funds and a commercial bank, BNP, together working to structure a product that has a very strong development, environment and social agenda,” Genasci said. “The potential for replicability here is great.”

Blue bonds

The Nature Conservancy is also looking to help prove to investors how tools can be adapted to support conservation and climate mitigation, in this case related to oceans and small island developing states, or SIDS. NatureVest, like its predecessor programs, has been using private capital to finance conservation for years, but they are now seeking to go big on a model where they’ve seen early potential.

NatureVest’s blue bond will follow the example of past work in the Seychelles, where the investment arm closed a deal just under a year ago to buy down debt with $15 million in loans and $5 million in grants. It handed the debt over to a local trust that NatureVest had helped set up to administer the funds as the government repays. Funds will be divided into three streams: paying back investors, funding programs in the country that address key conservation concerns including fisheries management and adaptation, and support for an endowment so operation can continue after the investment period.

“[NatureVest] focused on SIDS initially because they have very clear policy needs and the fact that many have high debt loads so there are opportunities to buy debt at discounts,” said Rob Weary, the senior director of product development at NatureVest.

“While there may not be debt relief, per se, its debt redirection,” he said. “Seychelles redirected $11 million that is instead invested in the country.”

NatureVest funded the Seychelles deal itself, but it needed more capital in order to expand to other countries — many of whom have approached the organization after hearing about the Seychelles project. That’s where blue bonds come in. NatureVest will sell the bonds to investors interested in ocean conservation and climate adaptation who are willing, in this case, to take somewhat lower returns. The project will function similarly to some existing green bonds on the market. Once the bond fund is raised, the money will be used to buy back debt. As countries repay their debt to the local trust, investors are repaid as well.  

The Nature Conservancy has used debt conversions since about the 1980s under the U.S. Tropical Forest Conservation Act, but when federal funds dried up for that mechanism, the organization went looking elsewhere.

“This is a twist on what done in the past,” Weary said. “[There is] no reason it couldn’t be applied to other development needs or in environmental, or other needs.”

The Seychelles deal proved that this kind of funding arrangement could work and also exposed some of the challenges, including getting all the pieces together — from the creditor to sell the debt, to raising the needed grant capital. Weary said he is hoping to expedite the process in future investments, in part by already having the investment pools in place through the bond fund.

NatureVest also has a ready pipeline of countries and projects, he said. At the moment there is probably $100 million worth of work in the pipeline, with potential to grow to $300 or $400 million over the next five years. In order for the bonds to work, they need to be long-term. NatureVest is aiming for a 15 year note with an interest rate of about 2.5 percent, and it is looking for additional ways to derisk the investment.

The structure for the blue bond fund should be finalized in the next few months and NatureVest aims to start issuing notes by the end of the year, he said.

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About the author

Adva%2520saldinger%2520photo
Adva Saldinger@AdvaSal

As a Devex Impact associate editor, Adva leads coverage of the intersection of business and international development. From partnerships to trade and social entrepreneurship to impact investing, she enjoys exploring the role the private sector and private capital play in development. Previously, she has worked as a reporter at newspapers in both the U.S. and South Africa. Most recently, she has been ghostwriting a memoir for a former child slave and NGO founder in Ghana.


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