SDG Impact Finance Initiative, with the support of Convergence, awarded a proof of concept grant of USD 200,000 under its Innovation Window to CrossBoundary for its CrossBoundary Carbon Fund for Nature-Based Solutions(NbS). The fund, currently incubated in the Climate Finance Lab, aims to bridge the gap in financing nature-based carbon projects and offer mission-aligned credit for off-takers at a lower price.
Despite representing more than a third of the necessary climate solutions, nature-based solutions (NbS) receive significantly less private funding than energy and low-carbon transport, which currently dominate climate finance. Around 86% of NbS projects are funded by public investors, leaving a substantial funding gap of over USD 700 billion for the next decade to be filled by private capital. Global carbon markets are promising for attracting private capital to finance NbS projects. Corporations increasingly pay to offset their CO2 emissions, creating a market for projects that sequester carbon or demonstrate emission reductions. As the voluntary carbon market expands rapidly, a key challenge it faces is the limited availability of high-quality nature-based carbon projects. There is a need to increase the supply of high-quality carbon credits to help increase the liquidity, integrity, and scale of the voluntary carbon market.
Cross Boundary’s Carbon Fund, a blended debt fund, aims to increase the supply of high-quality carbon credits in the economy. The fund focuses on irrecoverable carbon, or carbon emissions resulting from irreversible ecosystem loss. The fund’s innovative structure addresses the climate finance gap in four ways. First, the solution offers a lower cost of capital and open-source structures, enabling funding from a wider range of project developers. Secondly, the solution allows project developers to secure better terms with buyers of credits with less reliance on pre-purchase agreements at a discount to market price. Thirdly, the solution leaves more value to groups doing the actual work on the ground instead of the intermediaries. Lastly, the solution creates long-term jobs for the communities and thus encourages communities to be active participants instead of merely stakeholders in the project cycle.
Cross-Boundary has signed partnership agreements with developers such as Earthshot Labs to provide technical assistance. Earthshot Labs has experience supporting landscape-scale reforestation and conservation efforts across four continents.
Design question and learning potential for the market: How can a blended finance fund facilitate transactions in the voluntary carbon market while benefiting communities in Sub-Saharan Africa?
Cross Boundary selects mid-sized carbon credit producers and project implementers ("developers") based on specific criteria and establishes a financial parent vehicle ("HoldCo"). HoldCo then enters into Open-sourced Simple Agreements for Future Offtake (SAFO) with corporate carbon off-takers to provide them with secure loans and offer standard terms/contracts at a lower cost. By acting as an intermediary between developers and off-takers, HoldCo provides developers with debt for carbon projects, thereby reducing their initial capital requirement. This benefits off-takers as they are guaranteed a reliable supply of carbon credits at a predetermined price. Additionally, the fund owns a portfolio of project Special Purpose Vehicles (SPVs) operating in emerging markets to manage these projects. These SPVs engage with governments and communities by signing Benefit Sharing Agreements with local stakeholders. Through the partnership agreement, Cross Boundary will offer stakeholder consultation, education, and capacity-building programs, in exchange for local regulatory support.
The carbon fund for NbS by Cross Boundary is the first debt fund for nature-based carbon projects in Africa. Investors can participate at one of three levels: senior debt tranche, concessional mezzanine tranche, or equity tranche. At the end of their investment period, investors are repaid through carbon credit revenue generated through long-term off-take agreements.
