By: Joan Larrea and Annie Chen
Blended finance will be instrumental in advancing natural capital solutions to halt the climate crisis and can lead to bridging a USD 300 to 400 billion funding gap in conservation finance in Asia-Pacific.
While the current global health pandemic demands innovation in medicine, it also urges us to act on learned lessons about our state of resilience and ability to thrive. We know we are deeply dependent on our natural habitats, and our survival as a species is irrevocably intertwined with that of the other living beings sharing our planet. It is indisputable that our economic and social resilience is tied to the health of our natural resources. Unlike our unpreparedness in facing the current pandemic, we already have what is needed to repair our environment. We have preventative and curative solutions to curb greenhouse gas emissions and reduce our vulnerability to the impacts of global warming. Investing in our natural capital, including water, land, soil, air, plant and animal species, forests, and minerals, can be achieved at scale. What is needed is greater private sector investment.
Asia has proven to the world it can be a leader in crisis management; its policy makers and population can amass the resources and shared commitment to halt a global pandemic. However, compared to the outsized risks and population threatened by climate change in the region, the current pandemic is simply a wakeup call to act with greater urgency to protect the livelihoods and welfare of millions living across Asia-Pacific.
Asia-Pacific contains 17 of the planet’s 36 biodiversity hotspots, and 30% of the region’s wealth (GDP, exports, government revenues, etc.) stems from natural capital. Unfortunately, years of unsustainable practices in infrastructure expansion, water extraction and land conversion in the region have led to the deterioration of land, freshwater, and marine ecosystems, worsening water and food insecurity, and increasing vulnerability to climate change. Without increased private sector intervention for conservation in the region, over 3 billion people will be living in water-stressed areas across the Asia– Pacific by 2050, placing added pressure on neighboring regions.
Where national governments are slow to allocate capital, innovative financing approaches like blended finance have proven instrumental in financing climate change mitigation and adaptation projects, creating commercially viable transactions that interest private investors. We’ve seen this at work in developed countries like the United States, with The Forest Resilience Bond developed by Blue Forest Conservation in California. This bond is a USD 4.6 million public-private partnership, with bridge financing from two environmentally minded investment firms for the rehabilitation of 15,000 acres of forest land in the Tahoe National Forest. This partnership is expected to reduce the risk of cataclysmic wildfires, while protecting water resources, averting carbon emissions, and creating rural jobs.
Convergence’s database–the most comprehensive database for blended finance transactions globally– has recorded 30 blended finance transactions focused on conservation in emerging markets, representing US$3.1 billion in aggregate financing. These have largely focused on sustainable agriculture and forestry, concentrated in the USD 50-250 million range with a median size of USD 87.5 million. But, the number of nature-based blended finance opportunities in emerging and frontier markets is improving. What we have seen is that working capital for those who are developing investible structures and visibility of an investible pipeline are essential to pull in private capital to turn these opportunities into real investment engines.
In Asia, Convergence’s Design Funding Program awarded ADM Capital and ADM Capital Foundation a proof of concept grant to finalize the design of a Tropical Landscapes Finance Facility (TLFF) to deliver long-term financing for renewable energy and smallholder livelihood projects in Indonesia. In 2018, TLFF closed the first tranche of Asia's first corporate sustainability bond—a USD 95 million sustainability bond to finance sustainable natural rubber production in Indonesia across heavily degraded concession areas in the Jambi and East Kalimantan provinces, creating a network impact that has helped employ 16,000 people, rehabilitate land, and protect wildlife conservation areas.
Though investors have shown greater appetite for blended finance in developed countries, where government actors are more sophisticated and capital markets are relatively well-developed, the urgency to finance natural capital solutions in nascent markets must take greater priority. We cannot afford to sit idle as the natural ecosystem around us dives deeper into destruction. Even as the world looks to shut borders, we know that global warming knows no such boundaries. Our house is on fire.
As partners, our joint focus in Asia-Pacific is to continue raising the profile for blended finance, and boost deals in nature-based solutions for the region to preserve a rich portion of the world’s natural ecosystems. According to the Convergence State of Blended Finance 2019 report, blended finance transactions targeting Asia – including both East Asia and the Pacific and South Asia – have increased to meet the rising demand. The Convergence database indicates the region has seen 127 transactions close, with an aggregate deal flow of approximately USD 23 billion.
In response to this growing interest, Convergence and the RS Group launched the Asia Natural Capital Design Funding Window to accelerate the number of blended finance vehicles that go to market, structured to build a stronger investible pipeline for natural capital projects in Asia. Relative to all blended finance transactions, solutions for conservation have been nearly twice as likely to draw on design-stage grants, suggesting that such funding is instrumental for market acceleration.
Blended finance is critical in mobilizing private capital to advance global sustainability goals and can ensure institutional and commercial investors have a material impact on biodiversity. By no means is it a solution for the entire conservation financing gap, but it can address the funding gap in a significant way. The COVID pandemic has demonstrated the interconnectedness of our behavior, our health, the health of natural systems, and our economic future. In healing this gravely ill planet on which we depend for our wellbeing and survival, investors must likewise share the responsibility in its recovery.
With funding from the RS Group, Convergence is currently welcoming applications for its Asia Natural Capital Design Funding Window until September 15 to provide grants for the design and launch of catalytic blended finance solutions focused on natural capital in Asia. Learn more.