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08 Feb 24

Grantee Insights: Lestari Capital

Grantee Insights: Lestari Capital

During COP28, Convergence announced Lestari Capital as among the grantees awarded an Asia Climate Solutions Design Grant for designing a blended finance facility to invest in conservation and restoration projects in South-east Asia.

Convergence’s Design Funding and Market Acceleration (DFMA) Manager, Krishna Malhotra, spoke with Lestari Capital’s CEO, Michal Zrust, about how Lestari Capital aims to design their blended finance vehicle and their advice to prospective grantees.

Conversation has been edited and condensed. Find the recording of the full interview here.

Tell us about Lestari Capital’s story. What you do, where you work, and what drives your mission?

Lestari Capital started about six years ago in 2017, but actually the idea for Lestari Capital started much earlier than that.

We work in nature markets, innovating around structuring the market, working very closely with clients to build the mechanisms and the business cases for them to invest in nature- and climate-based solutions. One of our flagship programs, the Rimba Collective, really started as an idea.

Just to give you an example of how this works, we started with the idea that “the palm oil industry has really difficult challenges around sustainability.” A lot of those challenges are becoming more clear and they focus around the fact that the industry is heavily dependent on land use.

So you have challenges around deforestation, you have challenges around Scope 3 emissions, you have challenges around protecting sites, protecting the supply chains, not cutting out suppliers, working with suppliers to transform the supply chain towards sustainability. A lot of these challenges can be responded to through financing, supporting nature-based solutions on the ground, and that can take many different forms.

We worked with our four founding partners within the Rimba Collective to better understand what the business case is in terms of what they need, what the outcomes are, and what the impacts are that they need. Then we structured the mechanism around that to raise financing from the demand side, manage the financing and then deploy the financing to portfolios of projects.

We also work on those portfolios of projects—they are third-party projects that we finance, but we build the portfolios, we work on the due diligence, we originate the projects, we onboard those projects into the project portfolio. We provide measurement, reporting and verification (MRV) services, we're financing these projects in a portfolio in an aggregated way to effectively source the impacts that they generate. The impacts are numerous—whether it's biodiversity or conservation or restoration or livelihood impacts or climate focused impacts—and those impacts are then verified, put into a registry, and go towards the fulfillment of the corporate sustainability commitments that they have. Those could be quite varied in terms of how the impacts are utilized.

You could say that what we do is build nature credit mechanisms that are able to actually source and deliver nature credits to support the fulfillment of corporate sustainability commitments on the ground.

We do this in a number of ways. We as a company are actually innovating now around sourcing Scope 3 emission outcomes. We work on carbon credits as well.

We support certain companies and compliance with simple, specific standards. There is a wide variety that we do, but one of the most exciting things is innovating new mechanisms and trying to build the market, and that will then support conservation and restoration into the future.

Can you tell us about the blended finance vehicle you are designing and the development challenge you are looking to address?

What we're looking to do is really build on the experience that we have from the Rimba Collective working with the palm oil sector and bring this solution to the fashion industry, specifically the garment sector.

There are many similarities between any sector that is dependent on land intensive commodities. They are all facing multiple demands—some of them are still emerging, but some already exist and those could be both from voluntary commitments such as science based targets for nature or science based targets around climate, there could be no deforestation commitments and so on. More importantly there are emerging regulatory demands on these companies and those could be things like the EU developments under the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, under these [directives] companies will have to identify what their footprint is and report it publicly. Of course, companies will then be saying, “what can we actually do about this? How can we go through that journey where we identify what the impact is, but we avoid future impact? We minimize the existing impact. We rehabilitate.” There will always be a residual in there, so how do we address that remaining footprint?

There are effectively two buckets of inserting and offsetting and I firmly believe that nature credits can play a really important part in supporting companies in being able to credibly demonstrate that they are achieving or that they can achieve, the targets that they have committed to or that they will be forced to commit to at a later stage. What a lot of these commitments have in common is there is a focus around the need for intervention on the ground.

You’re required to finance interventions, whether they are removing or mitigating carbon emissions or they are actually supporting projects that avoid further deforestation in high deforestation risk areas in your sourcing regions. You proactively protect your supply chain—rather than be reactive, which is really no longer acceptable. But then, how do you positively contribute to the world? And that is, I think, where we see no net loss and no net positive kind of gains.

Nature positive: there's a lot of terminology around it, but what this means is how does the corporate world actually contribute towards conservation, restoration and livelihoods in a positive way?

This mechanism that we hope to conceptualize, that we're doing the feasibility study for under this grant, is really focused on that. The fashion industry is fascinating, they are at a much earlier stage than many other industries. They have similar issues that they need to address, but in many ways there are also different challenges, for example, around traceability to the field, certain commitments and the level of commitments that they have, biodiversity, pollution impacts and so on. What we're going to be doing here is not only identifying what the industry actually needs, but how it can achieve those needs and targets.

Can you shed more light just on the importance of having a blended finance mechanism here? Why is it important? How can blended finance help to mobilize these corporate commitments and support projects on the ground to create major credits and achieve the intended impact outcomes?

To make an impact, develop a new market and also work within a new sector, it is important that you know many traditional investors, different financiers probably would not support such early stage market development—and that is where blended finance plays a key role.

[Blended finance] catalyzes movement towards structuring the market better, being able to demonstrate that there is viability within the sector, that the mechanisms can function and that they can deliver the impacts that you need.

It also signals to corporates that not only is there interest from potential investors, but that there is a general consensus on the direction that the sector should be taking.

I think that's really important because there is a lot of fragmentation. There are a lot of different initiatives which work around this sort of biodiversity credit, nature credit and even carbon credits space. The corporates start to see that this can be a pathway to achieve their goals and sustainability credibly. We can demonstrate that and our actions are going to be taken in a way which is positive rather than being accused of greenwashing, which unfortunately is an issue.

Blended finance provides that catalyst towards the market maturing and structuring. It also provides the finance that then allows other investors to come into this space and say “this can actually work. This is an investable model.”

How will this grant funding support you in designing the proposed vehicle? What are some of the key elements that you’re looking to achieve with this structure?

This is really my favorite part because you're effectively starting with an idea or concept, with slight apprehension: “Are we too early? Are we not too early? What are the opportunities? What are the challenges? What are the risks that we're going to be facing?” Blended finance is the catalyst towards being able to explore some of these things.

We're starting with a general concept of what we would like to achieve, which is a sort of replication of the model of collective action and collective aggregated sourcing at scale of nature outcomes that then go on to fulfill the corporate sustainability commitments.

Under [the ACS Design Grant Window], we're going to be number one looking at what is the level of demand and what type of demand? What are the outcomes that the corporates within this sector require in order to achieve their sector-specific goals?

Of course given the difference and the complexity of the supply chains within the fashion sector, those types of issues are going to be different and the challenges are going to be different.

Once we identify that, we will be looking at what projects apply, what types of projects are actually out there that can then address that need, the sustainability commitments, and the demand, and can they do so credibly? Is there enough scale and how are these projects going to be sourced? Also what stage of development are these projects in?

Is there going to be further financing needed to springboard or catalyze that part of the industry? So we're going to be scoping our pipeline of projects moving forward depending on what the type of demand is.

We believe that the pipeline does exist and early assessments have shown us that. We have good experience already in Southeast Asia to show that the scale is there, but different projects obviously have different challenges.

Then we will be looking at the shape of the mechanism, how can you link those two aspects—the demand and the supply. What does the mechanism actually look like that can then deliver the financing to the ground and then source the outcomes that result from those projects and that will require looking at legal structuring, financial structuring, governance and operational structuring, MRV systems and so on. It is really exciting, effectively starting a new market for the fashion industry.

What advice would you give prospective applicants applying to the Asia Climate Solutions Design Grant?

I'm a very firm believer in having open and honest discussions. In the journey that [Convergence and Lestari Capital] took together, which lasted a fair few months, we had a good chance to actually get to know each other. Be very open and honest about exactly what you feel the challenges are and working through those with Convergence.

In this kind of early stage work in an evolving market, there are challenges, there are unknowns, there are risks, but there are also fantastic opportunities. And I think that level of excitement is what really helped us in the design of the grant proposal.

My advice to any prospective grantees would be to talk about the risks and the challenges that you foresee as well as the opportunities. We all see the opportunities, but the sector doesn't tend to learn from its mistakes as well. I think that's almost as important as being able to see the opportunities. Coming to the table and very openly discussing the challenges allows us to design the study and the work and the year ahead much better, because we understand each other's expectations, we understand where the challenges might arise and we understand what is and isn't feasible in the window. I think that is what makes for a really good application.

What do you think contributed to making Lestari Capital stand out as a strong applicant?

I believe one of the important things that made us stand out was the fact that we've done this before, we have gone from the conceptualization to the design to the building to the operationalizing of these vehicles in the past.

I understand that might not always be the same for all applicants. Some might not be presenting something to be replicated, but I think it is important to be able to actually demonstrate that these models can work and to know if they have tried and if they failed to understand why.

I think being able to talk about that and being able to say, “this is how we would address these risks,” would be really helpful.

I think also, we're very lucky to have almost 40 people now within Lestari Capital and we have a very multidisciplinary team: we have a legal team, we have a finance team, we have a very experienced project team, and that, I think, makes us stand out.

There are a lot of companies outside of the field level that have good ideas. But unfortunately, unless you actually have the field-level experience of what it takes to be able to deliver these projects on the ground, deliver the conservation and the restoration on the ground, it's a much higher risk proposition, so having that expertise in the team really counts for something. That is also why our corporate clients trust us, because we go into the field, we understand the challenges to deliver conservation and restoration and so on.

I think it comes down to being able to identify what the challenges are and talk about the risks, and be thoughtful about how you plan to address those. Not every risk can be mitigated. That's just a fact of early stage developments. But you can show that you're at least thinking about it smartly.