Equitable, Net Zero & Nature Positive Finance
Accelerating private investment in sustainable land use
UNEP Climate Finance Unit's Impact Report 2022
Time to act: Doubling investment in nature by 2025
The State of Finance for Nature report, led by UNEP’s Climate Finance Unit (UNEP CFU), in collaboration with the Economics of Land Degradation Initiative with support from Vivid Economics by McKinsey, has found that finance for nature-based solutions (NbS) must urgently scale up to double current levels by 2025.
Most of the current financial flows to NbS still come from governments in the form of domestic expenditure. Private flows need to dramatically increase from the current USD 26bn per year if we are to limit climate change, halt biodiversity loss and reach land degradation neutrality by 2030.
This will only be possible if the “wave of disincentives” against NbS is turned around through reforming distorting and harmful fiscal policies, by embedding nature and climate incentives in trade agreements, and by actively developing and supporting businesses that put nature, climate and equitable benefit sharing at the heart of economic growth in the 21st century.
Steady momentum
The increase of nature investments cannot be met by public finance alone, particularly given the current financial constraints and high levels of sovereign debt that many governments face. However, with the agreement on the Kunming-Montreal Global Biodiversity Framework reached, there is also reason to be optimistic.
Overall, awareness of the financial materiality of biodiversity loss is rising. Businesses and finance institutions can make a significant contribution to accelerating the transition to net zero, nature positive and equitable investments required by 2025. This requires vision and willingness by governments, businesses, and civil society to put nature and climate investments at the heart of future economic growth. Additionally, governments through regulation, economic incentives and standard setting can advance the transition towards greening finance.
UNEP’s Climate Finance Unit contributes to the much-needed acceleration with results obtained in six impact areas across the sustainable land-use finance value chain:
- Innovative financial solutions
- Impact investing and early-stage business development
- Scaling up sectoral commitments
- Fiscal incentives
- Positive indicators and targets
- Finance risks and opportunities
Innovative financial solutions
In order to transition to more sustainable forms of land use, concessional capital provided by governments, development finance institutions or philanthropy is still needed to overcome the high perception of risk associated with sustainable land-use activities, for example by providing capital with longer repayment tenors or by partly covering first loss in case of default.
By the end of 2022, the UNEP-supported AGRI3 Fund had provided a total of eight guarantees to enable the issuing of over USD 70 million in loans. AGRI3’s objective is to issue USD 1 billion in loans to farmers and businesses with positive nature, climate and livelihood impacts, the pace and scale needed to accelerate. To achieve scale, AGRI3 has launched a novel standardised loan product to accelerate pastureland renovation in Brazil called Renova Pasto.
Renova Pasto enables farmers to restore pastureland whilst simultaneously accelerating their compliance with the Brazilian Forest Code and achieving nature positive impacts at scale. The hypothesis is that by lowering the time to close transactions, smaller loans can be issued to more farmers in Brazil, thereby scaling up much-needed private capital in this domain. With the Cerrado and Amazon urgently at risk, it is imperative to find practical and pragmatic solutions that meet the needs of farmers and creates employment and economic growth in a way that does not further degrade the natural environment.
Over 2022, the &Green Fund has concluded three new transactions, bringing their portfolio to a total of seven investments and cumulative capital invested to USD 143 million (of which USD 119 million is outstanding). One recent transaction is focused on scaling up sustainable cattle raising in the Vichada province of Colombia, a second on the construction of a crude palm oil mill for certified production in West Kalimantan, contributing to smallholder empowerment and the establishment of a traceable, inclusive, and deforestation-free palm oil supply chain. The third transaction finances the production of deforestation-free corn and biomass-based bioenergy and high-value added animal nutrition products with a client in Brazil.
The Global Biodiversity Framework finalized at COP 15 calls for the mobilization of USD 200 billion per year for nature finance from public and private sources. Innovative structures such as &Green Fund are needed to enable at least USD 30 billion per year to flow to developing countries.
Impact investing and early-stage business development
The Restoration Seed Capital Facility (RSCF) is supporting its partners, Ecotierra and Arbaro Advisors, to develop investment opportunities that contribute to forest landscape restoration. In 2022, Arbaro Advisors successfully closed two RSCF supported projects in Ecuador and Peru, resulting in reflows to the facility. RSCF has further on-boarded two new partners in 2022, New Forests and the Shared Wood Company, who together have the potential to deploy up to USD 500 million of private capital across Africa, South East Asia and Latin America.
In 2022, UNEP CFU’s Restoration Factory Incubator Program, which supports early stage eco-preneurs to develop bankable restoration businesses, supported 46 early-stage entrepreneurs in Kenya. This mentoring platform is now being deployed to Thailand and Vietnam with new Sustainable Forest Trade Incubation Programs.
Scaling up sectoral commitments
Agriculture is the leading driver of global deforestation, and an increasing demand for food and agricultural products in coming years will contribute to the high risk of reaching a ”tipping point” of forest dieback in certain biomes. The Amazon and Cerrado regions of Brazil and the Chaco regions of Paraguay and Argentina are at the center of this challenge. Providing financial incentives to farmers to adopt new sustainable business models is instrumental to creating transformational change.
UNEP CFU co-convenes the Innovative Finance for the Amazon, Cerrado and Chaco (IFACC) together with The Nature Conservancy and the Tropical Forest Alliance. The initiative calls on financial institutions to scale-up farm loan products, farmland investment funds, and other innovative mechanisms to establish new norms for lending and investing, aimed to drive forest-positive commodity production. Fifteen financial institutions and agribusinesses have now signed the IFACC declaration, including financial commitments worth USD 4.2 billion.
UNEP CFU is also supporting the Responsible Commodities Facility, attracted over USD 11 million in investment from major UK supermarkets to provide incentives for Brazilian farmers who commit to deforestation- and conversion-free soy cultivation. This pilot is scheduled to be further scaled up in 2023 on the back of commitments by more than 160 consumer goods companies who are signatories of the SOS Cerrado Manifesto to move their supply chains towards deforestation-free soy.
Supporting the production and trading of responsible soy from Brazil
Fiscal Incentives
UNEP CFU has rolled out national economic and financial incentives programmes to support the restoration of productive ecosystems and landscapes.
Positive indicators and metrics
All work undertaken by the UNEP Climate Finance Unit seeks to create both direct and indirect positive environmental and social impacts. As such, all CFU-backed projects use the same environmental and social indicators focused on five impact areas - biodiversity conservation, climate adaptation, climate mitigation, forest protection, and sustainable livelihoods. These Key Performance Indicators have been made publicly accessible to support the creation of a standardized asset class for nature-based solutions like deforestation-free agricultural production, agroforestry, etc.
The Positive Impact Indicators Directory is available on the Land Use Finance Impact Hub, which was launched in April 2022. All blended finance projects, including AGRI3 and &Green, must report on progress in-line with the impact indicators directory.
UNEP CFU is also supporting a wider industry swift in sustainable food systems with the Good Food Finance Network (GFFN). In 2022, seven influential institutions in food and finance, as part of the GFFN’s High Ambition Group, set up and committed to a first tranche of environmental and social impact targets covering over USD 108 billion of existing assets. The targets are time-bound (short term to 2023, medium term to 2025, and long term to 2030) and include specific commitments on a range of sustainability-themed dimensions including no-deforestation, reduction in financed emissions in the agriculture and food sector, scaling up investments for land restoration and resilient food systems, and gender equality in financed agri-food businesses.
Finance risks and opportunities
UNEP CFU is providing support to the banking sector, including central banks and relevant government ministries, to enable the transition to sustainable finance through training programmes on topics relating to sustainable land use such as managing and mitigating deforestation risk, investing in nature-based solutions and blended finance.
From these trainings, the finance sector will be able to identify, assess, manage, and mitigate risks associated with financing agriculture as well as develop mechanisms to support the transition to sustainable agriculture and supply chains. In 2022, over 200 participants from nearly 100 financial institutions participated in the training programmes offered by UNEP CFU.