Investing in Landscape Transformation
Large-scale investment funding is missing in action when it comes to transforming landscapes. In 2023, North Star Transition and its partners have continued to find out how to unlock this critical piece of the funding puzzle. Jyoti Banerjee reports on our investigations.
There is a disconnect between place / environment and the financial sector. And that disconnect is hampering the flow of the large-scale funding that is vital if our economy is to transition to Net Zero, and carry out environmental, social and health transformations. At present, investment is largely piecemeal, tends to be project-based and scattered rather than place-based and connected and therefore the scope for the systemic change needed is limited.
This disconnect is apparent in multiple ways. There are huge gaps in:
understanding - bankers don’t know what makes a healthy soil or how long that takes, farmers don’t know which deals will pass an investment committee
trust - farmers don’t trust bankers, bankers only know farmers through the media caricatures
incentives - most financial institutions have a very short-term outlook due to quarterly results and pressure to increase share prices, many landscape interventions take decades to be impactful
communication - each have jargon the other side doesn’t understand
We see the problems created by this rift in the work we are doing to transform landscapes, whether it is Wye-Usk Transition Lab, Wales Transition Lab or Scotland Transition Lab. It is relatively easy to accuse each side of being one-dimensional in their thinking. A common response to the perceived need to create a return from environmental actions is to set up a market for platform to monetise ecosystem services. This may work for someone wishing to buy ecosystem services but does not help those wishing to invest in landscape transformation. The latter may have rather more sophisticated needs for balancing returns, time horizons and risk profiles.
Another example of one-dimensional thinking is the widespread belief in the efficacy of a Community Interest Company (CIC). A CIC is an excellent vehicle for helping ensure that the local community owns the benefits of the actions being carried out. However, a CIC is relatively difficult to scale up for large financings as it is unlikely to be able to achieve the combination of governance, alignment of interests and credit rating that institutional investors will require.
The finance side of the equation is just as likely to be one-dimensional in its thinking: the focus on buying failing farms for planting trees to achieve net zero completely misses the negative social impacts of breaking up rural communities, the environmental problems caused by monoculture forests, or the food security challenges of losing our farms.
Our approach
The key questions before us are:
What are different models for aggregating the supply and demand of ecosystem services at the landscape scale? How can we best bring together buyers and sellers across multiple objectives and multiple sectors?
What are the benefits and trade-offs of these different ways of bringing people together?
How do the aggregation and investment models explored in the first point fit with governance structures, and how best to manage risks, liabilities, and equity between actors?
In response, North Star Transition has been carrying out an engagement with representatives from a variety of financial institutions to get their take on what works, what doesn’t work, and where the challenges, obstacles and hurdles arise that prevent large-scale financing to be unlocked.
We start from an understanding that there are, broadly, three groups in play:
Sellers of ecosystem services (e.g. farmers who improve soil and practice regenerative methods that capture carbon and increase biodiversity, and firms that sell renewable energy or put in place natural flood management).
Buyers of ecosystem services (e.g. corporates looking to offset their emissions or wanting to inset by improving their supply chains / procurement, utilities such as water companies who will pay for cleaner water, and insurance companies who want to reduce the risk of flood payouts. There is also the public good of improved food security, reduced risk of drought, better energy security, etc.).
Funders of ecosystem services (e.g. pension funds, asset managers, banks, private equity, venture capitalists [see Appendix for glossary]). This group may also be buyers of ecosystem services of a sort, in that part of their motivation to fund nature-based solutions may be to earn a return, but part may be for reputational uplift, regulatory compliance or a need to offset high emitting investments elsewhere on the balance sheet.
For the purposes of our work, we have focused on the first and last set of stakeholders: sellers of ecosystem services and funders of those services. We implicitly address the middle set – buyers of ecosystem services – by making informed assumptions about their appetite to pay for such services and so generate a return for funders.
Fundamental questions
Two key questions set our direction of travel: what do investors want and what do the assets they will invest in look like? To answer these questions, we approached financial institutions and asked thse questions directly, through bilateral conversations and via a facilitated workshop. We believe large-scale landscape funding has a greater chance of success if financial institutions co-create the funding instruments needed.
Our dialogue with the institutions revealed preferences around revenue streams, costs, risks, financial and operational structure and appropriate governance:
Revenues, Costs and Risks: These are the core considerations for investment committees around which clarity is essential. Four revenue streams were identified; carbon and biodiversity credits, payments for renewable energy, value add from flood management and improved resilience through regenerative agriculture. The risks – from governance to operations - were multiple and some are known, while others are unknown, some are quantifiable and others unquantifiable.
Financial Structure: We tested three models with participants; project finance based, counterparty based or a platform-driven hybrid.
Organisational Structure and Governance: Our dialogue revealed a tension between the need for a well-known entity with a strong credit rating, possibly with equity involvement, to stand behind any project, and the importance of a place-based organisation with strong local ties and a focus on social impact and the public good.
The ideas we discussed were well received, with general support for a number of foundational principles:
the overall vision
the general risk-sharing structure
the landscape scale
the ticket size (e.g. minimum investment at a scale suitable for institutional investors)
the community involvement
the collaborative approach with other organisations already in the area
Our work has established that high-quality, well-structured projects, which address aspects across finance and a fair sharing of the benefits of the monetisation with local communities, are credible tools for investment. However, further work needs to be done to make a landscape-scale transformation into an investable proposition.
What’s next
Using the intelligence gained from the dialogue, the next step is to address the issues raised through this initial engagement. The process should involve co-production with potential investors with the overall goal to develop an investment structure or vehicle, which can be deployed across a landscape and then replicated across other landscapes.
So that’s where we at North Star Transition are headed: continuing the co-development process for landscape finance with those institutions that have already chosen to engage with our work, and to continue to draw in new participants from across the mainstream of financial institutions.
Further reading:
Check out Jenny Scott’s 2022 blog: Unlocking Landscape Change: Building a bridge between the environment and finance.
North Star Transition is appreciative of our partners who have worked with us in the development of these ideas: UCL Climate Action Unit, Apella Advisors and Preventable Surprises. We are grateful for the support of the Environment Agency in our work.
