Blending the Most Important Thing (MIT): How Forest Projects are Like Start-Ups
The world is approaching irreversible climate tipping points. Our ecosystem services, which provide us with the essential benefits of nature, are at risk of collapsing.
The good news is that we can help mitigate this by investing in nature. By recognising the value of our natural resources, we can take the necessary steps to protect them.
Unfortunately, there is a substantial disparity between the true value of nature and its recognition in market prices. The result is a significant financing gap for the protection and restoration of nature.
This is despite the fact that nature is fundamental to our economy, society, and existence!
Nature and Global Warming
Over the past decade, nature has absorbed 54% of human-made CO2 emissions, playing a crucial role in mitigating global warming.[1]
Whilst net zero carbon emissions is critical, it’s not enough to stay below 1.5°C unless we preserve nature’s ability to absorb and store human made C02.
There is no 1.5°C future without a nature-positive one!
Investing in Nature
Investment in nature-based solutions must triple by 2030 and increase fourfold by 2050 to meet climate change, biodiversity, and land degradation targets. [2]
Whilst it is now widely recognised that the cost of biodiversity protection and restoration is cheaper than the cost of inaction [3], public finance alone will not be sufficient to close this gap.
To mobilize investment for nature and climate, innovative financing models are required, including finance collaborations across investor groups.
Blended finance is one such solution, bringing together the public and private sectors, and philanthropists based on comparative advantages and risk tolerances.
What is Blended Finance?
“Blended finance is the use of catalytic capital from public to philanthropic sources to increase private sector investment in sustainable development.”- Convergence.
In other words, blended finance connects investors with varying risk appetite. Those willing to take more risk can act as a capital cushion for investors who need to take less risk but are eager to finance projects with social and/or environmental impact.
There are numerous blended finance instruments such as guarantees, concessional debt and equity, technical assistance grants, and impact-linked finance. Choosing the right instrument, and knowing when to use it, requires specialist knowledge and expertise.
Start-Ups and Forest Projects: Navigating the Valley of Death
Start-ups and forest projects are similar in that they both face a crucial early phase — “the death valley curve.” During this period, operations have started but no revenue has been generated. This poses significant challenges and a high risk of failure. [4]
Forest projects, like start-ups, will go on to require different types of funding at different stages of their journey.
During the concept stage of forest projects, when ideas are being developed, founders are coming together, and reconnaissance on the first land areas is being undertaken, project developers are likely to benefit most from non-refundable grants (Restor has pulled together a great selection of these opportunities).
To benefit, the project developer must navigate a network of grants and possess the ability to craft compelling and winning grant proposals that align with the strategic objectives of the grant organization.
Other Types of Funding
Many start-ups, and forest projects, tend to gravitate towards private funding, venture capital, and corporate funding. They are often allured, much like woodland moths, by the magnetic pull of media noise that emerges through platforms like LinkedIn, Twitter, or various media feeds.
There are noteworthy successes in this area. However, whilst public commitments are hugely exciting and indicate strong market support, they are rarely deployed directly to the forest. They can also be challenging to access, navigate or predict in terms of when and how much.
There are numerous other types of funding. The report, “Funding Options for Ecosystem Restoration in Central America and Africa” commissioned by GIZ, outlines many of these sources for local non-profit organizations implementing ecosystem restoration activities in Central America and Africa (Kenya, Cameroon, Malawi, Rwanda).
FIGURE 1: Mix of funding sources from “Funding Options for Ecosystem Restoration in Central America and Africa” commissioned by GIZ.
We are also seeing the emergence of funds such as The Kawari Fund, innovative bonds such as the Forest Resilience Bond, and bold support from the banking sector.
Government Public-Private Partnership (PPP) structures have also had some success, e.g., Partnerships for Forests. Also, development finance institutions (DFIs) have been active in the space for years and many new networking events and learning opportunities are emerging as key dates in the business calendar.
Accessing Funding
Of course, identifying funding sources is one thing, but accessing and effectively approaching organizations can be a different challenge, especially considering the multitude of requirements involved.
It’s also a process in and of itself to fully grasp the types of funding and their suitability for varying project stages.
For example, a feasibility study will require technical assistance linked funding (such as from FMO) and the implementation phase (setting up a tree nursery, planting the first trees, agreeing community rights, leasing or acquiring land, building the ops team etc.) requires first loss funders with a higher risk appetite (such as the TerraFund).
From here, a project developer is likely getting better acquainted with the needs of a more mature set of funders. They probably have in place a high-quality and easy-to-navigate Data Room and have aligned project milestones to specific funder expectations.
The next steps will involve exploring debt mechanisms, equity options, special purpose vehicles (SPVs), and other financing avenues.
In short, a blend of these funding streams is required to navigate (yes- spoiler alert- there’s more than one) valleys of death in a start-up forest project’s growth trajectory towards unicorn (planetary value of million tonnes of sequestered carbon) status.
To unlock this blend of funding streams, project developers typically require a broad network of different funding types. They must also understand funding needs, strategies and timeframes, and wield a decent reporting platform to streamline reporting and top-notch Key Performance Indicator (KPI) metrics.
This is made even more complex when you understand that a busy project developer should be spending most of their time on the Most Important Thing i.e., the forest and its community.
To recap, essential requirements include market intel, global networks and best-in-class report-writing skills — all things that neither a start-up nor an early-stage forest project typically has the time or resources for.
Some Help is At Hand
Markets and charity/aid in isolation are often insufficient to solve pressing social and environmental challenges. In these instances, novel and integrated approaches are necessary.
For example, Acumen, a non-profit impact investment organization, supports social enterprises by using patient capital to bridge market-based approaches and philanthropic capital.
Because patient capital is long-term, flexible and has a high tolerance for risk, entrepreneurs who may not qualify for traditional financing can tap into this funding.
This approach has helped Acumen catalyse sustainable and inclusive growth in low-income communities across sectors such as clean energy, healthcare, education, and housing.
Another organization, Altruist, serves the non-profit world by getting them ready for approaching the right type of funding at the right time.
They do this by working with non-profit organizations (NPOs) to understand funding needs, goals, and challenges. They then develop customized funding strategies that help NPOs identify potential funding sources, including grants, impact investors, and philanthropic donors.
Altruist also provides capacity building to NPOs to improve operations, which can make them more attractive to funders.
Then there is Bridge for Billions, an organisation that works with social enterprises. They offer personalized incubation programs to start-ups, ensuring they receive the necessary support at the right time.
And WRI’s The Land Accelerator provides a network and accelerator program for entrepreneurs who restore degraded forests and farmland. They do this through online and in-person boot camps, and personalised mentorship. This empowers entrepreneurs to pitch to impact investors.
There is, of course, also support available for specific activities like tree planting (e.g., Ecosia or WeForest).
And for those at a more advanced stage, there are great fund and contractual management professionals who excel at structuring commercially viable forest businesses and providing pre-finance and technical assistance to develop forest carbon projects.
But, Who is Doing the Blending?
Blended Finance Transaction Intermediaries are emerging fast in some geographies; however, there are still too few global players supporting staged financing in the nature-based solutions field.
Intermediaries are instrumental in facilitating the successful implementation of blended structures to initial financial close and beyond.
Intermediaries identify, test and develop structures that effectively unite public, philanthropic and private investors within a single blended transaction while considering the distinct investment interests and requirements of each party. [6]
Blended finance intermediaries are, for good reason, often set up to leverage loans and equity in a drive towards leveraging sustainability for financial returns. However, it’s important to note that investing in forest commercial plantations is not the same as investing in community-based, multi-revenue streamed, landscape projects and there will always be trade-offs to consider.
Blended finance is, for nature-based solutions at least, perhaps best reconfigured as “phased blending” of different finance over the project’s timespan. To make it work at scale, such ‘phased blending’ will need precision digital platforms capable of connecting actors from finance through to tech solutions through to projects on-the-ground.
The nature-based solutions ecosystem of actors is accumulating great data, great MRV tech, fantastic projects, and high-calibre expertise across the board. A perfect opportunity to do this together!
Bringing Forest Projects to Life
Investing in forests is challenging, expensive, and time-consuming. The lengthy process of closing a deal, hinders the realization of project funding and the full potential of forests.
What’s more, existing approaches predominantly operate from the perspective of the forest itself: identifying its resources and potential buyers. For instance, “…here’s what the forest has. Who wants to buy it?” But this mindset is no longer effective. To keep up with the market, projects must become more attuned to the needs of capital providers.
That’s why it is imperative for the project developers to know what the funder needs and for the funders to understand what the forest is capable of offering. This includes requirements such as ticket sizes, the type of funding on offer, the KPIs used, and other factors such as whether there is a need for carbon.
Once the funder’s needs are clear, it’s time to focus on the projects. Project onboarding and assessment is all about data. And there is a wide spectrum of data sources that need to be covered. This includes all due diligence and policy requirements such as audit certificates, labour policies, citizen science, and NGO watchdogs.
As data is gathered from diverse sources and stakeholders, efficient data management and accessibility is key. Digital solutions offer an innovative way to not only store data but also connect and harness the nature-based solutions ecosystem of actors. When it comes to investments in forests, ALL stakeholders benefit from streamlined collaboration and informed decision-making.
What’s more, digital data-based due diligence solutions can facilitate the timely connection of the right funders to the right projects at the right time.
This helps deploy capital to where it’s needed in the climate & biodiversity crises and enhances a project’s ability to generate financial, social, and environmental returns for people, for funders and for the planet!
Mobilizing Capital for Forests: The Xilva Way
Xilva is building a transaction intermediary platform for funding nature-based projects. It all starts with Xilva GRADE and culminates in us working with the best projects to get them structured for approaching the right type of, mission-aligned funding at every stage of growth — grant, venture philanthropy, loan, impact investment, equity.
Below is a snapshot of our process:
1. Funder’s Needs:
We start by understanding the funder’s needs (type of funding on offer, the KPIs used, and other factors such as whether there is a need for carbon).
2. Onboarding and Assessing Projects:
We ensure that all due diligence and policy requirements are registered and can be met by the projects such as ESG requirements, labour policies, specific certificates like FSC and Verra, biodiversity frameworks, and other reporting requirements.
We also tap into a broad spectrum of data sources such as audit certificates, satellite monitoring, citizen science and NGO watchdogs. We combine this data with the project developer’s own information.
3. Xilva GRADE
We use Xilva GRADE our proprietary forest evaluation methodology to analyse the data across five core dimensions, considering various criteria like ecological integrity, social equity, economic viability, and project governance.
4. Data Room
Following Xilva GRADE, information is added to a bespoke Data Room. Here, funders get access to all documents in the document centre, visibility of all external data sources used for cross-referencing and truthing project data, and an overview of the risks and accompanying mitigation strategies.
The Data Room also includes a summary of the grading results. And perhaps, most importantly, an area where financial milestones are broken down and structured for investment.
What works with Data Rooms is that they are a commonly used tool for investors- they understand them and use them every day. Now we’re starting to talk their language!
References:
[1] WWF. 2022. Uncovering Nature’s Role in Climate Action. https://wwf.panda.org/wwf_news/?6878466/Uncovering-Nature-Climate-Action
[2] United Nations Environment Programme. 2021. State of finance for nature: tripling investments in nature‐based solutions by 2030. https://www.unep.org/resources/state-finance-nature.
[3] BloombergNEF. 2023. $1 Trillion to Protect Biodiversity is Cheaper Than the Cost of Inaction. https://about.bnef.com/blog/1-trillion-to-protect-biodiversity-is-cheaper-than-the-cost-of-inaction/
[4] Fernando, J and Mansa, J. 2022. Death Valley Curve: How to Calculate it So You Can Avoid It. Investopedia. https://www.investopedia.com/terms/d/death-valley-curve.asp#:~:text=The%20death%20valley%20curve%20describes,when%20plotted%20on%20a%20graph
[5] Oelschlager, F. 2018. When is the right time to innovate your business? Ten Square Mile. https://tenmilesquare.com/resources/technology-strategy-innovation/when-is-the-right-time-to-innovate-your-business/
[6] Rossmann, R. 2023. Designing a blended finance solution? You might need an intermediary. Convergence. https://www.convergence.finance/news-and-events/news/2vAm6a88OGvbmlxvMjDHJe/view
