Gen McFalls l Palladium - Jun 12 2024
To Push or be Patient: When Will We See the Green Finance Tipping Point?

‘Green finance’ is a broad church.

Broadly, the term refers to financing from all sectors to support nature-positive businesses, and to help make businesses nature-positive. It can also be used more broadly, to refer to finance that improves sustainable development priorities.

Businesses and organisations in the nature and forestry sector have been trying to mainstream green finance for decades. In many sectors, investing in nature or sustainability has been simply seen as part of an investor or company’s CSR (corporate, social, responsibility) work, rather than a viable, return-raising investment opportunity.

Already, there are factors pushing the private sector towards more sustainable business models and pushing investors towards greener opportunities.

One is the cost of being associated with environmentally or socially harmful industries. Companies with a poor or unethical reputation amongst the public can come under pressure indirectly from buying habits, and more directly from shareholder pressure. As profits are affected, the investment profile grows weaker. Secondly, make-good provisions are increasingly being built into the cost of doing business.

Right now, however, the tipping point for green finance, the point at which returns are stronger from nature-positive investments, than from alternatives that deliver greater returns in the short term but that are unsustainable in the long-term, is still some way in the distance.

So, how long will it be before green finance is simply ‘finance’? And what models will get us there, from where things sit today?

Blended Finance – and Other Stepping Stones

Most public funders, including development financers and philanthropists -that channel funds into blended finance solutions are working not for the model to become the norm – but rather as an intermediary step – or a leg-up – to smooth the path for private finance to enter frontier and emerging markets.

Public-private-community cooperation is vital to sustainable and positive business and in the forestry and nature space, this is offered referred to as landscape governance, or a landscape approach.

However, public money (such as from aid programs or development banks) cannot be scaled in the same way that large-scale private investment can.

Partnerships for Forests (P4F), our UK Aid-Funded program which worked with nature-based businesses to combat deforestation, is an example of such a stepping stone. In just eight years, the program catalysed £1.35 billion in private investment into forests and sustainable land use, using grants and technical assistance to bolster nature-based businesses. The total value of the grants and technical assistance supported provided was £120 million – a 11:1 mobilisation ratio of private money to public funds.

The program was built around a theory of change that uses public-private-community partnerships to develop businesses that help protect and restore forests. This was complemented by two other key components; creating an on-the-ground environment for forest businesses to thrive (think processing facilities, removing barriers to getting products to market, and empowering farmers to negotiate fair prices); and work at the demand side, in consumer countries, which has seen us develop fair trade and zero-deforestation commitments with UK and European supermarkets, governments, and other buyers.

The mobilisation ratio achieved by P4F – and indeed, the results of individual businesses supported, many of which are scaling strongly – show that an appetite does exist for investible green business investments.

But £1.35 billion is a drop in the ocean of private finance - the financial flows to environmentally harmful industries remain vast. However, the opportunities for industries to transform, or for new industries to emerge, are equally vast.

The Roadblocks to Mainstreaming: Risk and Return

One key factor stopping investment from flowing as smoothly to nature-positive industries as they to do to traditional, often less sustainable sectors, is risk. This isn’t a secret – risk is a shared concern among investors, and a major topic of discussion, and sometimes debate, at virtually every investor event P4F has convened.

Why? Risk is one of the driving factors to affect returns.

Risks to companies and investors can be down to factors in a particular landscape affect profitability – such as conflict, workforce reliability, and guarantee – or wider factors, such as political instability in the operating countries. For investors, predictability is key, and factors that make it difficult to guarantee profits, whether that’s because of an unevenly enforced tax environment, or land conflict, will halt the flow of private funds.

Ironically, a risk that can hold up the investment in and development of nature-and climate-positive projects is the impact of natural disasters, which are and will be exacerbated in severity and frequency by climate change itself.

Programs like P4F support nature-based businesses and project developers to de-risk their projects, making them more viable to investors. But we also aim to work from the other side, communicating to investors about a different approach to assessing risk. This isn’t about asking funds to accept a higher level of risk for a project. Though, as mentioned, climate instability will cause higher risks in the medium and long term. Instead, it’s important that investors don’t profile individual businesses or ventures based on the country they’re based in, or historical issues. A more individualised risk assessment model can open up major streams of nature-positive income.

P4F, which recently drew to a close after eight years, was a proof of concept for many investors – and indeed, for many businesses, including multi-national businesses – that hadn’t previously taken nature seriously as an investible asset. What’s needed now is for a critical mass to take these results and run with them.

Read more about the legacy of Partnerships for Forests or contact for more.