The what, how and why of inclusive finance for sustainable landscapes

But what if we could turn this around? What if we could instead invest these billions of dollars into making landscapes more sustainable and inclusive of the rural poor?

To explore this potential, the CGIAR Research Program on Forestry, Trees and Agroforestry (FTA), Tropenbos International (TBI) and the Center for International Forestry Research (CIFOR) set out to gather information from a range of experts, including financial service providers. So far, eight interviews and a summary note have been published. Recently, a webinar discussed the findings, focusing on barriers, solutions and unanswered questions.

Big bucks for landscapes

The idea behind ‘inclusive finance’ is to leverage a growing appetite for new financial instruments for good. Fund managers and non-governmental organizations (NGOs) are piloting new models that help reorient investments toward inclusive and environmentally responsible land use practices.

While many different models exist, the recent webinar highlighted two in particular. Pauline Nantongo Kalunda, the executive director of ECOTRUST in Uganda, explained that her organization specializes in conservation finance. It works with poor smallholder farmers, who depend on natural resources for all their basic needs and who are far removed from markets and sources of financing.

“What my organization does is … identify the resources they live with and the new land use options they could adopt, and then we package these into bankable opportunities to be able to access multiple finance sources throughout the gestation period for sustainable land use,” Kalunda said.

After sustainable land use practices have been established, often with help from donor funding or impact investors, ECOTRUST quantifies the resulting ecosystem services and sells them. For example, if a new land management practice results in greater carbon sequestration, carbon credits can be sold on the global carbon market. The returns can be reinvested in sustainable land use, creating a positive feedback loop.

This approach resonated with the webinar’s second presenter, Juan Carlos Gonzalez Aybar, an impact investment manager at Althelia Funds. His work includes searching for the kind of bankable prospects that ECOTRUST develops. Althelia Funds seek out investments that conserve protected areas and strengthen farmer cooperatives, and they gain their returns when they sell earned carbon credits on the carbon markets, while enabling the cooperatives to sell their produce on the cacao and coffee markets. Aybar said that while the shareholders backing these funds sit on “big bucks” and want to create an impact, they are looking for the right projects.

“An opportunity is a little bit more than an idea – it’s not enough to know that we should probably invest in the Amazon or the highlands of Peru. We pitch opportunities to investors as an investment product, we raise the funds and we deploy it,” he explained.

Barriers to success

Beyond a shortage of suitable investment opportunities, other barriers for taking inclusive finance to scale also exist. The webinar’s third presenter, Marco Boscolo, forestry officer at the Food and Agriculture Organization of the United Nations (FAO), mentioned a lack of financial literacy and business management skills in local communities as a persistent challenge.

“I want to highlight the importance of strengthening the organization of these small producers and to develop human capacity, including financial literacy,” he said. He went on to say that it is very important to have the right mindset, likening smallholders to ‘sleeping giants’ who can achieve great things as long as they have access to the necessary resources.

FAO, whose mandate includes advising governments on how to manage new opportunities for poverty reduction, such as through inclusive finance, have developed guidelines on how different players can engage in inclusive value chains.

Another challenge is finding institutions that can attract and subsequently distribute funding. Local banks or cooperatives, for example, might either not be present or cannot be accessed by all members of a community.

Althelia Funds therefore relies on existing local institutions. “NGOs are great catalyzers. They have the habit of administrating external funding, and they have the social and technical capital to be the aggregator of the financing,” said Aybar.

Read also: Linking smallholders to existing wood value chains for sustainable supply

A risky reputation

“Things like forests – they are looked at like resources to bring in income, but not necessarily resources that need to be invested in,” said Kalunda, pointing to another stumbling block in Uganda and elsewhere: Investing in landscapes and smallholders is still perceived as risky.

“Local bankers may only know what they read in the newspaper, which is maybe about invasions and wildfires, so forestry is not really seen as a business with potential,” said Boscolo.

According to Aybar, investors’ reluctance can be partly blamed on the recent financial crisis that led many to experience large losses. Yet achievements such as the Paris Climate Agreement and a growing portfolio of successful landscape investments are likely to increase investors’ appetites. “Few investors are ready to be the first ones to raise money, but now that we’ll have a track record, others will come,” Aybar said.

Finally, national governments have an important role to play. They can create an enabling environment by ensuring that rules and regulations are clear and enforced, and they can promote public finance instruments. Such efforts could also help mobilize more in-country financing of landscape investments.

Proof of concept

While the potential for inclusive finance investments for sustainable landscapes has been established, many questions remain unanswered. First of all, some of the basics are still being explored – how is inclusive finance defined, who can benefit and what models work well?

Boscolo reiterated the need to document and share case studies and business models that have proved successful. FAO is also working to establish forest finance information hubs to help governments learn more about these mechanisms.

A second line of questioning is focused on impacts. Is there a risk that investors are only seeking a social license to operate, rather than large-scale transformative change? One webinar participant put it like this: There is a danger of facilitating cherry-picking of the very best, most profitable productive asset projects, yet never reaching scale as a consequence.

“In general, investing in landscapes and making this financing inclusive is already a huge challenge, so if there are situations that we can call cherry-picking, then let’s learn from them,” answered Boscolo. “We still need to demonstrate that it can be done.”

Aybar shared the sentiment that establishing proof of concept is an important first step: “We need to get out of our comfort zone, go to new frontiers and keep [taking] risk[s].”

By Marianne Gadeberg, communications specialist (FTA)

This article was first published on FTA’s website

Cover photo: Farmers weed rice fields in Dintor village, Indonesia. Photo by: A. Erlangga/CIFOR

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This event was organized by the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) and hosted by the Global Landscapes Forum (GLF). The event is part of a project involving FTA, Tropenbos International (TBI) and the Center for International Forestry Research (CIFOR). FTA is the world’s largest research for development program to enhance the role of forests, trees and agroforestry in sustainable development and food security and to address climate change. CIFOR leads FTA in partnership with Bioversity International, CATIE, CIRAD, INBAR, ICRAF and TBI. FTA’s work is supported by the CGIAR Trust Fund.