Natural Capital Financing FacilityInformation event with introduction workshop

Welcome

Brussels, 8/05/2015

Natural Capital Financing FacilityInformation event with introduction workshop

Pia Bucella

Director - Natural CapitalDG Environment

Brussels, 8/05/2015

Natural Capital Financing FacilityInformation event with introduction workshop

Humberto Delgado Rosa

Director – Mainstreaming Adaptation and Low Carbon TechnologyDG Climate Action

Brussels, 8/05/2015

Investing in Natural Capital- Key concepts- Financial sector view

Anders NordheimBrussels, 8 May 2015

Investing in Nature• Humanity depends upon the services provided

by ecosystems. • These include provisioning services such as

food and timber, regulating services such as carbon sequestration, disease control, and flood protection, and cultural benefits, such as recreational places.

• In order to sustain ecosystem services, terrestrial and aquatic ecosystems need to be protected and, where possible, restored.

Why is this relevant?• World population growth, economic growth

and changing consumption patterns are unsustainable for the environment

• Overuse of resources will create increasing social and environmental pressures

• Governments, business and finance are at risk from these pressures

• Opportunities for new and innovative practices can help transition economies to green growth

Planetary Boundaries• Four of nine planetary

boundaries have now been crossed as a result of human activity

• Transgressing a boundary increases the risk that human activities could inadvertently drive the Earth System into a much less hospitable state, damaging efforts to reduce poverty and leading to a deterioration of human wellbeing in many parts of the world, including wealthy countries

Source: Science (16 January 2015)

National Biocapacity

9PRI/UNEP FI, Universal Ownership: Why environmental externalities matter to institutional investors, 2011

Costs of damages are often externalised, thus paid by governments, society and others in the economy.

The impact of Business

The Total Economic Value of Ecosystems

10Source: Pay – Establishing payments for watershed services, IUCN (2006)

Motivations for Investing in Natural Capital

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Government- National/regional policy goals- International commitments (Climate change,

Convention on biodiversity)- Improved economic resilience

Business- Better risk management (including supply chains)- Opportunities for new products/services- Corporate social responsibility

Finance- Managing portfolio risks- Additional sources of funds/revenues- Corporate social responsibility

Society- Access to more and better recreational areas- Improved health/quality of life- Better prospects for future generations

Financial Opportunities• Conservation finance

– Investment in protecting ecosystem to conserve the value of the ecosystem for the long-term. Cash flows are generated from sustained outputs such as products, services and credits.

• Restoration finance– Investment in improving ecosystem to restore to historical

value based on outputs. Increase in value of asset provides return to investor on exit.

• Biodiversity offsets– Conserve, restore or create new ecosystems to provide

stocks of ecosystems that can be used as offsets.

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Natural Capital Finance ModelInvestors- Institutional- Retail- Companies- Government- Crowd funding- Philanthropy

Cash flows- Service

payments- Offsets- Products- Tradable

permits

Ecosystems- Terrestrial

lands (forests)- Fresh water- Oceans- Habitats

Inve

stm

ent

Impa

ct

Impact reporting

Financial return

Challenges:- Difficult to value, price and account for environmental

assets, benefits and impacts- Value generated does not always (directly) benefit

stakeholders

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Example: Water Quality Trading• Watersheds are often becoming too warm for

local species (due to removal of trees, etc)• Users of the river are often regulated for water

quality impairment (waste water treatment, power generation, factories)

• The engineered solution: cooling tower• The ecosystem solution: restoration of natural

cooling, e.g. planting of trees• Water quality credits are generated by the project

through measurement of impact• Users purchase credits to meet compliance• Project costs are covered• Landowners receive payments• Investors receive returns• Improvement in ecosystem regulatory services,

cultural serves, etc.Source: The Freshwater Trust (2014)

Thank you

Contact:l.vanast@globalcanopy.organders.nordheim@unep.org

www.naturalcapitaldeclaration.org

What is the NCFF and why was it set up?

Laure Ledoux, DG ENV.B.2

Brussels, 8/05/2015

The policy context for NCFF

Financing gap for biodiversity and adaptation

Innovative financing mechanisms foreseen in EU Biodiversity Strategy, Green Infrastructure Strategy and the Climate Adaptation Strategy

Investment in ecosystems provide benefits for a number of challenges, including climate adaptation

Emerging market opportunities for investments in natural capital, but there are barriers that need to be addressed.

Insufficient financial resources to support biodiversity conservation and promote climate resilience

Market failures and barriers

long project payback periods

perceived high risks

uncertainty related to future regulatory environment or to climate projections

lack of affordable finance.

Total annual investment costs for natural capital management projects are projected to be between €73 million and €288 million by 2020

Not yet precise estimates of overall costs and benefits of adaptation. EU costs of adapting to flood risks and sea-level rise between EUR1.7 bn in 2020s and EUR4.9 bn in 2050s

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100

150

200

250

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1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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Total Cost Business as Usual Growth Rate 13.7% Growth Rate 20%

Rationale

LIFE: why financial instruments

Make optimal use of scarce public funds, i.e. identify ways of increasing leverage;

Testing new instruments to mobilise or "crowd in" private finance;

Address specific market barriers by investing in projects that are not considered commercially viable today but have the potential to be so in the future;

‘Fill the gap’ in the financial market and demonstrate the business case for ‘higher-risk’ projects

Facilitate market uptake of climate and environment friendly actions and greening of financial intermediaries via financial instruments

Complement traditional action grants

NCFF objectivesAddress market gaps and barriers for revenue-generating or cost-saving projects promoting the conservation of natural capital to meet biodiversity/adaptation objectives;

Test different financing options; identify most suitable approaches

Three more specific objectives

Establish a pipeline of replicable, bankable Operations, serving as a 'proof of concept'

Demonstrate to private investors the attractiveness of natural capital projects; develop a sustainable flow of private capital and achieve scale

Leverage funding from private investors for this pipeline through the use of EU Funds

NCFF set up (1)EIB executes the Facility

€ 100-125 million Investment facility during 2015-2017

9- 12 operations, typically between €5 million and €15 million:

Direct loans to individual, large projects

Indirect loans through financial intermediaries aimed at smaller projects

Indirect investment aimed at smaller projects via equity funds

Target term: 10 year with possibility of grace period of 3 year

Maximum NCFF contribution to total project costs: 75%

Maximum NCFF participation per private equity fund : 33%

NCFF set up (2)

EU contribution to the EIB of € 60 million:

€ 50 million for guaranteeing investments

€ 10 million for the Support Facility.

Budget comes from the LIFE programme, which is the EU’s funding instrument for the environment and climate action.

Aim at balanced spread:

Total support in any MS maximised at 20% of EU guarantee

Support for direct operations in any MS maximised at 15%

Support for intermediated operations in any MS maximised at 15%

Support for individual categories maximised at 35%

NCFF Support facility

€ 10 million Support Facility

financed from the LIFE Programme

for Operations expected to be supported by the NCFF

maximum contribution per (potential) operation: € 1 million

support consists in external advice and consultancy services contracted by the EIB

Which projects can be financed by the NCFF?

Matt Rayment, ICF International

8 May 2015

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The NCFF will finance projects which: NCFF INTRODUCTORY EVENT

Promote the conservation, restoration, management and enhancement of natural capital, which can benefit biodiversity and climate adaptation. This includes ecosystem-based solutions to challenges related to land, soil, forestry, agriculture, water and waste.

Are capable of generating revenues and/or saving costs.

Are capable of repaying a loan or equity investment.

Address barriers to mainstream commercial financing, e.g. because they are innovative, uncertain, test and demonstrate financing models.

More details over the eligibility criteria in the next session

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NCFF will finance 4 types of projects:

Payments for ecosystem services

Green infrastructure projects

Pro-biodiversity and pro-adaptation businesses

Projects involving biodiversity offsets

NCFF INTRODUCTORY EVENT

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Payments for ecosystem servicesNCFF INTRODUCTORY EVENT

NCFF may fund investments in ecosystems that deliver services attracting payments from beneficiaries

Possible examples:→ Natural capital investments that enhance water quality

or flood retention, attracting payments from utilities, food & drink sector, local authorities, property interests or insurers

→ Investments in peatland or forest restoration, attracting payments for carbon credits, water quality and/ or other services

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Payments for ecosystem services NCFF INTRODUCTORY EVENT

Characteristics and challenges:

Key challenge is to develop payment mechanisms capable of repaying an investment

We know that ecosystem services are valuable, but there needs to be a financial, as well as economic rationale for investment

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Green infrastructure projectsNCFF INTRODUCTORY EVENT

Strategic investment in high quality natural and semi-natural areas (rivers, forests, landscapes, urban green infrastructure) generating services for which businesses or local authorities are willing to pay

Possible examples:→ Investments in urban green infrastructure (e.g. green spaces,

green roofs and walls, trees, sustainable drainage systems) → Green alternatives to traditional infrastructure investments

(e.g. flood defence, waste water treatment)

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Green infrastructure projectsNCFF INTRODUCTORY EVENT

Network of high quality natural and semi-natural areas with other environmental features: From hedgerows, fish ladders, green roofs to entire functional

ecosystems

Perform several functions in the same spatial area

Form integral part of an interconnected GI network

Check spatial planning

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Green infrastructure projectsNCFF INTRODUCTORY EVENT

Characteristics and challenges:

Various examples demonstrate cost effectiveness of green infrastructure compared to built infrastructure

Up front investment in creation or restoration needed to deliver benefits over time

Overlaps with PES; similar challenges regarding uncertain benefits and payment mechanisms

Green infrastructure needs to demonstrate benefits for biodiversity and/or climate adaptation to be eligible

Mix of private and public benefits - how to combine payments from different beneficiaries (e.g. business, public sector)

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Pro-biodiversity and pro-adaptation businesses NCFF INTRODUCTORY EVENT

NCFF can invest in businesses providing goods and services that contribute to conservation of ecosystems and their services, including through conservation management, sustainable forestry/ agriculture/ aquaculture or ecotourism.

Possible examples:→ Certified products and services, environmental technologies,

consultancy and technical services, financial products and services, ecotourism businesses

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Pro-biodiversity and pro-adaptation businesses NCFF INTRODUCTORY EVENT

Characteristics and challenges:

This category is wide ranging and could cover a different types of goods and services

Includes innovative products and services, but unlike other categories may involve more traditional business models (e.g. not requiring new payment mechanisms)

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Projects involving biodiversity offsetsNCFF INTRODUCTORY EVENT

NCFF may finance conservation activities providing measurable benefits designed to compensate for unavoidable damage to biodiversity arising from development or other activities, ensuring ‘no net loss’ of biodiversity

Discussions on project design are ongoing

Characteristics and challenges:

Offsetting often requires up front investments that are capable of generating revenues over time, through sale of credits

Offsets are controversial – discussions on project design are ongoing

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ConclusionsNCFF INTRODUCTORY EVENT

NCFF can fund a wide range of natural capital projects through the four categories (overlap between the different categories possible)

Research demonstrates that there is much interest in the NCFF and a strong potential pipeline

However a significant challenge is to develop potentially “bankable” projects capable of repaying an investment

Thank you for your attention

Natural Capital Financing FacilityInformation event with introduction workshop

Q&A

Brussels, 8/05/2015