Natural Capital Financing Facility
Information event with introduction workshop
Welcome
Brussels, 8/05/2015
Natural Capital Financing Facility
Information event with introduction workshop
Pia Bucella
Director - Natural Capital
DG Environment
Brussels, 8/05/2015
Natural Capital Financing Facility
Information event with introduction workshop
Humberto Delgado Rosa
Director – Mainstreaming
Adaptation and Low Carbon
Technology
DG Climate Action
Brussels, 8/05/2015
Investing in
Natural Capital
-
Key concepts
Financial sector view
Anders Nordheim
Brussels, 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
The impact of Business
PRI/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. 9
The Total Economic Value of
Ecosystems
Source: Pay – Establishing payments for watershed services, IUCN (2006)
10
Motivations for Investing in Natural Capital
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
11
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.
-
Institutional
Retail
Companies
Government
Crowd funding
Philanthropy
Cash flows
Ecosystems
- Service
payments
- Offsets
- Products
- Tradable
permits
- Terrestrial
lands (forests)
- Fresh water
- Oceans
- Habitats
Impact
Investors
Investment
Natural Capital Finance Model
Financial return
Impact reporting
Challenges:
- Difficult to value, price and account for environmental
assets, benefits and impacts
- Value generated does not always (directly) benefit
stakeholders
13
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)
14
Thank you
Contact:
l.vanast@globalcanopy.org
anders.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.
Rationale
Insufficient financial resources to support
biodiversity conservation and promote
climate resilience
350
Market failures and barriers
300
long project payback periods
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
EUR Millio n
perceived high risks
250
200
150
100
50
0
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
Total Cost
Business as Usual
Growth Rate 13.7%
Growth Rate 20%
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 objectives
Address 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
NCFF INTRODUCTORY EVENT
The NCFF will finance projects which:

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 INTRODUCTORY EVENT
NCFF will finance 4 types of projects:
 Payments for ecosystem services
 Green infrastructure projects
 Pro-biodiversity and pro-adaptation businesses
 Projects involving biodiversity offsets
26
NCFF INTRODUCTORY EVENT
Payments for ecosystem services
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
27
NCFF INTRODUCTORY EVENT
Payments for ecosystem services
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
28
NCFF INTRODUCTORY EVENT
Green infrastructure projects
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)
29
NCFF INTRODUCTORY EVENT
Green infrastructure projects
 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
30
NCFF INTRODUCTORY EVENT
Green infrastructure projects
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)
31
NCFF INTRODUCTORY EVENT
Pro-biodiversity and pro-adaptation businesses
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
32
NCFF INTRODUCTORY EVENT
Pro-biodiversity and pro-adaptation businesses
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)
33
NCFF INTRODUCTORY EVENT
Projects involving biodiversity offsets
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
34
NCFF INTRODUCTORY EVENT
Conclusions
 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
35
Thank you for your attention
Natural Capital Financing Facility
Information event with introduction workshop
Q&A
Brussels, 8/05/2015