Our Take: Natural Climate Solutions, The Big Apple, Trust, & Credit Enhancement

It was already 1:15 pm, New York time. We had less than 2 hours to figure this out. The rich conversation around the table was far-ranging, but our small group had yet to land on a concrete plan.

Our mission was to develop strategic recommendations to better position this natural climate solution (NCS) project to move forward. The project is an Afforestation, Reforestation, and Revegetation (ARR) project in Brazil. The project is in the design phase and is making plans to enroll 1,000 landowners and restore 10,000 hectares by the end of 2028. The developer estimates that the project has a $24 million financing need and will have to start raising capital immediately. It also believes the “combination of the project’s long payback period (15 years), irregular cash flows (every five years), and exposure to many performance risks is going to make it difficult to find affordable financing.”

Sound familiar?

We were on the 10^th floor in the Madison Avenue offices of our host, the Doris Duke Foundation, participating in the workshop titled “Catalyzing Carbon Finance for High-Quality NCS Projects.” The event kicked off the start of the New York Climate Week and was convened by the Symbiosis Coalition, Forest Investor Club, and the Business Alliance to Scale Climate Solutions. I had been on the steering committee, contributing to the planning and design of the workshop.

As the small group facilitator, I reminded everyone of the task at hand. We were to assemble recommendations for the developer using the design criteria that included scalable, replicable, viable, and equitable considerations. Around my table, we had representatives from Microsoft, UBS, Morgan Stanley, Google, Conservation International, Kita, VNV Advisory Services, and Mitsubishi; a powerful brain trust!

At 3:15 pm, we gathered in the main conference room to hear the recap of the proposed financing design solutions from all nine small groups that had considered the three furnished case studies that included the ARR one our group examined, Improved Forest Management, and Agroforestry.

This event was very different from the normal climate financing gathering, where one listens to a raft of panelists sharing their viewpoints, gripes, and silver bullets. The goal of the Catalyzing Carbon Finance for High-Quality NCS Projects workshop was to identify concrete actions that key market participants could take to enhance financing solutions for next-generation NCS projects that delivered high integrity impact. The small group exercise format was excellent in having an array of top-caliber contributions from project developers, financiers, buyers, insurance, and market intermediaries, all working to holistically solve the carbon finance mechanism needed to accelerate NCS.

The day commenced with three panels designed to develop a shared understanding of the challenges and opportunities associated with scaling finance for the NCS sector. These challenges included the lack of affordable debt instruments, large development costs that disadvantaged smallholder projects, carbon price volatility, limited participation from development finance institutions and catalytic capital providers, methodologies that increased confidence in carbon accounting but introduced yield uncertainty and additional cost, challenging risk and return profiles for NCS investments, long investor payback periods, and lack of available benchmarks from successful transactions.

I noted several nuggets shared throughout the day:

Cam Moore (TNC) boiled things down to the carbon market needing to build trust.

Jamey Mulligan (Amazon) hammered home the point that solutions need to catalyze systems change.

Kate Wharton (CrossBoundary) pointed out that most project developers are start-ups and, therefore, need critical early-stage finance. She also noted that it wasn’t always easy to explain the voluntary carbon market (VCM) to the investment community.

Jamie Cashman (U.S. Development Finance Corporation) urged market stakeholders to “reach out” to explore partnering on solutions that involved debt/equity and insurance/credit guarantees.

Mark Wishnie (BTG Pactual) responded to Julia Strong’s (Symbiosis) question on what was needed to make a credit offtake agreement work for all parties, explaining that carbon price discovery was very difficult currently.

Chris Leeds (Standard Chartered) felt that market benchmarks and standardization would spur engagement by large banks and the secondary market, concluding that we currently have “Lots of chickens and no eggs!”

In the panel discussion on lessons learned from other sectors, such as renewable energy, microfinance, etc. Rob Feigenson (Morgan Stanley) shared the story of a green bond backed by the sale of carbon credits to corporate buyers. The bond was issued by the American Forest Foundation. Rob made it clear that the credit enhancement (guarantee) had been pivotal. The green bond had 34 investor roadshow views, three management calls, and ultimately received $23 million in orders across three different investors, including $13 million of ESG-specific orders.

Sheri Hickok (Climate Impact Partners) weighed in with her experience in the renewable energy sector on the need for track record and benchmarks, stating clearly, “We don’t yet have the reps in the VCM!”

Back to the results of the small group report-outs in the penultimate closing session for the day.

While many of them described the financing approaches relevant to the case study they examined, strikingly, they all – in one way or another – landed on the need for credit enhancement (guarantee). Terms used included the need for “guarantee or bespoke insurance,” “a bond (compounding) facility with credit enhancement,” “MIGA/DFC breach of contract insurance,” “DFI covering unfunded first loss,” “government loan guarantees to reduce the cost of capital,” “a guarantee facility to provide coverage under contract for differences,” and “DFIs for principal protection.”

Our work is cut out for us!