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

Farmers weed rice fields in Dintor village, Indonesia. Photo by A. Erlangga/CIFOR
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Cabbage plantation areas on the slope of mount Gede Pangrango Sukabumi, West Java, Indonesia. Photo by R. Martin/CIFOR

Every year, hundreds of billions of dollars are invested into the land use sector. Currently, almost all of these funds are spent in support of conventional land use practices, generally contributing to environmental degradation and hampering progress toward the Sustainable Development Goals.

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.

Read also: Summary and discussion: Inclusive finance interviews

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.

A farmer displays cowpeas at the weekly market in Chiana, Ghana. Photo by A. Fassio/CIFOR

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.

A woman carries vegetables in Yangole, DRC. Photo by A. Fassio/CIFOR

“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.

Farmers harvest rice paddies in Dintor village, Indonesia. Photo by A. Erlangga/CIFOR

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 farmer sits near a collection of groundnuts near Chiana, Ghana. Photo by A. Fassio/CIFOR

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.

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.

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Forest finance partnerships more productive than competition

Trees stand in Kisangani, Democratic Republic of Congo. Photo by O. Girard/CIFOR
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FTA COMMUNICATIONS TEAM
“Distribution and equitability contribute directly to reducing inequality, one of the root causes of environmental degradation.” © Ben Singer

Benjamin Singer of the United Nations Forum on Forests (UNFF) Secretariat shares his views on inclusive landscape finance in the latest of this new interview series.

He brings a decade of experience from his role in implementing the UNFF’s Global Forest Financing Facilitation Network to the discussion. Here he reflects on using public funds to assist developing countries in their efforts to mobilize finance for sustainable forest management.

How do you define ‘inclusive finance’ and why is it important?

There are two distinct ideas to the concept of ‘inclusive finance’ in the context of sustainable forest and land management within the broader landscape. The first relates to the need to mobilize finance as a key ingredient for the implementation of sustainable forms of land and forest management. The second is how to distribute this finance equitably among all stakeholders, with a particular focus on the most vulnerable – local communities, indigenous peoples, women, youth and the elderly.

While much of the debate around sustainable or ‘green’ finance has focused on mobilizing finance, few have considered the equitable distribution of finance once it is mobilized – as if it were a mere side-thought to consider only after money had been secured.

Yet distribution and equitability contribute directly to reducing inequality, one of the root causes of environmental degradation. Wealthier, more powerful stakeholders often exhaust natural resources without having to face the negative externalities they are creating, whereas these tend to fall onto poorer sections of society who rely on these same resources for their livelihoods and even survival.

Empowering this second category of stakeholders, through equitable benefit-sharing, amongst others, would enhance their resilience in the face of environmental change – including climate change.

It could also help create a balance of power that would introduce checks and balances on the use of natural resources by wealthier stakeholders, therefore contributing to reducing environmental degradation in the first place.

Read more: Catalyzing partnerships for reforestation of degraded land

What are the underlying reasons for the underfinancing of small-scale agricultural and forest businesses?

There are trillions of dollars going into investments worldwide – so why is it so difficult to find just a few million to meaningfully reduce the overuse of natural resources? The reason is that the vast majority of these trillions follow well-trodden paths that have shown strong track records of producing returns on investments. Many of these paths are not productive. Some may even be very risky, but they will still be attractive if investors are familiar with them and the mechanisms of investing are straightforward.

In contrast, investing in small-scale agriculture and forestry in developing countries can be daunting to investors from the North – private or institutional. One reason for this is that knowledge of the financial performance within this subsector is scant, if it exists at all.

Such investment also varies considerably from one country to another, and often has a dismal reputation – though mostly unwarranted – of causing environmental degradation. Perhaps most importantly of all, the scale of financing required in each case, which may be one or two million at most – is simply incompatible with opportunities that interest institutional investors, which generally start at half a billion.

What are we not doing right, or not doing well enough, or not doing at all?

“Finance exists (lots of it), and the need for financing exists. The problem is that we are just not connecting the dots.” © Ben Singer

Finance exists (lots of it), and the need for financing exists. One problem is that we are just not connecting the dots. Instead, we are carrying on with business as usual. Investors tend to invest in the usual stock markets that finance the main agricultural commodities produced in developing countries, while foresters in developing countries continue to lament deforestation and forest degradation.

We need to focus on building bridges between sectors (finance, forestry and agriculture), between stakeholders (private investors, public authorities, and small-scale agriculture and forestry businesses) and between concepts (economic development and social and environmental sustainability). All the ingredients are there. The challenge is how to identify, experiment and scale up those win–win solutions that actually work.

Read more: Strengthening producer organizations is key to making finance inclusive and effective

How is your organization addressing inclusive finance, and what are your experiences and key lessons?

The UNFF Secretariat, through its Global Forest Financing Facilitation Network, supports its member states in mobilizing finance for sustainable forest management in three ways:

    • Assisting in the design of national forest financing strategies
    • Assisting in the design of project proposals to harness funding from multilateral financing institutions such as the Green Climate Fund and the Global Environment Facility
  • Creating a clearing house to highlight lessons learnt and best practices in forest financing in developing countries and those with economies in transition

One key lesson is that there is no one-size-fits-all approach. Despite appearing obvious, policy makers time and again underestimate the specificity of financing needs of different countries or different forest stakeholders.

It is essential to get a better understanding of the gaps, obstacles and opportunities related to financing specific forests or forest activities, before targeting financing sources. In some cases, for example, grants from multilateral financing institutions might be the best-adapted source, for others it could be micro-credit from non-governmental organizations.

What examples do you have of successful or promising ‘model’ approaches or innovations?

Policy makers and decision makers often lurch into mobilizing funds from a specific source because they have seen it work in other conditions, or because they have heard that it is easy to access.

However, I consistently recommend developing a forest-financing strategy that takes a step back and helps to understand the financing gaps, obstacles and opportunities. We take a four-step approach to developing such a strategy:

    • Identifying and quantifying forest financing needs
    • Mapping financing resources according to their origin
    • Matching the needs with the sources
  • Drawing up a list of tasks required to actually mobilize the shortlisted sources of financing

The idea of developing a forest financing strategy might seem like a cumbersome first step, but we have shown that it can save a lot of time and effort, as it helps identify the most promising sources of financing for the actual needs of the country or stakeholder concerned.

Read more: Background note on FTA financial innovations for sustainable landscapes interviews

What is your vision on how best to increase finance and investment in sustainable forestry and farming?

My vision is simple: partnerships. Again, this might seem obvious, but the financial sector is extremely competitive and this spills over into the world of forest finance. I have often seen supposed partners compete and withhold information and resources from each other, despite sharing the overall goal of sustainable forest management. And I have seen this result in failure for all, time and again.

Forest finance differs fundamentally from the broader finance sector in that the maximization of one’s personal gain as the overarching objective is replaced with a global gain, through the implementation of sustainable forest management worldwide. In this respect, competition is counterproductive as it inhibits the possibility of partnerships, which are crucial to increasing financing for forests.

To mobilize and equitably distribute the financial means necessary for the benefit of all – from local and indigenous communities to institutional investors, multilateral financing mechanisms, national decision makers and small, medium and large enterprises – we need to agree on both the overall goals and how to best achieve them.

However, building such partnerships is by no means a small task. All stakeholders first need to realize that forest financing is not business as usual, and that partnerships are much more productive than competition.

By Nick Pasiecznik, Tropenbos International.

This interview has also been published on the Tropenbos International website.

This article was produced by Tropenbos international and the Centre for International Forestry Research (CIFOR) as part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA). 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.

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Forest finance partnerships more productive than competition

18 April, 2019
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FTA COMMUNICATIONS TEAM
“Distribution and equitability contribute directly to reducing inequality, one of the root causes of environmental degradation.” © Ben Singer

Benjamin Singer of the United Nations Forum on Forests (UNFF) Secretariat shares his views on inclusive landscape finance in the latest of this new interview series.

He brings a decade of experience from his role in implementing the UNFF’s Global Forest Financing Facilitation Network to the discussion. Here he reflects on using public funds to assist developing countries in their efforts to mobilize finance for sustainable forest management.

How do you define ‘inclusive finance’ and why is it important?

There are two distinct ideas to the concept of ‘inclusive finance’ in the context of sustainable forest and land management within the broader landscape. The first relates to the need to mobilize finance as a key ingredient for the implementation of sustainable forms of land and forest management. The second is how to distribute this finance equitably among all stakeholders, with a particular focus on the most vulnerable – local communities, indigenous peoples, women, youth and the elderly.

While much of the debate around sustainable or ‘green’ finance has focused on mobilizing finance, few have considered the equitable distribution of finance once it is mobilized – as if it were a mere side-thought to consider only after money had been secured.

Yet distribution and equitability contribute directly to reducing inequality, one of the root causes of environmental degradation. Wealthier, more powerful stakeholders often exhaust natural resources without having to face the negative externalities they are creating, whereas these tend to fall onto poorer sections of society who rely on these same resources for their livelihoods and even survival.

Empowering this second category of stakeholders, through equitable benefit-sharing, amongst others, would enhance their resilience in the face of environmental change – including climate change.

It could also help create a balance of power that would introduce checks and balances on the use of natural resources by wealthier stakeholders, therefore contributing to reducing environmental degradation in the first place.

Read more: Catalyzing partnerships for reforestation of degraded land

What are the underlying reasons for the underfinancing of small-scale agricultural and forest businesses?

There are trillions of dollars going into investments worldwide – so why is it so difficult to find just a few million to meaningfully reduce the overuse of natural resources? The reason is that the vast majority of these trillions follow well-trodden paths that have shown strong track records of producing returns on investments. Many of these paths are not productive. Some may even be very risky, but they will still be attractive if investors are familiar with them and the mechanisms of investing are straightforward.

In contrast, investing in small-scale agriculture and forestry in developing countries can be daunting to investors from the North – private or institutional. One reason for this is that knowledge of the financial performance within this subsector is scant, if it exists at all.

Such investment also varies considerably from one country to another, and often has a dismal reputation – though mostly unwarranted – of causing environmental degradation. Perhaps most importantly of all, the scale of financing required in each case, which may be one or two million at most – is simply incompatible with opportunities that interest institutional investors, which generally start at half a billion.

What are we not doing right, or not doing well enough, or not doing at all?

“Finance exists (lots of it), and the need for financing exists. The problem is that we are just not connecting the dots.” © Ben Singer

Finance exists (lots of it), and the need for financing exists. One problem is that we are just not connecting the dots. Instead, we are carrying on with business as usual. Investors tend to invest in the usual stock markets that finance the main agricultural commodities produced in developing countries, while foresters in developing countries continue to lament deforestation and forest degradation.

We need to focus on building bridges between sectors (finance, forestry and agriculture), between stakeholders (private investors, public authorities, and small-scale agriculture and forestry businesses) and between concepts (economic development and social and environmental sustainability). All the ingredients are there. The challenge is how to identify, experiment and scale up those win–win solutions that actually work.

Read more: Strengthening producer organizations is key to making finance inclusive and effective

How is your organization addressing inclusive finance, and what are your experiences and key lessons?

The UNFF Secretariat, through its Global Forest Financing Facilitation Network, supports its member states in mobilizing finance for sustainable forest management in three ways:

  • Assisting in the design of national forest financing strategies
  • Assisting in the design of project proposals to harness funding from multilateral financing institutions such as the Green Climate Fund and the Global Environment Facility
  • Creating a clearing house to highlight lessons learnt and best practices in forest financing in developing countries and those with economies in transition

One key lesson is that there is no one-size-fits-all approach. Despite appearing obvious, policy makers time and again underestimate the specificity of financing needs of different countries or different forest stakeholders.

It is essential to get a better understanding of the gaps, obstacles and opportunities related to financing specific forests or forest activities, before targeting financing sources. In some cases, for example, grants from multilateral financing institutions might be the best-adapted source, for others it could be micro-credit from non-governmental organizations.

What examples do you have of successful or promising ‘model’ approaches or innovations?

Policy makers and decision makers often lurch into mobilizing funds from a specific source because they have seen it work in other conditions, or because they have heard that it is easy to access.

However, I consistently recommend developing a forest-financing strategy that takes a step back and helps to understand the financing gaps, obstacles and opportunities. We take a four-step approach to developing such a strategy:

  • Identifying and quantifying forest financing needs
  • Mapping financing resources according to their origin
  • Matching the needs with the sources
  • Drawing up a list of tasks required to actually mobilize the shortlisted sources of financing

The idea of developing a forest financing strategy might seem like a cumbersome first step, but we have shown that it can save a lot of time and effort, as it helps identify the most promising sources of financing for the actual needs of the country or stakeholder concerned.

Read more: Background note on FTA financial innovations for sustainable landscapes interviews

What is your vision on how best to increase finance and investment in sustainable forestry and farming?

My vision is simple: partnerships. Again, this might seem obvious, but the financial sector is extremely competitive and this spills over into the world of forest finance. I have often seen supposed partners compete and withhold information and resources from each other, despite sharing the overall goal of sustainable forest management. And I have seen this result in failure for all, time and again.

Forest finance differs fundamentally from the broader finance sector in that the maximization of one’s personal gain as the overarching objective is replaced with a global gain, through the implementation of sustainable forest management worldwide. In this respect, competition is counterproductive as it inhibits the possibility of partnerships, which are crucial to increasing financing for forests.

To mobilize and equitably distribute the financial means necessary for the benefit of all – from local and indigenous communities to institutional investors, multilateral financing mechanisms, national decision makers and small, medium and large enterprises – we need to agree on both the overall goals and how to best achieve them.

However, building such partnerships is by no means a small task. All stakeholders first need to realize that forest financing is not business as usual, and that partnerships are much more productive than competition.

By Nick Pasiecznik, Tropenbos International.

This article was produced by Tropenbos international and the Centre for International Forestry Research (CIFOR) as part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA). 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.

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Catalyzing partnerships for reforestation of degraded land

Aerial view of Southwest Mau Forest and neighbouring tea estates. Photo by Patrick Sheperd/CIFOR
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FTA COMMUNICATIONS TEAM
Charlotte van Andel. Photo by FMO

In this second edition of the “Innovative finance for sustainable landscapes” interview series, we hear from two sustainable finance experts from the Netherlands Development Finance Company (FMO). Steven Duyverman is a manager in FMO’s Agribusiness, Food and Water department and Charlotte van Andel is a senior environmental and social officer in the same department.

Steven Duyverman. Photo by FMO

Working in inclusive and green finance, FMO is ramping up its investments in the forestry sector. Duyverman and Van Andel reflect on how to apply their experience at the landscape level.

“Investors are reluctant to invest in landscapes in developing countries, since it is a new sector, with long payback periods and of uncertain risks. Such risks can be reduced by clarifying tenure rights, early engagement of local stakeholders in project development, strengthening partnerships and strengthening local capacities to implement best practices. Investors need to consider these if they really want to have an impact.”

How do you define ‘inclusive finance’ and why is it important?

Making finance inclusive is about reaching the bottom of the pyramid, so to speak, directly or indirectly. It must also focus on those so often left behind – the vulnerable, women, indigenous peoples and other marginalized groups. It is about increasing local employment, especially for the poorest, with decent and sustainable jobs that help improve local economies and reduce inequalities.

In forestry, outgrowers and employees, who are recruited locally to the largest extent possible, receive training. They are made aware of health and safety aspects, like using protective equipment when pruning or spraying. This equips them with skills and helps to ensure better livelihoods in the long term. Women are empowered and are often also seen as being more reliable and precise in certain tasks, such as in tree nurseries, allowing them to gain new knowledge and increase their own incomes.

With our forestry investments, we create 30–50 new jobs per 1,000 hectares of new plantations established. At the end of the day, FMO was established nearly 50 years ago not only to make money but, importantly, to create long-term development impact and to improve environmental and social conditions in the countries where it operates.

People gather under a tree. It takes time to find the most inclusive way of investing in the forestry sector. © FMO

What are the underlying reasons for the underfinancing of agricultural and forest businesses in developing countries?

One reason for underfinancing in the forestry sector is the reluctance of many to invest in a new sector, with long payback periods and unknown risks, in developing countries. For energy projects, for example, revenue streams and returns only come two or three years after the investment has been made. But investing in forestry requires a different view on cash flows, because even on the shortest cycles, it takes eight, 10, 12 years to start generating income from selling a marketable product (i.e. construction wood, electricity poles or wood chips), and before investors start to be repaid.

In such new markets, the risk is inherently higher than in more well-known investments with much shorter payback times that are perceived as ‘safer’. This does not just concern financial risk, but also – and inherent in inclusive finance – social and environmental risk. Establishing timber plantations is also a high-impact investment, and one of the cheapest means to make significant changes in mitigating climate and improving local economies and communities. However, given the complexity of large landscape-level forestry projects, getting these approved and implemented takes time. But we are gaining more experience in the sector, so we trust that efficiency will improve.

Another key issue for foreign investors is that working with local smallholders is difficult, as for them formal titles over the land they farm or want to reforest are sometimes impossible to acquire, and of uncertain legality if they do exist. Local authorities and land users sometimes have quite different views on what is needed, indicating that more dialogue is needed to increase understanding among all groups involved.

Read more: Strengthening producer organizations is key to making finance inclusive and effective

What are we not doing right, or not doing well enough, or not doing at all?

There is no right or wrong, but it is very important that we strive for sustainable development. That also means that we must ensure that business models are sustainable. Viability of a project requires financial, environmental and social standards to be met. For example, we require all our forestry clients to be Forest Stewardship Council (FSC) or Program for the Endorsement of Forest Certification (PEFC) certified.

We see that with a structured approach, income is created, deforestation is reduced and biodiversity improved. As a consequence, people have new alternative sources of cash income rather than depending on illegal charcoal making or poaching. At the same time, having additional income also tends to enhance development and security in local communities.

Our strength lies in catalyzing other partners; hence we need partnerships, partnerships and more partnerships to more effectively progress in the reforestation of degraded land. But for alignment reasons, we also require the support of governments to politically back up plans for land reforestation and to aid where adjacent commercial plantation forestry can be developed as a future mitigation toward deforestation.

We need more cooperation and collaboration, between us as a development finance institution and the private sector, with UN organizations, with national governments and their departments, with NGOs and civil society. To successfully nurture opportunities for growth in the restoration economy, cooperation of technology startups, smallholder finance and timber companies open doors to inspiring venture capital, private equity and impact investors who may know little about such landscape restoration opportunities.

Read more: Background note on FTA financial innovations for sustainable landscapes interviews

How is your organization addressing inclusive finance, and what are your experiences and key lessons?

At FMO, we provide ever more loans and equity to support projects with landscape-level objectives, and that have social and environmental benefits at their core. We have learned to include contextual risks. This triggers an early focus on risks outside the influence of our project, on how to better ensure indigenous peoples’ rights are respected, including land ownership and user rights, and using stakeholder engagement safeguards even more. We now also realize that it is not always possible to be able to do the right thing at the right time. Circumstances can be such that land issues cannot be fully resolved, or that human rights defenders are threatened, or that deforestation still takes place around the client’s activities. In such cases, we have developed ‘early warning systems’ and if seen to be so, we decide not to invest in unsustainable projects.

Companies that we invest in must have good and transparent relationships with local and legal authorities that have influence over forests and landscape. We also expect them to hear the voices of the people, of local communities, and to fully assess their needs. This means they must invest considerable time from an early stage, and talk to all involved, communities and traditional leaders, occasional users such as nomadic pastoralists, district and forestry authorities, NGOs or knowledge partners.

Going full circle, we also never forget local legislation, such as on forest protection, but also deal with the livelihood impacts of (illegal) users according to the World Bank’s International Finance Corporation (IFC) Performance Standards. Squaring that circle is not always easy. But only then can we add value and have the impact we are looking for.

One key lesson is that we used to give a lower priority to stakeholder engagement when we focused on returns. But now, at the very start of every investment, we expect companies to start talking with communities to get them to really understand the expected and potential changes, and agree in advance on how benefits can be shared. These include local job opportunities, training in pruning, use of fertilizers and safe pesticide application, and building roads, which can also initiate a village market, access to healthcare and schooling.

Training and supervising are important complements to inclusive finance, leading to sustainable safe jobs that support sustainable landscapes. © FMO

What examples do you have of successful or promising ‘model’ approaches or innovations?

In Ghana and Sierra Leone, FMO is supporting a project that has reforested 10,000 hectares of formerly degraded land since 2013 and is working toward adding up to another 9,000 hectares of new plantations. In Laos, we are funding the expansion of a forestry plantation from 3,400 to 15,000 hectares, including investment to support the building of a new sawmill and wood-processing facilities. This is another example of how we are implementing an integrated, long-term investment strategy.

Helping to establish such large areas of forest plantations is also helping FMO achieve its aim of becoming carbon neutral, in line with the Paris Accord. For now, FMO has approved investment of around €40 million a year in new forest plantations. Innovative financial products are necessary, as repayments may only start after 5–7 years, so in the early years there will be no cash flow available to pay even the interest on the loans.

Furthermore, training is an important tool that builds knowledge, but also helps companies to ensure that environmental and social concerns are integrated into their processing system. So, we also provide financial support for analysis, studies, training and implementation, for instance for more efficient use of scarce water resources and for waste-water treatment.

What is your vision on how best to increase finance and investment in sustainable forestry and farming?

The most important single factor that would increase investment is to support systems for registering and securing land rights, so that smallholders and foreign investors alike have formal ownership titles for the land they farm or want to plant with trees. And, of course, this is not just a need for development banks – it is a basic need for all land holders, independent of any future investment. Without formal titles, smallholder options are limited in many ways.

We work for a future where international development finance is no longer needed, where sufficient capital is available nationally, to support the establishment and growth of sustainable businesses in all sectors. And we also hope to see that environmental and social standards widely implemented in developed markets are also fully accepted in emerging markets and developing countries.

In that future, we expect old and new forms of finance to blend seamlessly, also mixing traditional approaches with the use of new technologies, working toward a circular and inclusive economy. This is what we are striving for. But just as it takes time for trees to grow, it will also take time to find the most inclusive way of investing in this sector. We are already seeing shifts.

By Nick Pasiecznik, Tropenbos International.

This interview has also been published on the Tropenbos International website.

This article was produced by Tropenbos International and the Center for International Forestry Research (CIFOR) as part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA). 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.

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Catalyzing partnerships for reforestation of degraded land

04 April, 2019
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FTA COMMUNICATIONS TEAM
Charlotte van Andel. Photo by FMO

In this second edition of the “Innovative finance for sustainable landscapes” interview series, we hear from two sustainable finance experts from the Netherlands Development Finance Company (FMO). Steven Duyverman is a manager in FMO’s Agribusiness, Food and Water department and Charlotte van Andel is a senior environmental and social officer in the same department.

Steven Duyverman. Photo by FMO

Working in inclusive and green finance, FMO is ramping up its investments in the forestry sector. Duyverman and Van Andel reflect on how to apply their experience at the landscape level.

“Investors are reluctant to invest in landscapes in developing countries, since it is a new sector, with long payback periods and of uncertain risks. Such risks can be reduced by clarifying tenure rights, early engagement of local stakeholders in project development, strengthening partnerships and strengthening local capacities to implement best practices. Investors need to consider these if they really want to have an impact.”

How do you define ‘inclusive finance’ and why is it important?

Making finance inclusive is about reaching the bottom of the pyramid, so to speak, directly or indirectly. It must also focus on those so often left behind – the vulnerable, women, indigenous peoples and other marginalized groups. It is about increasing local employment, especially for the poorest, with decent and sustainable jobs that help improve local economies and reduce inequalities.

In forestry, outgrowers and employees, who are recruited locally to the largest extent possible, receive training. They are made aware of health and safety aspects, like using protective equipment when pruning or spraying. This equips them with skills and helps to ensure better livelihoods in the long term. Women are empowered and are often also seen as being more reliable and precise in certain tasks, such as in tree nurseries, allowing them to gain new knowledge and increase their own incomes.

With our forestry investments, we create 30–50 new jobs per 1,000 hectares of new plantations established. At the end of the day, FMO was established nearly 50 years ago not only to make money but, importantly, to create long-term development impact and to improve environmental and social conditions in the countries where it operates.

People gather under a tree. It takes time to find the most inclusive way of investing in the forestry sector. © FMO

What are the underlying reasons for the underfinancing of agricultural and forest businesses in developing countries?

One reason for underfinancing in the forestry sector is the reluctance of many to invest in a new sector, with long payback periods and unknown risks, in developing countries. For energy projects, for example, revenue streams and returns only come two or three years after the investment has been made. But investing in forestry requires a different view on cash flows, because even on the shortest cycles, it takes eight, 10, 12 years to start generating income from selling a marketable product (i.e. construction wood, electricity poles or wood chips), and before investors start to be repaid.

In such new markets, the risk is inherently higher than in more well-known investments with much shorter payback times that are perceived as ‘safer’. This does not just concern financial risk, but also – and inherent in inclusive finance – social and environmental risk. Establishing timber plantations is also a high-impact investment, and one of the cheapest means to make significant changes in mitigating climate and improving local economies and communities. However, given the complexity of large landscape-level forestry projects, getting these approved and implemented takes time. But we are gaining more experience in the sector, so we trust that efficiency will improve.

Another key issue for foreign investors is that working with local smallholders is difficult, as for them formal titles over the land they farm or want to reforest are sometimes impossible to acquire, and of uncertain legality if they do exist. Local authorities and land users sometimes have quite different views on what is needed, indicating that more dialogue is needed to increase understanding among all groups involved.

Read more: Strengthening producer organizations is key to making finance inclusive and effective

What are we not doing right, or not doing well enough, or not doing at all?

There is no right or wrong, but it is very important that we strive for sustainable development. That also means that we must ensure that business models are sustainable. Viability of a project requires financial, environmental and social standards to be met. For example, we require all our forestry clients to be Forest Stewardship Council (FSC) or Program for the Endorsement of Forest Certification (PEFC) certified.

We see that with a structured approach, income is created, deforestation is reduced and biodiversity improved. As a consequence, people have new alternative sources of cash income rather than depending on illegal charcoal making or poaching. At the same time, having additional income also tends to enhance development and security in local communities.

Our strength lies in catalyzing other partners; hence we need partnerships, partnerships and more partnerships to more effectively progress in the reforestation of degraded land. But for alignment reasons, we also require the support of governments to politically back up plans for land reforestation and to aid where adjacent commercial plantation forestry can be developed as a future mitigation toward deforestation.

We need more cooperation and collaboration, between us as a development finance institution and the private sector, with UN organizations, with national governments and their departments, with NGOs and civil society. To successfully nurture opportunities for growth in the restoration economy, cooperation of technology startups, smallholder finance and timber companies open doors to inspiring venture capital, private equity and impact investors who may know little about such landscape restoration opportunities.

Read more: Background note on FTA financial innovations for sustainable landscapes interviews

How is your organization addressing inclusive finance, and what are your experiences and key lessons?

At FMO, we provide ever more loans and equity to support projects with landscape-level objectives, and that have social and environmental benefits at their core. We have learned to include contextual risks. This triggers an early focus on risks outside the influence of our project, on how to better ensure indigenous peoples’ rights are respected, including land ownership and user rights, and using stakeholder engagement safeguards even more. We now also realize that it is not always possible to be able to do the right thing at the right time. Circumstances can be such that land issues cannot be fully resolved, or that human rights defenders are threatened, or that deforestation still takes place around the client’s activities. In such cases, we have developed ‘early warning systems’ and if seen to be so, we decide not to invest in unsustainable projects.

Companies that we invest in must have good and transparent relationships with local and legal authorities that have influence over forests and landscape. We also expect them to hear the voices of the people, of local communities, and to fully assess their needs. This means they must invest considerable time from an early stage, and talk to all involved, communities and traditional leaders, occasional users such as nomadic pastoralists, district and forestry authorities, NGOs or knowledge partners.

Going full circle, we also never forget local legislation, such as on forest protection, but also deal with the livelihood impacts of (illegal) users according to the World Bank’s International Finance Corporation (IFC) Performance Standards. Squaring that circle is not always easy. But only then can we add value and have the impact we are looking for.

One key lesson is that we used to give a lower priority to stakeholder engagement when we focused on returns. But now, at the very start of every investment, we expect companies to start talking with communities to get them to really understand the expected and potential changes, and agree in advance on how benefits can be shared. These include local job opportunities, training in pruning, use of fertilizers and safe pesticide application, and building roads, which can also initiate a village market, access to healthcare and schooling.

Training and supervising are important complements to inclusive finance, leading to sustainable safe jobs that support sustainable landscapes. © FMO

What examples do you have of successful or promising ‘model’ approaches or innovations?

In Ghana and Sierra Leone, FMO is supporting a project that has reforested 10,000 hectares of formerly degraded land since 2013 and is working toward adding up to another 9,000 hectares of new plantations. In Laos, we are funding the expansion of a forestry plantation from 3,400 to 15,000 hectares, including investment to support the building of a new sawmill and wood-processing facilities. This is another example of how we are implementing an integrated, long-term investment strategy.

Helping to establish such large areas of forest plantations is also helping FMO achieve its aim of becoming carbon neutral, in line with the Paris Accord. For now, FMO has approved investment of around €40 million a year in new forest plantations. Innovative financial products are necessary, as repayments may only start after 5–7 years, so in the early years there will be no cash flow available to pay even the interest on the loans.

Furthermore, training is an important tool that builds knowledge, but also helps companies to ensure that environmental and social concerns are integrated into their processing system. So, we also provide financial support for analysis, studies, training and implementation, for instance for more efficient use of scarce water resources and for waste-water treatment.

What is your vision on how best to increase finance and investment in sustainable forestry and farming?

The most important single factor that would increase investment is to support systems for registering and securing land rights, so that smallholders and foreign investors alike have formal ownership titles for the land they farm or want to plant with trees. And, of course, this is not just a need for development banks – it is a basic need for all land holders, independent of any future investment. Without formal titles, smallholder options are limited in many ways.

We work for a future where international development finance is no longer needed, where sufficient capital is available nationally, to support the establishment and growth of sustainable businesses in all sectors. And we also hope to see that environmental and social standards widely implemented in developed markets are also fully accepted in emerging markets and developing countries.

In that future, we expect old and new forms of finance to blend seamlessly, also mixing traditional approaches with the use of new technologies, working toward a circular and inclusive economy. This is what we are striving for. But just as it takes time for trees to grow, it will also take time to find the most inclusive way of investing in this sector. We are already seeing shifts.

By Nick Pasiecznik, Tropenbos International.

This article was produced by Tropenbos International and the Center for International Forestry Research (CIFOR) as part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA). 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.

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