Finance Day at COP26 highlights the urgent need to mobilize private climate finance. An estimated $3.7 trillion will be needed to finance the work still needed to achieve the Sustainable Development Goals (SDGs), a mammoth amount that development institutions alone cannot fulfill.
The good news is that capital to finance this radical change is available. Interest in impact investing for social and environmental good is growing across sectors. The levels of capital at play are staggering: institutional investors, for example, hold $100 trillion in assets. However, channeling finance towards high-impact, viable SDG investments remains a challenge. Commercially oriented multi-stakeholder partnerships with ambitions to transform a sector or market through the launch of a new business venture can be one way to tap into this funding pool.
On paper, private investors and commercially driven transformative partnerships are a good match. They work to create the systemic changes needed to meet the SDGs, guided by commercial models that aim to generate the returns investors want. In reality, partnerships struggle to unlock private capital and investors are frustrated by the lack of an SDG investment pipeline. So, what’s driving this disconnect? Investing in transformative partnerships presents unique challenges:
1. Transformative partnerships need new financial approaches
While investing in any new SDG business venture comes with inherent risks like a long return timeline, these challenges are often magnified for partnerships working to create systemic changes that disrupt the way a market, supply chain or sector operates. Private sector actors may be reluctant to invest in green or new business models that lack strong track records or are entering a market that doesn’t formally exist yet.
2. Partnerships can get stuck in a grant rut
For many partnerships, grant and philanthropic financing is integral in supporting innovative strategies and getting operations off the ground. While this is a valuable starting point, they can hold partnerships back from securing the investment needed for commercially oriented partnerships to scale. Beyond the legal and structural challenges that go along with seeking both investment and grant funding, investors and grant funders are often looking for fundamentally different things. Investors want to make quick decisions opportunistically and are looking for leaders with a strong track record, compelling business case and experienced team that has done its commercial homework. By contrast, grant makers are rarely driven by market forces, instead targeting specific focus areas or impacts for set periods of time. As a result, partnerships can get caught in short grant cycles to stay afloat financially, bogged down in rigid reporting requirements and left without capacity to build out their business model or do the due diligence needed to stand out to investors.
3. There isn’t a standard way of doing things
Today, most impact is self-reported, seldom independently verified and rarely publicly disclosed. Little disclosure coupled with a lack of harmonized evaluation criteria (for example, there are over 1,000 environmental, social, and governance metrics and over 150 impact measurement frameworks) or knowing in which context to deploy them can make it challenging for investors to compare potential SDG investments, replicate successful strategies and identify the best way to track impact and report on the investment. Ultimately, this can cut the incentives for private SDG investment at scale. This challenge is particularly relevant for transformative partnerships working to monetize something new.
What Does Successful Partnership Financing Look Like in Practice?
Navigating these challenges requires creative thinking and patience. While there’s no one-size-fits-all approach for finding investment, a few partnerships stand out as great examples of how these challenges can be addressed. The Forest Resilience Bond (FRB), for instance, tackled each of these barriers by leveraging its innovative model to bring the world’s first forest restoration bond to market. Here’s how FRB did it:
FRB created a new financial market.
Established in 2015 by Blue Forest Conservation and World Resources Institute, FRB overcame the traditional barriers associated with restoration investment. Nature-based investments are often viewed as too risky due to the long return timeline and the difficulty of monetizing restoration activities. This has resulted in low private sector investment and an estimated $60 billion financing gap for U.S. forests alone.
To address this, FRB developed a blended finance instrument that bridged the gap between urgent restoration projects and private investors. FRB acts an intermediary, aggregating restoration project costs and creating a cost-sharing mechanism between beneficiaries of restoration work to accelerate payout to investors. By creating a new investment vehicle that shortens the return timeline, FRB attracts new investors that would not typically consider restoration a viable investment option.
FRB purposefully used early grant funding to develop its comprehensive commercial case.
By establishing an investment strategy early on, FRB used philanthropic funding to its advantage. Like many partnerships, FRB was reliant on early-stage grant and concessional funding. The partnership used this funding strategically to shore up its business model and investment vehicle, secure buy-in from critical stakeholders and establish its impact measurement methodology.
This groundwork enabled the partnership to secure $4.6 million in private capital for the Yuba Project in 2018 to restore 15,000 acres in California’s Tahoe National Forest. The successful pilot, which is now more than 75% complete, paved the way for a bigger project on the Tahoe National Forest. Announced last week, the Yuba II FRB, will finance $25 million in forest resilience and post-fire restoration projects in California’s Sierra Nevada mountains to restore an additional 48,000 forested acres, protect nearby communities, and enhance water security.
FRB paved its own path.
When FRB realized a conventional investment agreement would not meet its needs, the partnership created a contracting strategy better suited to restoration projects. Initially, FRB planned to use a standard pay-for-performance component to evaluate success and structure payments. However, the challenges associated with evaluating and quantifying restoration benefits, like fire suppression costs, made this unrealistic. Instead, FRB uses a cooperative process to establish contracts with individual stakeholders, allowing each beneficiary to outline the terms of its contract. This structure benefits all stakeholders by allowing them to incorporate their individual priorities.
Upcoming Research on Partnership Financing
Properly financing the SDGs is not an impossible dream. Transformative partnerships can play a key role in mobilizing the tremendous amount of private financing available, unlocking the money required to improve the wellbeing of our planet and its people. Upcoming WRI research, to be launched in time for next year’s U.N. General Assembly, will further explore the challenges with development financing through the lens of commercially driven partnerships. The research, in partnership with global partnership accelerator Partnering for Green Growth and the Global Goals (P4G) and the Global Impact Investor Network (GIIN), will further highlight stories of partnerships, like FRB, in their journeys to acquire private investments — ultimately with the hope to help transformative partnerships and investors work together to accelerate the SDGs in this decade of action and delivery.
