Did you know that 60 agricultural producers and other companies have a collective liability of up to $500 million to comply with their pledges for deforestation-free production of palm oil?
Neither did many of their banks and other lenders, who generally don’t like such hidden risks.
The “Sustainable Commodity Conservation Mechanism” was one of the most intriguing — and wonkiest — financing schemes presented at this month’s Conservation Finance conference at Credit Suisse in New York. The idea is to leverage penalties owed by palm oil suppliers to create a fund for large-scale forest restoration. The suppliers need to be certified under the Roundtable on Sustainable Palm Oil, or RSPO, in order to sell to global distributors.
The mechanism “becomes a de-risking tool for banks,” said Gabriel Eickhoff of Lestari Capital, which is developing the approach with backing from the David and Lucile Packard Foundation. Credit Suisse, for example, has committed to invest only in RSPO certified palm oil producers by 2020. Applied to cacao, rubber and even oil, the mechanism could conceivably generate billions for ecosystem restoration, Eickhoff told ImpactAlpha.
The latest episode of ImpactAlpha’s Returns on Investment podcast explores how risk reduction has emerged as the key lever in conservation finance. At the conference, The Nature Conservancy’s Kathy Baughman McLeod led participants in chanting, “Nature reduces risk. Nature reduces risk.” (Listen to our podcast roundtable regulars, Imogen Rose-Smith, Brian Walsh and David Bank chant “Nature reduces risk.”)
McLeod presented The Nature Conservancy’s efforts to use insurance premiums to finance reef restoration. Hotels along Mexico’s Mayan Riviera around Cancun have taken out the policy to pay for damage caused by hurricanes. After storms, Swiss Re will make quick payouts for repairs to the reef and beaches. The healthier the hotel owners keep the reef, the lower their insurance costs.
Increasingly, conservation financing mechanisms are bringing together unlikely allies. A $152 million Forest Bond, backed by the International Finance Corp. and developed by Conservation International, backs deforestation-reduction projects that generate carbon credits. Bond buyers can take their returns in cash or in carbon credits. The mining giant BHP Billiton has committed to buy any unclaimed credits, up to $12 million over five years, to further reduce the risks of the bond.
“We want to operate in your community, your country,” BHP’s Edwin Mongan said. “There’s a license to operate element of this.”