Investing In Nature: Financing Conservation And Nature .

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INVESTING IN NATURE:FINANCING CONSERVATIONAND NATURE-BASEDSOLUTIONSA PRACTICAL GUIDE FOR EUROPEIncluding how to access support from theEuropean Investment Bank’s dedicatedNatural Capital Financing Facility

Boosting investment forbiodiversity, conservation andnature-based adaptation to climateIS THIS GUIDE RELEVANT TO ME?Are you . an entrepreneur exploring nature-based solutions to improve project performance,cut costs or drive new revenue? a conservation organisation or foundation seeking to move towards a commercial business model? a corporation looking to offset the environmental impact of your operations? a financial institution looking to support conservation or nature-based climate projects? a fund manager considering raising capital for conservation or biodiversity projects in Europe? a city or municipality inspired to become greener, more biodiversity friendly and more resilient toclimate change?

CONTENTS4PART A:What are conservation and nature-based solutions? How could they benefit me?PART B:7A seven-step guide to financing conservation and nature-based solutions projects1. Get to know the financing basics2. Describe the project: your business model and expected impact3. Describe your current financial standing4. Forecast future cash flows5. Identify risks and possible mitigants6. Analyse different funding structures and sources of capital7. Assess appropriate legal structures16PART C:What are examples I can look at for inspiration?22PART D:Taking the next step: accessing finance from the NCFF and elsewhere24GLOSSARY27APPENDIX 1: Eligible sectors for NCFF financing32APPENDIX 2: Finance ‘deep dive’36RECOMMENDED READING1

PART A: WHAT ARE CONSERVATION AND NATURE-BASEDSOLUTIONS? HOW COULD THEY BENEFIT ME?Biodiversity is the variety of life on earth: thebuilding blocks from which ecosystems - reefs,reedbeds, forests and grasslands - are formed.Humanity depends on the goods and servicesthese ecosystems deliver: from food and fibre tooxygen and clean water.Introducing the European InvestmentBank’s Natural Capital Financing Facility(‘NCFF’)The NCFF is a dedicated programme tosupport pioneering conservation andConservation of biodiversity and ecosystemsoffer nature-based solutions to climate changenature-based solutions projects.It consists of:- cost-effective, scalable ways to increase theplanet’s resilience to temperature rises, natural a flexible finance facility (typicallydisasters and other climate extremes, andproviding direct/intermediated debthumanity’s ability to adapt.or investing in equity funds);N.B. Biodiversity, conservation and nature-basedsolutions to climate adaptation are collectivelyreferred to as ‘conservation and nature-basedsolutions’ for the remainder of this document.in combination with a technical assistance supportfacility (grants for project preparation,implementation, monitoring andevaluation).2

WHY DO CONSERVATION AND NATURE-BASED SOLUTIONSMATTER TO MY BUSINESS OR PROJECT?Nature’s contribution to the global economy is 1there are national sources, such asworth more than 125 trillion annually. Buildingthe Croatian Bank for Reconstruction andconservation and nature-based solutions into projectsDevelopment’s efforts to support Croatia’srepresents a massive opportunity: from loweringrich native biodiversityoperational costs, to unlocking new revenue there are dedicated funding instrumentsstreams to increasing customer engagement toset up specifically to drive environment anddelivering public environmental goods.climate action – such as the EuropeanBut deciding how to finance these projects, and harnessnature’s benefits, can be challenging. This guide willhelp you identify the cost-saving and commercialopportunities that nature could unleash for you. It willhelp you think about the optimal financial structure foryour project or business and outline practical ways foryou to access financial support to incorporate thesesolutions into your operations.Inspiringly, a range of innovative and large-scalefinancing sources exist to help you do this:there are large global sources2, dedicated to low-emission and climate-resilient development– such as the Green Climate Fund or the GlobalEnvironment Facility; there are regional public developmentfunds, that include a low-carbon focus as oneCommission’s LIFE Programme; and there are a range of non-governmentaland philanthropic organisations whosepurpose is to drive more positiveoutcomes for both people and the planet– such as the World Wildlife Fund and theWyss Campaign for Nature.Even if you have never considered nature a core partof your business you may still be eligible for funding,including from the European Investment Bank’sdedicated Natural Capital Financing Facility. Forexample, if you are a property developer, couldyou access support to build green walls? If you are afarmer - could you secure finance for pollinator-friendlyproduction? Equally, a range of support exists forprojects or enterprises that have nature at their core:everything from ecotourism to wild-caught fisheries.of their key investment themes – such asthe European Regional Development Fund;1. WWF, “Living Planet Report 2018: Aiming Higher” (2018).2. Note that global mechanisms will have differing levels of activity within Europe, some of which may be relatively limited.3

WHY CAN BANK FINANCING BE MOREATTRACTIVE THAN USING GRANTS?Grants provided by public institutions, philanthropies or companies havemany advantages. However, there can also be inherent limitations from onlyrelying on these sources of finance. For example, they can be limited in sizeor linked to very specific (often short) funding cycles. Most importantly,if they do not cover the full financing need of a project over its lifetime,project developers will need to re-apply for funding on a regular basis. Thisapplication process can be time-consuming, costly and uncertain.Therefore, using a model which generates its own revenues, or consistentlysaves costs over time, can help to set your project on an independent andfinancially sustainable path.4

PART B: A SEVEN STEP GUIDE TO FINANCING CONSERVATIONAND NATURE-BASED SOLUTIONS PROJECTSEngaging with potential investors and financial institutions (including the NCFF) requires a structured andrigorous approach. Taking yourself through the following seven steps should act as a helpful starting point tostructure and prepare relevant information that you need to access the right type of financing, at the right time.1234567Get to knowthe financingbasicsDescribethe businessmodel tfuture cashflowsIdentifyrisks andpossiblemitigantsReviewfinancialinstrumentsand sourcesof capitalAssessappropriatelegalstructuresSTEP 1: GET TO KNOW THE FINANCING BASICSUnderstanding direct financing options through equity and debtCompanies typically rely on a combination of debt and equity to establish and grow their activities. Table 1provides an overview of the pros and cons of these ‘traditional’ financing instruments, including ‘hybrid’ solutionswith both debt and equity features (for example, debt that can be converted into equity). A further deep dive onthe specific features of debt and equity financing can be found in Appendix 2.EQUITYHYBRIDSDIRECT FINANCINGDEBTTable 1: Comparing direct debt and equity financing5DESCRIPTIONPROsCONs Loans from a bank or other financialinstitution (similar to a mortgage orcar loan) Repayments consists of (i) interest(variable or fixed rate) and (ii) principal(amortising gradually or bullet paymentat end) Interest margin, decided by the bank,depends on project’s risk profile, tenor(length of loan) and potential security(also called collateral, e.g. property orequipment) Predictable repayments (interestand principal) which can be included inforecasts and budgets Need sufficient cash-flow for regularprincipal and interest payments(for many small or early stage companiescash flow is uncertain) Tax deductable interest expenses Operational restrictions (e.g. possiblyon amount of additional debt allowed oron total new investments) Capital injection from investors inreturn for ownership share (based on adue diligence process and assessment ofgrowth potential) No gradual repayment, investors willreceive capital gain/loss at sale (possiblyregular dividend for mature companies) Risk of performance sits until sale (canlose money and are ranking below debtproviders. It is a “patient form of capital”) Improves credit profile generally (e.g.strengthens the debt/equity ratio) anddoesn’t require security Limited cash flow requirements,(unlike debt, no interest cost or debtrepayments) as part of normaloperations Strategic input and expertisecomplementing the management teamcan come from external investor network Reduced control and autonomy indecision-making as investors will wanta say in the operation of the business todrive growth Generally takes longer to raise equity(thorough due diligence process) andmore management reporting required Divergent views between managementand investors on direction of the ventureor firm Financing that combine debt andequity features Mezz tend not to require security,good if available collateral has alreadybeen offered to other lenders Mezz more costly and still requiresregular interest, generally higherinterest margin than other senior debt(subordinated higher risk) Mezz means more monitoring than fornormal debt given equity features of thestructure Mezzanine financing, as an example,gives lender ability to convertto equity at later stage (pre-definedcriteria, typically at default) No transfer of ownership meaningowners keep control on how thecompany is run (except if defaultingon payments or materially breachingagreements which can give lendersability to step in) Mezz potentially treated as equity onborrower’s balance sheet (depend ondefinition, can improve debt/equity ratio) Security (collateral) may be required(e.g. on property or equipment) or athird-party guarantee

Understanding intermediated debt and equity fundsThere are a number of benefits of accessing debt and equity financing through intermediaries (kind of a “middleman”) such as a local bank operating in your part of the country or from a dedicated fund manager familiar withyour sector. In general, working through intermediaries can increase access to capital for smaller conservationand nature-based solutions projects. Some intermediaries benefit from the support of public developmentBanks (e.g. EIB) and are able to pass-through financial advantages and/or offer complementary guidance tofinal beneficiaries on the implementation of their projects. More information about the pros and cons of such‘intermediated’ debt or equity financing can be found in Table 2.INDIRECT DEBTEQUITY FUNDSINTERMEDIATEDTable 2: Intermediated debt and equity financingDESCRIPTIONPROsCONs "On-lending" to end borrower by alocal bank or other intermediary financethat was originally provided (long-term)by a different financial institution (suchas the EIB) Lending decisions and financial riskremains with the intermediaryinstitutions Contractual relationship only betweenend-borrower and intermediary (albeitgets informed about on-lending structure) Better access to finance and supportfor high-impact segments through thenetwork of local banks andintermediaries Smaller loans tend to be possibleallowing small business owners to obtainnecessary financing Lower transaction costs withstraightforward legal and contractualagreements (typically nationalstandards) Potential lack of resources at localbank or intermediary to develop projectpipeline in target impact sector(solutions include support facilities andtechnical assistance) Portfolio structure whereby a fundmanager raises capital from investorsand/or financial institutions (such as theEIB) that are subsequently invested inprojects Diversification benefits due toportfolio approach (e.g. underperformerscan be compensated by high-performingassets) Provides access to investors forprivate equity transactions (may nothave mandate / resources to investdirectly) The expertise of fund managers inspecific sectors can improve ability toidentify projects and create value Potential restrictions agreed withinvestors at inception on asset type,geography, sector etc. which could limitflexibility of pipeline development Fund manager responsible for pipelinedevelopment and due diligence Strategy and return expectationsdetermined with investors ahead ofcapital commitment No direct access to network oflarge financial institutions for the finalbeneficiaries (may not be necessary) Potential high return expectations ofinvestors for overall fund performance Management and performance feesfor fund managers increase pressure forreturn on underlying assetsUnderstanding where my finance is coming fromWhere the finance for your project originates from will often determine the nature of it, and the conditions uponwhich it is given. Commercial funding (debt and equity finance) is typically provided by banks or investmentfunds. There are programmes with grant funding (concessional and ‘non-recoverable’) available for projects invery early stage or with high potential for environmental impact (e.g. public grants3 or funding from NGOs andphilanthropies).In addition, there are ways for commercial finance to be ‘blended’ with concessional and non-recoverablefunding. Such blended finance structures can act to (i) improve access to finance (possibly ‘below market-rate’),(ii) de-risk projects for investors (e.g. first-loss capital in a portfolio, or through guarantees) or (iii) incorporatesupport for project preparation and pipeline development (e.g. technical assistance). An example of this is theNCFF which combines an EU guarantee and a support facility with commercial lending and investing activity,thereby increasing access to finance for conservation and nature- based solutions projects in Eu