“BLENDED FINANCE OFFERS AN INCENTIVE STRUCTURE THAT HAS THE POTENTIAL TO CORRECT MARKET FAILURES BY STRATEGICALLY COMBINING PUBLIC, PHILANTHROPIC AND PRIVATE CAPITAL...”
Energy is the ultimate currency of life. Every living thing
relies on the transfer and transformation of energy, the
primary source of which is the one thing that connects
us all — the sun. Before the modern era, most of the
energy we used came directly from food, and this tied
us closely to the Earth. But over the past century, the ability to
harness, store and commodify concentrated sunlight (ie fossil
fuels) to use for energy has essentially disconnected us from
the natural world, the effects of which we are starting to see
and experience today.
Our global economic systems have largely been decoupled
from the planet’s ecological systems. Economies have been
built on the premise that the products and services derived
from the Earth’s ecosystems are more valuable than the actual
ecosystems from which they are sourced. This extractive model
has led to intensive mining and industrial farming, resulting
in depleted soils, which in many instances are now unable to
withstand life. The UN Convention to Combat Desertification
(UNCCD) recently released data showing that the world lost
at least 100 million hectares of fertile land annually between
2015-19.
Global food systems, in particular, are increasingly vulnerable
to production shocks, and productive agricultural land has
become a prized asset. While large-scale industrial farming
has enabled tremendous efficiencies in food production at
lower costs to the consumer, these mass production systems
are entirely unsustainable and have left a devastating
ecological footprint, inducing deforestation, biodiversity loss,
water pollution and degraded soils.
Plus land degradationis inextricably linked to climate change, food insecurity, illhealth, forced migration and violent conflict. These things
may seem remote to some of us but we are part of a global
food system that is intricately weaved together. And as Martin
Luther King Jr. wisely and so eloquently said, “Whatever
affects one directly, affects all indirectly.”
It’s a gloomy prognosis if we stick to the antiquated economic
models built on the assumption that human beings are separate
from nature. Or we can change course, and work towards a
rosier future by building and investing in new models that
recognise our economies cannot be decoupled from our
ecosystems. Regenerative food production has the potential to
reverse the environmental impact and societal repercussions
of industrial farming. Food provides the sustenance we
require to simply exist but food is also intertwined with
culture, history and relationships, and is a key element to
bringing communities together.
Regenerative agroforestry,
which incorporates the cultivation of trees into agriculture
whilst actively improving soil fertility, biodiversity, water
percolation and the overall health of ecosystems, also enables
inclusive growth by empowering farmers and fostering resilient
communities. Social cohesion is a vital aspect of sustainable
production that has largely been lost in industrialised
farming practices.
But is sustainable production just a pipe dream? What about
the elephant in the room: none of us wants to give up the
conveniences the extractive economy has afforded us — access
to vast varieties of food, the ability to travel across the world,
and, we might recall from physics class that energy is the ability to do work.
The energy we consume today via fossil fuels
has displaced the manual labour we’d previously have had to
do for basic things such as laundry; one would be hard-pressed
to find anyone advocating for a ban on washing machines. Air
travel, though, has caught the eye of some environmentalists.
Fortunately, Phyla Earth has been developing solutions to
change course and make sustainable aviation and regenerative
agriculture a reality. By observing nature’s biological processes
and her ability to produce energy, sequester carbon, fix nitrogen
and provide food, Phyla has been involved in groundbreaking
afforestation work propagating climate change resilient
plant species.
One species they’ve been working on that’s
particularly effective in regenerating degraded ecosystems
is Pongamia pinnata, a non-invasive legume tree native to
India and Southeast Asia with medicinal properties that is
nitrogen-fixing (no need for fertilisers!) and produces perennial
dividends high in protein and oil.
Remarkably, many of Phyla’s
varieties of Pongamia are able to withstand drought and metal
toxicities where virtually no other plants are able to grow, thus
serving as a powerful catalyst, laying the foundation to rebuild
healthy soils and generate new biodiverse ecosystems.
Phyla’s
Elite Pongamia surpasses the output of standard Pongamia
by up to ten times, and thus has the capability of producing
commercially significant volumes of feedstocks for sustainable
aviation fuel and plant-based proteins whilst sequestering
carbon and providing other vital ecosystem services.
With a business model rooted in nature and bolstered by
productive biological infrastructure, Phyla’s agroforestry
systems have been successful in transforming contaminated
and wholly barren landscapes into fertile forests. And their
proprietary technology and AI capabilities allow them to
monitor and quantify climate mitigation activity, adapting
accordingly to solve our deeply entrenched socioeconomic
and environmental challenges encapsulated within the UN’s
Sustainable Development Goals (SDGs).
The SDGs are often
seen as challenges but they present an enormous business
opportunity. The Business Commission estimates tackling
them could generate USD 12 trillion in market opportunities.
But in order to achieve the SDGs and solve the systemic and
interconnected challenges outlined above, these systems have
to be scaled appreciably.
To that end, global carbon markets were valued at over $909
billion in 2022; that’s nearly a trillion US dollars of carbon
traded last year. Carbon credit schemes have been attractive to
impact investors because carbon is seen as a sort of currency
to mitigate climate change. Unfortunately, the systems in place are not always transparent, and the quality of credits are highly
varied given the lack of standardisation. With effective reform,
carbon markets will be an important mechanism to finance
emission reductions, but excessive focus on carbon returns
can sometimes crowd out the social and ecological dimensions
of regeneration work where returns aren’t as easily measured.
But attention to and quantification of these elements is key to a
sustainable future.
There are a number of restoration initiatives, such as Ecosia
and Justdiggit, which are making considerable inroads towards
sustainable development through awareness campaigns and
concerted tree planting. Both are non-profit organisations, but
Ecosia earns revenue from advertising, and has planted over
185 million trees globally, while Justdiggit is funded primarily
through donations and government subsidies. Justdiggit
has restored 14 million trees in the past five years and has a
mission to regreen Africa through regenerative ‘treecovery’.
Commonland is another not-for-profit working towards
holistic landscape restoration with an ambitious mission to
restore 100 million hectares of degraded land by 2040. They
have developed a unique four-returns framework to generate
social, inspirational and natural returns in addition to financial
returns, giving rise to a number of regenerative businesses
producing sustainable food products, thereby bolstering
communities whilst restoring the land. These organisations
are doing exceptionally valuable work to reverse biodiversity
loss and elevate the climate dialogue to highlight the vital role
healthy ecosystems play within our lives and within a larger
economic and planetary context.
But can we meet the UN’s target to restore 5 billion hectares
of degraded land by 2050 without investment from the private
sector? Asset managers / institutional investors, who hold
trillions in assets globally, have the financial resources to fill a
significant portion of the SDG investment gap, and many have
committed to the Net-Zero Banking Alliance. But their appetite
for land restoration projects has been curbed by a preference
for low-risk, liquid investments with a clear ROI profile. Private
equity investments in impact sectors are often constrained
due to shorter fund durations compared to the recovery time
required for ecosystems to regain economic productivity. While
prevailing short-term models can be highly lucrative, they
simply don’t account for the existential risks that result from
the unsustainable use of natural resources.
How do we then restructure financial models to finance
companies working on solutions to exceedingly complex
problems? Blended finance offers an incentive structure that
has the potential to correct market failures by strategically
combining public, philanthropic and private capital to catalyse
investment into sectors that are largely seen as risky or
unprofitable in the short-term. Philanthropic and concessional
finance mitigates risk in early-stage regeneration projects when
capital requirements are high, making the investments more
attractive to private investors seeking long-term commercial
returns. Plus, restoration allows asset managers to hedge risks against more unsustainable investments.
Phyla’s regeneration
systems, for instance, offer attractive financial returns over the
medium and long-term, secured against future revenue from
the sale of biofuel, protein and biomass in addition to carbon
and nature-based credits. When restoration projects are well-
designed, they also create permanent jobs, enhance livelihoods
and social unity. Through scaling sustainable development
and yielding positive financial returns, blended finance offers
tremendous upside for all stakeholders.
Recent years have underscored the fragility of our global
economic and food systems. By aligning financial interests
with environmental sustainability, we can pave the way for a
greener and more prosperous future, ensuring positive returns
for investors whilst making a meaningful impact on climate
change and global food security. With public institutions,
philanthropists and private investors collaborating to share
risk and capital to further sustainable development, blended
finance can be a true catalyst for systemic change.
By Anjou Dagar, Philea Earth