Despite Asia’s wealth of natural capital – its water and land and the ecosystems they support – the region has disproportionately underfunded the protection of these important assets.
In a newly released report, published in partnership with Convergence Blended Finance, Hong Kong family office RS Group has outlined how blended finance is exploring ways to fund natural capital projects.
The next step in RS Group's natural capital initiative will be the launch of Terratai, a nature venture support business aiming to provide funding and hands-on venture support to projects in Southeast Asia until they attain the ability to attract institutional capital. It is scheduled for launch in Q3 this year.
As such, blended finance is suitable as a structuring approach for the United Nations' Sustainable Development Goals (SDGs) to generate commercial revenues. The most frequently targeted SDGs are SDG 15 (Life on Land) and SDG 13 (Climate Action), and almost half of portfolio projects target SDG 14 (Life below Water).
“Blended finance mobilises private investors into underlying activities with cash flows from which they can ultimately expect to be remunerated,” the report says.
Although renewable energy attracts a large portion of private finance, due to its commercial viability.
“Our general observation is that while conservation actors are constructing the first planks of the bridge built for natural capital to become an asset class … we have yet to see a commensurately serious overture by financial actors into the natural capital space.
“This may indicate that asset managers and commercial investors still consider investing in natural capital a novel proposition," the report says.
The UN believes the challenge for the investment industry is to create suitable investment vehicles to begin closing what it estimates is a $4 trillion funding gap in engagement, divestment and the direction of capital towards nature protection by 2050.
According to the 2022 State of Finance for Nature report by the United Nations Environment Programme, finance flows to nature-based solutions (NbS) to sustainability issues are currently $154 billion annually, less than half of the $384 billion annual investment in NbS needed by 2025 and only one-third of the $484 billion annual investment needed by 2030 to halt biodiversity loss and achieve land degradation neutrality.
RS Group launched its Asia Natural Capital funding window in 2019. At the time, the window was the first of its kind focusing on NbS in Asia and allowed RS and its investment partner, Convergence, to test how blended finance could help build a natural capital investment ecosystem.
The report noted that blended finance structures could be an effective tool for addressing the NbS financing gap, bringing together typically siloed funding sources from conservation and capital markets.
But blended finance means different things, depending on who you talk to. One investment consultant AsianInvestor spoke to said: “The problem with the blended finance model being used is the focus on ‘bankable projects’. Somewhere along the line, the word blended finance was hijacked to be about institutional banks requiring de-risking to finance activities in the developing world.”
Natural capital portfolios
The current portfolio of the Convergence/RS window consists of seven grants selected from 94 proposals received. The grant recipients include NGOs, a fund manager (ADM Capital), a fintech and social enterprises (Kandelia Alam, Fairventures Social Forestry and Blue Finance).
Projects supported, with capital targets ranging from $10 million to $50 million, include a sustainable seafood fund to support fishery improvement projects in Asia-Pacific, a fund to tackle deforestation around Indonesia's Bukit Barisan Selatan National Park, and a fund for financing sustainable forest landscape restoration.
Four of seven grants target Indonesia, pointing to the urgency of addressing the country’s environmental degradation, according to the RS Group report. The remainder focus on other Southeast Asian nations.
In addition to an absence of institutional finance sector applicants from within Asia-Pacific, the RS report notes that “Asia-domiciled financial institutions have not yet made significant use of blended finance to pursue opportunities in natural capital and other high-impact sectors.”
Small ticket sizes and limited or unproven revenue potentials of NbS to date exacerbates other commonplace factors such as risk-return expectations, unknown market exposure and market immaturity.
Singapore’s Temasek is one of the few Asian institutional investors with a defined policy for natural capital, on which it worked in association with the World Economic Forum and AlphaBeta, a Singapore-based strategic economics consultancy. Temasek estimates that investing individually or collectively in just 59 specific nature-positive business opportunities in the region could generate $4.3 trillion and 232 million jobs annually by 2030, equivalent to 14% of Asia-Pacific’s GDP.
“Funders looking to engage in the sector need to understand the unique challenges of designing solutions targeting natural capital to provide the right facilitation support,” the report notes.
However, in the view of the independent consultant with whom AsianInvestor spoke: “The model of funding windows and cycles reinforces what I think is a ‘beggar’ market that doesn’t create institutional capacity.
“I think there needs to be models around mutual, not-for-profit, community-aligned institutional structures that align with the interests of communities. This can’t be delivered from New York or London. It has to be delivered by a genuinely diversified financial system.”
Editor's Note: The story has been amended in para 2 to reflect publication of the report was a joint effort. Para 7, para 12 and para 20 have also been updated to attribute comments to the report.