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Creativity and Collaboration Vital to Finance Nature

Jose Pugas, Head of Responsible Investments and Engagement at JGP Asset Management, explains why scaling-up finance between the global north and south for nature-based solutions is essential to tackle climate change and biodiversity loss.

Brazil is the most biologically diverse country in the world. Our economy is dominated by the production of commodities like soy, beef and timber, and we are heavily reliant on our forests, soils, and rains.   

The future of our economy and society hinges on keeping Brazil competitive for investment and commodity production – but if climate change and nature destruction continue, we will lose our rains and second harvest, eroding our natural competitive advantage, and risking our industries becoming stranded assets.   

We are on the front line in the global race to stabilise the climate and halt and reverse the destruction of nature. It’s part of our fiduciary duty to be at the forefront of efforts to scale up and re-allocate capital. We need to prioritise proven solutions that tackle climate and nature together, at the same time as supporting livelihoods and generating compelling financial returns.  

Exercising influence 

Worldwide, investments in nature-based solutions (NbS), such as reforestation, or flood recovery, need to more than double by 2030 to US$384 billion, and the newly agreed Global Biodiversity Framework calls for at least US$200 billion of private sector capital a year. 

The capacity to employ this capital is huge. In Brazil, for example, we have vast deforested areas where there is little fresh food, high rates of poverty and lack of employment. Land restoration through agroforestry -– a mixture of trees and agriculture – represents a huge opportunity to invest in nature and provide sustainable livelihoods in these regions. Working in partnership with WWF, we are aiming to raise US$41 million for a fund that will restore deforested land around the Amazon while generating carbon credits. Every 1,000 hectares restored can create 180 jobs and an economically sustainable future for these regions – a wonderful impact with excellent potential returns. 

Mobilising this scale of funding means we need to get creative and novel financing solution. For example, together with the other 14 signatories of IFACC (Innovative Finance for the Amazon, Cerrado and Chaco), we have collectively committed US$4.3 billion for deforestation –and conversion-free soy and cattle production in South America. We have already disbursed US$111 million to farmers as part of this scheme, including through our new ‘GreenGalaxy’ programme that securitises agricultural receivables to fund small and medium farmers – enabling them to transition to regenerative agriculture by raising yields on cleared lands, while avoiding deforestation. 

But new capital allocations on their own are not sufficient. We need to use our influence as corporate shareholders, and global stakeholders, to work in partnership with the commodity sectors to help them re-allocate existing capital away from activities that harm – and towards those that support – the long-term sustainability of our economy, ecosystems and society. 

Deforestation – responsible for around 11% of emissions and at the heart of the climate, nature and food security crises – must be a core focus of these efforts, and it’s only by forging close partnerships with the agricultural commodity sectors driving most deforestation can we really turn the flow of financing around.  

We adopt this approach with our Deforestation-free Active Ownership Hybrid Fund, a strategy that targets companies at high risk of deforestation and poor governance, those with deforestation disputes, and those that finance deforestation, such as Vale, JBS, Agrogalaxy and other large Brazilian commodity-based companies. Our number one rule for this strategy is that we only invest if we can engage – not confrontationally, but as an ally, building a constructive relationship underpinned by trust as a force for good. We are far from alone in our efforts to re-align commodity markets with sustainability goals, and are proud to be part of Finance Sector Deforestation Action, a roughly US$9 trillion strong group of financial institutions committed to ending deforestation – and energetically pursuing this goal. Convened at COP26, we have already worked to set industry-wide standards for engagements, and are using these, together with the fast-growing set of tools, data and roadmaps to use our best efforts to eliminate the deforestation in our portfolios by 2025. 

Mobilising new capital and working to re-direct existing capital is a vital part of efforts to create a Brazilian – and global economy – that is fit for the long term. But we need to further and bolster these efforts by working with governments to create a supportive policy environment. Again, collaboration is key here, and we are part of Investors Policy Dialogue on Deforestation (IPDD), a US$10 trillion strong investor engagement in dialogue with governments on deforestation. We want our government to put policies in place so commodity businesses with ambitious climate and nature targets can remain competitive. For example, Brazilian meatpacker JBS has set science-based climate targets and are aiming to have full supply chain traceability by 2025. It’s very important to us that JBS realises these goals, and part of our active ownership engagement with the company to ensure it does. We need to ensure the regulatory environment supports JBS in this mission. 

Time is ticking 

Of course, none of this is straightforward – creating a pipeline of investable opportunities for our fund with World Wide Fund for Nature (WWF), for example, has sometimes proved a challenge. It takes from eight to 14 months to fully structure an investable nature-based solution asset. And in Brazil, where interest rates are high, it is harder for our GreenGalaxy project to attract the full potential of traditional soy farmers. The difficult environment for ESG funds in the US doesn’t make things any easier. Even so, we have developed a pipeline of over ten large nature-based solutions to be financed during 2023, with an overall potential of 40,000 hectares of agroforestry and productive restoration.  

Yet the world is changing. And, like the sea, for every wave that rolls against us, the tidal wave of momentum towards an economy that works in harmony with climate and nature continues to rise. 

We are especially encouraged by the steady maturing of the carbon credit markets, the upswing in corporate venture philanthropy towards net zero and nature positive supply chains, and the diversity of the discussions around nature-based solutions and bio credits. And with target 15 of the newly agreed Global Biodiversity Framework set to result in mandatory disclosure on biodiversity-related risks and impacts, the Glasgow Financial Alliance for Net Zero Co-chairs urging financial institutions up their game on tackling deforestation, and the Taskforce on Nature-related Financial Disclosures (TNFD) due to launch its final recommendations this Autumn, the political and institutional momentum towards investments and loans that support – rather than harm – life on earth, is growing too. 

With only seven years left to halve global emissions and halt and reverse biodiversity loss, we can’t wait for new technologies to step into play – we have to get to net zero with what we have.  And with new research showing that a healthy, functioning Amazon is crucial not only for the regional climate in Brazil, but for the whole Earth system, the importance of securing a prosperous future for us in Brazil – plus the other 17 megadiverse countries around the world – is vital. If we can be creative, strategic and collaborative, working to reallocate finance towards climate and nature presents us with a fantastic opportunity to develop our economies and bring about a healthy capital flow between north and south. 

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