Investing in a low-carbon future – is it time to rethink our priorities?
Nature-based carbon projects have been gaining increased attention in recent years due to their potential to help combat climate change. The latest IPCC AR6 Synthesis Report: Climate Change 2023 highlights the importance of such projects in achieving global climate goals and reaching net-zero emissions.
It is increasingly clear to all the market players – companies big and small – that investing in carbon projects is essential to meeting their future net-zero commitments. It is beneficial to secure the price and future high-quality credit supply. Investment reports have highlighted that nature-based voluntary carbon credits are an especially attractive asset class, presenting a unique opportunity to contribute to a sustainable future while achieving multiple Sustainable Development Goals (SDGs) and getting financial returns. There is an expressed desire among individuals and businesses alike to invest their money to make a positive impact and protect themselves from potential reputational risks in the future. However, even though it is a real trend, we have yet to witness large flows of capital towards prefinancing nature-based carbon removal projects.
Let us explore the bottlenecks that prevent increasing investment and ambition to scale-up high-quality carbon projects.
First of all, most nature-based projects take place in high-risk countries. This also allows for the most impact since projects located in Africa, Asia, and South America can help achieve multiple SDGs. However, risk managers in companies and funds often block these investments due to the perceived risks associated with working in these regions. This is a significant issue because these countries are also the most vulnerable to the effects of climate change. By not investing in projects in these areas, we are missing an opportunity to help those who need it most.
Secondly, there is an underestimation of the importance of equitable carbon revenue sharing with local communities. Investors are often primarily focused on returns and may push projects to prioritise their carbon share over community needs. This approach can lead to projects being not sustainable in the long term, as the involvement of local people and empowerment are critical to ensuring that projects are successful and impactful. A better approach would be to motivate and empower communities to take an active role in project development; this will help in ensuring that the project’s benefits are distributed fairly and sustainably.
There is also a lack of understanding of the nature-based project mechanisms and nature-related risks. Investors may need to gain more knowledge of how nature-based solutions work. For example, trees have certain growth periods and cannot be made to grow faster to achieve quicker returns. Investors may also habitually expect a break-even point within four years and an Internal Rate of Return (IRR) of 20%, but nature-based projects often have longer timelines and lower returns. It is important for investors to understand the unique nature of these projects, learn to estimate and manage these risks, and adjust expectations accordingly.
Low appetite for long-term investment is also a big challenge. Nature-based carbon removal projects are long-term investment opportunities. For example, mangrove reforestation can be certified to receive carbon credits for up to 20-30 years. At the same time, these projects require a significant upfront investment. To make them happen, a substantial prepayment is needed, and carbon credits will only start being issued two years after planting. It can take up to seven years for the carbon credits to reach significant volumes. Such investment requires a true commitment to delivering high impact for climate and people for the years to come.
Finally, because of the lack of experience with such breakthrough investments, there is often a lack of trust. The carbon market is fragmented and non-transparent, with limited price discovery and integrity as a result. There needs to be more trust in voluntary carbon standards and monitoring, reporting, and verification (MRV) mechanisms. This lack of transparency can create difficulties for early-stage funding, as investors may be hesitant to invest in projects without long track record. However, since these are new investments, those who take early risks will be rewarded with outstanding returns in capital and impact.
The case for Blue Carbon
Blue Carbon projects, those storing carbon in coastal and marine ecosystems, are currently considered to be among the most high-quality nature-based solutions. Mangrove reforestation projects have the potential to be a prime example of impact investing, with the ability to sequester 40 times more CO2 and do it five times faster than terrestrial forests. These projects address climate change and secure significant social and environmental co-benefits.
The environmental benefits of mangrove forests are vast: they are biodiverse habitats that serve as nurseries for fish, marine life, coral reefs, birds, and animals. In addition, the roots of mangroves act as a filtration system, capturing silt and preventing siltation in seagrass meadows and on coral reefs.
Mangrove projects bring about numerous community benefits. These projects introduce income-generating activities and reduce poverty in vulnerable coastal communities. They create new jobs for local people and provide value-added livelihoods and new revenue streams such as sustainable crab and shrimp farms and the production of natural dyes from mangroves. The projects also provide community education and upskilling, focusing on supporting women and youth. They protect people in the project area from extreme weather events such as tsunamis and floods.
As mangrove restoration efforts continue to gain traction, new technologies are being employed to increase transparency, trust, and integrity. Digital carbon markets, in particular, have emerged as a powerful tool in this regard. Using decentralised and more precise MRV systems can further enhance trust and accountability in the carbon market. The real game-changer in this space is Web 3, which is poised to revolutionise the way carbon markets operate and bring them to a new level.
Blue carbon credits, the carbon credits issued to mangrove reforestation projects, are widely regarded as highly valuable in the voluntary market and are sold at a premium price. In fact, if you attempt to purchase issued blue carbon credits today, you would likely find that all the high-quality projects are sold out. Furthermore, even the carbon credits that will be issued within the next one to two years are already presold. Nevertheless, the price of blue carbon credits is constantly growing, so investing in a mangrove reforestation project at an early stage could be an option for receiving credits at a significant discount.
In order to benefit from an investment in mangrove reforestation projects, it is essential to understand the working of the project, its associated risks, how to distinguish between high-quality and low-quality initiatives, and to treat it as a meaningful investment in creating a positive impact for the people and planet.
While mangroves grow faster than other trees, it takes seven to eight years after planting to start significantly accumulating carbon. But once they start generating volumes, the investment is secure, since they are not susceptible to forest fires and the survival rates are generally very high. Equitable sharing of carbon with the community is essential for project sustainability, along with decent wages, quality control, and a science-based approach to project implementation. Investors must also adjust their expectations of IRR, recognising that long-term and stable returns will be more important over the long run and will enable them to save lots of money as the price of carbon grows.
Redefining Impact Investing
It is imperative to change the definition of impact investment and shift our focus towards prioritising the impact. Investing solely for profit while pretending that one is pursuing climate goals is far from being a sustainable approach and could damage reputations. Only by prioritising impact can we ensure that our investments contribute to the greater good of society, the planet, and a low-carbon future.
By Dr. Irina Fedorenko-Aula and Lena Mechenkova, Co-founders, Vlinder
Vlinder is a climate tech company that plants mangroves and innovates carbon financing.