Policy Advisor International Climate Finance
Jeromine Bertrand is a Policy Advisor International Climate Finance at the UK’s Department for Business, Energy and Industrial Strategy (BEIS). She joined the organization 3 years ago and is currently leading on private sector investment in the forest, land use and carbon markets sectors in developing countries. Earlier this year, BEIS set up a blended finance program called Mobilising Finance for Forests, which was co-designed by FMO, and aims to unlock private sector investment in projects that protect and restore tropical forests across Africa, Asia and Latin America.
We were missing a big piece of the puzzle
The UK government has been working in the forest, land use and carbon market sectors across developing markets for many years. Most of its interventions have been historically centered around REDD+ initiatives* and other programs aiming to strengthen land governance, monitoring and evaluation, improve livelihoods and develop resilience to climate change. A couple of years ago, BEIS introduced a grant finance and technical assistance program* called Partnerships for Forests, that supports business models that could generate revenue from forests and simultaneously reduce deforestation pressure. Bertrand: “But BEIS was missing a big piece of the puzzle to support efforts to halt deforestation through its ICF portfolio. We saw a strong need for blended finance to successfully scale up business models that had been successfully incubated* but we didn’t have the means to support them. And we are keen to bring the private sector along with us.”
“We need blended finance to show these investors that the business models can work and can be commercially viable.”
Why we blend
But it is quite challenging to build a sustainable business case around forests and land use projects in emerging markets. Bertrand: “It is a new sector. There are challenges around corporate governance, land governance, environmental and social risks or enforcement that make it quite difficult to mobilise investments. Private sector investors find the forests and land use sector very complicated. It is perceived as high-risk. We need blended finance to show these investors that the business models can work and can be commercially viable.” BEIS already had experience in designing blended finance instruments for the energy and infrastructure sectors. “And we felt the forest and land use sector was coming to the stage where there was space for blended finance, and appetite for a new initiative that would complement our portfolio.”
Bertrand’s advice to other donors looking to set-up a blended finance facility
Co-design “We found it quite helpful to co-design our blended finance investment program with our delivery partner (FMO).
Try to keep the design flexible. “If you’re setting up a multi-year program, it is important that it can respond to arising needs and opportunities. I'm sure we'll need to adapt MFF as we learn more about how blended finance works for this sector.
Factor sufficient time to build the programme. “From a practical point of view, I would like to stress how much time you need to actually get to a point where you have a workable program.”
When you're trying to tackle the deforestation problem with help of private sector investment, make sure you engage with all key stakeholders.
One of the most difficult parts of designing the Mobilising Finance for Forests program was deciding on its scope, says Bertrand. “We had many discussions on whether we should only focus on a particular region, a particular sector or have a much wider remit to diversify our delivery risk as forestry is quite an undeveloped sector. In the end, we decided to include multiple countries and sectors to ensure we could finance the best business models out there and have the flexibility to respond to needs and opportunities when they arise.”
Bertrand: “It's a really interesting time in the forest and land use sector. We’re at the cutting edge, trying to figure out new policies, new ways of working and exploring. We're dealing with challenges that we’re figuring out as we go: What kind of projects should we be supporting? How can we make the best use of voluntary carbon markets and ensure supply and demand integrity? How do we ensure long term sustainable change? And it's just the beginning. It feels like the blended finance in the forests and land use sector is about 15 years behind the energy or the infrastructure sector. And we are starting to see it develop. I'm really looking forward to see what it will look like at the end of the Mobilising Finance for Forests program’s investment period in five years.”!
MOBILISING FINANCE FOR FORESTS
Mobilising Finance for Forests is BEIS’ first blended finance program in the forests and land use sector. The program is a mix of fund investments and direct investments, looking to provide to three types of capital support. First is development contribution, which helps fund managers and FMO to build their pipeline and to get projects to a bankable state. The second type of support is capital investment, which will be structured as either first loss equity or concessional debt. This is to help improve the risk-return profile of investments in the hope of leveraging additional private sector investors in the transaction. Thirdly, MFF offers Technical Assistance (TA), which helps projects to further develop and mobilize additional private sector investment.
With MFF, BEIS hopes to scale two types of projects. “The first type is projects that add value to standing forests. So here we're looking at anything that has to do with harvesting non-timber forest products like coffee and nuts and all kinds of different fruits, project that can divide revenue from a carbon market, ecotourism or conservation projects. And then the second type of project that we're looking at is projects that can that incorporate force protection into the production of sustainable agricultural commodities. And here we really looking at the sectors which are driving deforestation, such as soy, palm oil, cattle, timber, cacao.”
The UK is the upcoming president for COP 26 and has committed £3bn of its international climate finance to nature and biodiversity over the next five years. The Mobilising Finance for Forests program is a key component of this commitment. We have made it our priority to get this right and we will be calling for other donors, DFI MDBs and private investors to invest more in this sector.