Editor’s Note: Land degradation is a huge issue globally, and a quarter of degraded land today is abandoned farmland. Currently, public and philanthropic investors provide the bulk of support to initiatives trying to reverse or prevent land degradation, but there’s a role for private investors too, argues Renee Cheung, managing partner and founder of Bonterra Partners, a consulting firm specialized in natural capital investments.
Cheung recently co-authored a study entitled “Unlocking the market for Land Degradation Neutrality” with Sarah Maillard at Mirova, a responsible investment manager.
Here Cheung lays out some of the key arguments that make land degradation neutrality an interesting investment prospect for private investors.
Two billion hectares of productive land are degraded worldwide, and 500 million hectares of this is abandoned agricultural land. We continue to degrade another 12 million hectares of land every year.
Major causes range from overgrazing, deforestation, environmentally-destructive agricultural practices to overexploitation of land for fuelwood. It is a global problem that affects us all. Degraded farmlands lose their capacity to produce, increasing food prices and insecurity. Land degradation also leads to other environmental and social consequences: loss of biodiversity, poverty (about 500 million small farms in developing countries support the livelihoods of more than 2 billion people), potential mass human migration, and social conflicts, all of which would result in a tremendous cost to society.
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Public and philanthropic funding alone is not sufficient to combat land degradation worldwide. This represents not just a need but an investment opportunity for long-term private investors. Land degradation neutrality (LDN) is a relatively new concept and refers to a “state whereby the amount and quality of land resources necessary for the world to support ecosystem functions and services and enhance food security, remains stable or increases going forward.”
Agroforestry, regenerating degraded land through intensive livestock rotational grazing, reforesting abandoned land, and continuous cover forestry, are just a few examples of LDN investments in the market today.
LDN projects fall into two land management strategies: land degradation rehabilitation (i.e. restoring degraded land) and sustainable land use (i.e. preventing healthy land from being degraded).
In the recent “Unlocking the market for Land Degradation Neutrality” study published by Bonterra Partners and Mirova in June 2016, the business case for investing in LDN projects is laid out at length (download the full report here). Based on the study findings, here are five reasons why the nascent LDN market is appealing to private investors.
- Bankability: LDN projects established on farmland and forestland have the same investment merits as traditional agriculture and forestry investments: long-term cash flow and hedge against inflation from food and fiber production, buoyed by rising global demand and declining amount of productive land. They also bring the additional long-term benefits of enhancing soil fertility, increasing biodiversity, and improving livelihoods of those working on the land which could create further financial upside. They are “bankable” (i.e. profitable) investments: investors make equity and/or debt investments in long-term agricultural and forestry projects that generate annual operational yield and capital gain. In regions where land tenure laws are clear, a land ownership strategy also offers downside protection and potential capital appreciation. Arguably, LDN investments have better risk-adjusted returns than other traditional real asset investments: a sustainably-managed operation has lower long-term operational risks from a climate resilience perspective and the potential to generate a higher return on the upside.
- Investment scalability: There are opportunities to scale various LDN investment models given the vast amounts of degraded land in the world. While a $1 million-$50 million investment may be too small for most institutional investors today, capital could be deployed at scale once a specific LDN investment model is proven and ready to be replicated. In addition, land ownership is an option for investors who wish to deploy larger tickets.
- Growing pool of market talents: In our market study, we covered 31 investment managers and project developers who have been operating profit-seeking LDN projects for a median of 10 years. They have successfully raised a cumulative $7 billion to date and target to double the amount to $15 billion over the next five years. While this is still a nascent market, there is a growing number of these experienced specialists as well as new entrepreneurial talents with whom investors can invest. The continuous development of the LDN market, combined with the scale and track record the market will build over time, would further attract participation from other new entrants and investors.
- Large offtakers are getting involved: Industries that source land-based raw materials, such as the food and beverage and timber industries, are increasingly pressured to improve the sustainability of their supply chain. They are facing risks from all angles: reputational, regulatory, and operational. Many have been experiencing more fluctuations in commodity price and availability in recent years. Some large corporations such as Starbucks and Barry Callebaut are now exploring ways to collaborate with project developers and/or microfinance institutions to invest in smallholder farmers, supporting their transition to more sustainable land management in return for long-term offtake arrangements. Potential opportunities for financial investors could arise from co-financing with industry players or investing in operators that would implement projects on the ground.
- Embracing true fiduciary duty: Investing in land degradation restoration and prevention activities is going above and beyond “avoiding harm” or checking boxes for rudimentary ESG requirements. LDN investments are about actively looking to generate social, environmental and financial benefits. Doing this allows investors, their shareholders and future generations to live well in a healthier planet. This is true fiduciary duty that the investment community should embrace.
The above investment rationale gave rise to the concept of the LDN (Land Degradation Neutrality) Fund project. The LDN Fund, jointly promoted by Mirova, the responsible investment subsidiary of Natixis Asset Management, and the UNCCD (United Nations to Combat Land Desertification), is designed to be a public-private investment vehicle that utilizes both sources of capital to invest in profit-generating LDN projects in developed and developing countries. With a particular sector focus on sustainable agriculture and forestry, the fund would select investments using four main criteria: land rehabilitation or degradation avoidance potential, bankability (i.e. profit-generating) potential, scalability/replicability to maximize impact, and investment readiness.
As a first-of-its-kind fund to specifically address land degradation, the LDN Fund would strive to make a significant contribution to LDN, demonstrate the long-term investment case for these projects and attract an increasing amount of private capital over time. To unlock the LDN market, private capital has to be part of the solution.
 Global Mechanism of the UNCCD (United Nations Convention to Combat Desertification) and Mirova, “Land Degradation Neutrality Fund, An Innovative Investment Fund Project” 2015.
 Global Mechanism of the UNCCD and Mirova, 2015.
 UNCCD Intergovernmental Working Group
 In urban areas, LDN opportunities include land reclamation and green infrastructure.