As more private capital makes its way to nature-based solutions, greater due diligence on projects and actions is needed to avoid unrealistic expectations, controversies and conflicts, says Jamie Lawrence, co-founder of Xilva.
Recent research from the company found that there are “critical gaps” in how investors and project developers look at nature-based solutions, Xilva aims to fill them with its AI-enabled due diligence services that help projects and funders alike make forest- and nature-based initiatives beneficial and investable.
Few organizations currently have a specific system for due diligence of nature-based projects, says Lawrence. Frequently, those on the ground with these projects are very passionate about forests, biodiversity and social issues, but may not be the best experts in finance. On the flip side, those working with finances may unknowingly omit such factors in their assessments.
“There’s very few who are translating between those two worlds, so we thought it really our duty to share that knowledge,” he tells AgFunderNews.
Current limitations of nature-based solutions
“Nature-based solutions” are, according to the World Wildlife Fund and others, “a suite of actions or policies that harness the power of nature to address some of our most pressing societal challenges” including climate change, increasing natural disasters and water scarcity.
Growing consensus is that more private capital needs to be directed towards these projects, which can’t survive on public funding alone.
“A lot of nature-based solutions start off quite small, and they fall into a rhythm of getting funded by patient funders [e.g., philanthropy, grant funding], which are far less demanding around the type of documents that they need,” explains Lawrence.
The financial risk is usually small, too: in the ballpark of $250,000 to $500,000 to get a project moving, he adds.
“However, when [projects] then get to the point where they need to scale, or when they have a product to take to market, like carbon credits or biodiversity, they’re in a far more mature and demanding market, and they’re often just not ready for that.”
Surprise findings
Xilva analyzed 288 projects — including afforestation, reforestation, restoration and avoided deforestation — across multiple geographies for the report.
Brazil had the most projects, while Colombia, Guatemala, India, Kenya, Peru, Tanzania, the US, and Uruguay also made a strong showing.
“The geographical mix that’s coming through this isn’t necessarily a complete representation of all of the projects around the world,” Lawrence cautions. “This is a representation of the projects we’ve seen and been asked to to assess. But even so, it gives an idea of the availability of projects out there.”
“The geographical scope was quite surprising for us around the dominance of Latin America,” he adds.
Latin America, he says, has the growing conditions to produce a lot of carbon credits. For example, Brazil is one of the world’s most forested countries, and the entire region is one of the world’s most biodiverse areas.
At the same time, “there are other regions around the world where you have those conditions, and those projects were not coming through.”
Another surprise for Lawrence and the team was that Xilva’s due diligence saw high attrition at the beginning and “almost none towards the end.”
The initial screenings rejected 5.7% of the projects (36) due to red flags “critical enough to render the projects unviable for a capital provider to consider from reputational, environmental, and/or socio-economic perspectives,” according to the report. Red flags might be inaccurate or exaggerated carbon credit estimates or conflicts with indigenous communities. (More than 100 other projects were dropped for various other reasons.)
“It never ceases to surprise me how many gaps we find in carbon calculations when [those calculations] are, for many companies, the go-to market value they’re putting forward,” says Lawrence.
“They may be doing lots of other actions on the ground, but the way they’re trying to finance [the forestry project] is by selling carbon credits to the market. And that surprises me, that there are holes in those calculations.”
Forestry: it’s not just about the trees
Miscalculated carbon credits aren’t the biggest risk to forestry projects, however. According to Xilva’s due diligence, a lack of critical documentation and “inadequate community and rights-holder engagement” were the most frequently found risks, and can quickly dismantle a project.
“Invariably, if there’s something drastically wrong with the project’s design, it’s in the social area,” says Lawrence.
“You might find a project that’s actually got a great carbon calculation sheet. Its finances look fantastic. It’s got an amazing team, but they’ve completely ignored entire social grouping in their landscape.”
According to Xilva’s report, a “significant number” of projects “failed to adequately give voice to and involve local communities and right-holders, especially when obtaining free, prior and informed consent, which gives indigenous communities the right to withhold consent for an action that would impact its land or rights.
That could lead to numerous consequences, says Lawrence — not just distrust or dislike of a project but “actual conflict on the ground that will unhinge the project faster than any carbon calculation could.” Such a conflict would also more than likely wind up with a deteriorated forest, too.
“Forestry is far more about people than it is about trees. If you get the people piece right, and you engage local community correctly, and they get jobs and benefits from what you’re doing on the ground, they will be the first defenders of that project. They will be the eyes on the ground, seeing if there are fires, if there’s poaching, etc.”
For projects that don’t prioritize the social element, “you’re a loser from day one.”
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