According to the World Resources Institute (WRI), one-quarter of the world’s land mass has suffered environmental degradation over the past 50 years. The costs have totaled at least $6.3 trillion in lost ecosystem services; on the flip side, there is massive investment potential in repairing all these lands. The challenge, however, is finding ways to make land restoration more enticing for investors.
A report WRI issued earlier this week suggests seven essential steps by which governments and the private sector can find ways to make ecosystems restoration an attractive financial proposition. The results would include more food grown, improved energy efficiency and of course, better air and water quality. So what is getting in the way of restoring forests and other remediation efforts worldwide?
Environmental and social benefits are of little value to private investors
The restoration of forests and other lands creates clearly results in a huge net positive for citizens and businesses. The problem is that conventional financial metrics give no value to environmental and social benefits. WRI suggests both the public and private sectors adopt accounting measures that assign a value to benefits such as carbon sinks, improved farmland and clean water. An additional suggestion is the adoption of a payments for ecosystems services (PES), which pay landowners and farmers to adopt practices that promote environmental stewardship.
Short-term incentives to degrade lands surpass efforts to restore them
The business case for land restoration is almost impossible to make when governments offer incentives for continued land degradation by incentivizing unsustainable practices in the first place. Examples include Brazil backpedaling on forest production in the quest to boost beef and soy production, or the U.S. federal government continuing subsidies to encourage the production of meat and poultry to the detriment of ecosystems. Eliminating harmful environmental subsidies would be one way to stop this trend, though WRI acknowledges the outsized political influence agribusiness interests have in most countries. Increasing the subsidies for restoration, however, would be one way to counter this ongoing problem.
For most restoration projects, climate access is difficult to access
When it comes to climate finance access, the winners are renewables, energy efficiency and transportation projects; at a first glance, this is understandable as those investments can often generate quick returns. That reality explains why of the $128 billion in funds available for climate finance projects available during 2015, only $7 billion of that amount was available for forest and land restoration. Meanwhile, red tape, especially in developing countries, can result in even more hurdles for such projects. If more governments included land restoration as part of their climate mitigation strategies, more of those funds’ monies could find their way to repairing ecosystems.
Environmental budgets are too small to fund big restoration projects
WRI has estimated that the restoration of 150 million hectares of degraded agricultural land can generate as much as $40 billion in extra income for smallholder farmers annually, while raising enough food for up to 200 million people. There is also a connection between land restoration and energy; after all, less erosion from forests cleared for firewood means less sediment can end up interfering with hydroelectric power production. But those numbers frequently get lost in translation. Greater cooperation between government agencies responsible for the environment, agriculture and energy could help boost the case for environmental restoration. And more tools that clearly state the financial links between environmental stewardship and economic development could also help governments draft more coherent policies.
Restoration projects are too small for institutional investors
As this report’s authors note, a $5 billion fund will never consider any $5 million investment; the transaction costs are simply too high. Financial mechanisms similar to the resecuritization of assets such as auto loans (and ahem, mortgages before the 2008-2009 global financial crises) could help bundle such projects and make them more compelling for investors.
A 10 to 20 year payback is too long for most investors
It is a given that $1 today will be worth more than $1 ten to 20 years from now. And therein lies the fundamental problem restoration projects have in attracting investors: how can the need for environmental restoration overcome the short-termism endemic across global markets? WRI suggests tactics such as the scaling up of agroforestry, which allows economic and environmental activities to continue side-by-side. Securitization could also aggregate such investments, giving them more liquidity while reducing those pesky transaction costs.
Restoration is still seen as a risky investment
The countries that could benefit the most from land restoration projects also turn off investors because the lack of transparency pushes them to look elsewhere. Tax credits and other investment guarantees, however, could help make these projects to financial institutions and companies, while building up trust between governments and the businesses investing in the long-term health of their ecosystems.