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Land Degradation Neutrality (LDN) Fund – UNCCD Global Mechanism

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This presentation by UNCCD Global Mechanism was given at a session titled "Land Degradation Neutrality (LDN) Fund" at the Global Landscapes Forum: The Investment Case on June 10, 2015. For more, please visit http://www.landscapes.org/london/

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Land Degradation Neutrality (LDN) Fund – UNCCD Global Mechanism

  1. 1. Global Landscapes Forum London, 10 June 2015 Simone Quatrini (LDN Fund Coordinator) Siv Øystese (Advisor: Land, Private Finance and Investments)
  2. 2. 1. WHY AN INVESTMENT FUND 12 million hectares of land are degraded every year by human activities. By rehabilitating this land: • we create a land degradation neutral economy • we achieve food security by 2050 • we contribute to biodiversity conservation • we mitigate climate change by sequestering up to 20% of CO2 emissions by 2050 Bankable projects for transitioning to land degradation neutrality can deliver strong social and environmental benefits and long-lasting positive impacts alongside with market average or above-average financial returns. 1
  3. 3. New York Declaration on Forests 350m ha by 2030 Bonn Challenge 150m ha by 2020 WRI/IUCN 20x20 initiative 20m ha in LAC by 2020 Meta-Atlantica Pact 15m ha by 2050 WBCSD Action 12m ha per year by 2020 2. SIZE: A LARGE SCALE ENDEAVOUR $ 100-150 / ha average cost of land rehabilitation ± $ 1.2-2 bn/year financial needs for rehabilitation 2 billion hectares of degraded land worldwide are available for rehabilitation 18 Countries voluntary committed to LDN (> 30m ha): Algeria, Armenia, Belarus, Bhutan, Chad, Chile, Costa Rica, Ethiopia, Grenada, Indonesia, Italy, Korea, Myanmar, Namibia, Nicaragua, Panama, Senegal, Turkey + China, East/Southern Africa, Central Asia, Mekong, Caribbean 2
  4. 4. 3. NO ‘LAND GRABBING’ The fund willThe fund will not  secure access to degraded land  promote commitment to sustainable use by all concerned stakeholders  finance rehabilitation operations × buy/sale land × execute land transactions × finance land-use operations Via the provision of finance conditional to long-term land rehabilitation and sustainable use the LDN Fund will address:  Inefficient markets  Weak regulations A rigorous due diligence process will:  Identify suitable land and investable projects  Produce positive social and environmental impacts 3
  5. 5. PLATFORM 12 Million hectares of degraded land upgraded to profitable assets, per year  Private investment fund  Evergreen  Leveraging private investors  Enhanced by public funding  In partnership with international and local operators  Developing & Developed Countries  Large scale rehabilitation projects & medium scale via partner intermediaries  Debt & Quasi-equity instruments  All sustainable land-use sectors: sustainable agriculture, sustainable forest management, conservation, renewable energy, infrastructure, eco-tourism, etc.  Complemented by targeted technical assistance • ANNUAL LDN STRATEGY TARGETS Mobilised Rehabilitated Reached Reduced $ 2bn $ 50bn• 20 YEARS 12m ha 300m ha 5-6 countries Worldwide 1Gt 20Gt 4. HOW IT WILL WORK 4
  6. 6. Fin. Returns Profits Land Value INVESTORS BUSINESSES LANDOWNERS LAND (SUPPLY) - Public - Private LAND (DEMAND) - Multinationals - SMEs FINANCIAL CAPITAL - Institutional - Impact REHABILITATION LDN 5. DIRECT CHANNEL: LARGE DEALS 5
  7. 7. CO- INVESTMENT Financial Institutions FUND of FUNDS (marginally) 10-25% of Fund’s assets could be allocated for small and medium scale projects through:  Selection of partners funds/investors  Entering into cooperation agreements  Deal by deal basis  Mainly debt financing  Financing existing/new funds  Supporting innovative strategies  Targeting regions/sectors not accessible by a large fund  Building trust relationship with local land rehabilitation project promoters  Providing debt funding and capacity building services through local banks Examples of potential partners: 6. INDIRECT CHANNEL: OPTIONS 6Companies are mentioned for illustrative purposes only. This should not be considered as a firm commitment to partner with the LDN Fund
  8. 8. 7. BUSINESS MODEL (INDICATIVE) Current Land Use Type Land Ownership Land Degradation Severity Opportunity Costs Intended Land Use after Rehabilitation Market Value Generated from Rehabilitation LDN FUND Channel LDN FUND Investee LDN FUND Instrument LDN FUND % Portfolio (indicative) Private Low Medium Sustainable soft commodity production Medium Direct Agri- business Loan 25-30% Public Medium Low Renewable Energy + Livestock High Direct Energy company Loan / Equity 25-30% Public Low Low SFM + Conservation High Direct Forestry company Loan 10-15% Public / Private High High Sustainable Infrastructure Low Direct Construction company Loan 10-15% Private Medium Medium Value chain development High Indirect Financial intermediary Loan 5-10% Public / Private High High Sustainable Mining Low Direct Mining company Loan 5-10% Communal Medium Low Holistic Livestock Management Medium Indirect Existing fund Equity 0-5% 7
  9. 9. 8. TYPICAL INVESTMENT 8 Cash flows from leasing out upgraded land LDN Fund investments Opportunity costs to access degraded lands Debt finance for rehabilitation activities
  10. 10. • Under-performing land assets can be upgraded via debt financing. • Land restoration companies can bid for rehabilitation projects enabled by the LDN Fund. • Upgraded land assets can be secured for long- term sustainable use against leasing fees, commitment to LDN, social and environmental standards and impact reporting. • Stranded land assets can be made available for rehabilitation and sustainable use. • Companies invest in the Fund to pursue/achieve LDN targets. • Productive land assets are available for continued sustainable use by the same or new land operators, under renewed commitment to LDN. 9. OPTIONS FOR BUSINESS ENGAGEMENT
  11. 11. High risk • Forestry (forestry, papers, metals, etc.) • Construction and materials • Food and beverage • Industrial goods and services (transportation, packaging, etc) • Leiure and travel (airlines, hotels, restaurants, etc) • Personal and household goods (consumer electronics, tobacco, clothing, etc) • Utilities (water, electricity) Medium risk • Chemicals • Health care (e.g. equipment and services) • Insurance • Oil and gas • Real estate • Retail Source: ELD, 2013 10. LAND MATERIALITY RISK
  12. 12. 10. BUSINESS COMMITMENTS Companies are mentioned for illustrative purposes only
  13. 13. RISKS BARRIERS LDN Market risks Pipeline Viability Track record Innovation Risk/Return imbalance Size/Concentration Scalability/Replicability Operational risks Financial Transaction costs Unsuitable instruments Liquidity Investors’ short horizon Currency Volatile local currencies Political risks Regulatory Policy change Uncertainty Access & Exit Lack of policy support Communication Unlevelled playing field 12. SPECIFIC FEATURES Source: adapted from ‘Green Finance and Investment’, OECD series, January 2015 RISK MITIGANTS TRANSACTION ENABLERS Risk management Platform Insurances/Guarantees Multiple channels Portfolio diversification Blended capital Co-investment Warehousing/Pooling Credit enhancement Other incentives In-house expertise Direct channel, TA facility Tailored notes issuance High capital & return protection Hedging, First loss Portfolio hedge UNCCD oversight LDN commitments Enabling conditions Investment-grade policies Public stakes Land tenure policies Disclosure Strategies and roadmaps
  14. 14. Through a successfully tested layered fund structure  Private Institutional Investors investing in well protected Notes with adapted liquidity and return  Private Impact investors participate as senior shareholders  DFIs and donor agencies support private investors by providing credit enhancements through junior equity or guarantees to the LDN Fund  All investors pooled to invest collectively in upgraded land through rehabilitation 13. BLENDED CAPITAL STRUCTURE 9
  15. 15. With an efficient independent governance structure  LDN Fund = private entity managed by private Fund Manager targeting private investors  High reputation Fund Manager advised by specialised rehabilitation finance firms  Alternatively, Fund Manager established as a private equity firm  Board of Directors (BD) representing interest of shareholders  Decisions on investment proposal approved by expert Investment Committee (IC)  UNCCD Global Mechanism (GM) leveraging commitments to LDN and ensuring ethical standards Board of Directors Investment Committee International Private Fund Manager Investment Advisor Sector 1 Investment Advisor Sector 2 Investment Advisor Sector 3 14. PRIVATE GOVERNANCE STRUCTURE 10
  16. 16. 11 Country Project Developer / Incubator Project Size (m. ha) sustainable livestock intensification Althelia Climate Fund 0.5 certified teak plantation + intercropping Across Forest + Nica-Forestal 0.8 reforestation of degraded tropical forest President + Min. Environment 0.8 restoration of the Oasis ecosystem Ministry of Water, Energy, Environment 1.0 dryland restoration with rural communities Niger river basin authority 1.0 solar energy (PV) project Green Silk Road Fund – Elion Foundation 1.3 sustainable economic land concessions (ELCs) Conservation International + MAFF 2.0 renewable energy in economic dev zones Jordan Investment Commission 2.0 land banking to support land consolidation Ministry of Agriculture 3.0 holistic livestock management in Patagonia Aurora Impact – Savory Institute 6.0 Total Land 18.6 Brazil Nicaragua Costa Rica Morocco Niger China Cambodia Jordan Turkey Argentina 15. PROJECTS OF INTEREST (SAMPLE)
  17. 17.  June – Sep 2015 : identification of anchor investors and setting up of a co-promoters committee  June – August 2015 : selection of fund manager and identification of specialised investment advisors  July 2015 : press release at the Finance for Development conference (Addis Ababa, Ethiopia)  June – Oct 2015: preparation of investment cases for initial pipeline  October 2015 : business commitments to LDN announced at UNCCD COP12 (Ankara, Turkey)  December 2015 : official launch at UNFCCC COP21 (Paris, France) 13 16. NEXT STEPS
  18. 18. CONTACT Mr Simone Quatrini LDN Fund Coordinator Private Sector Finance & Investments in Land The Global Mechanism of the UNCCD UN Campus, LE-1414, Bonn, Germany P: +49 228 815 2860 M: +49 173 278 6901 E: squatrini@unccd.int

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