Rethinking Finance and Planning for Climate-Resilient Landscapes
November 18, 2019
Posted By Daphne Yin
Those of us working on forestry, agriculture, and landscape conservation can attest to the progress made in sustainable land use in recent decades. Yet we also see firsthand how environmental and socioeconomic forces can easily unravel, halt, and even reverse this progress.
It is more critical than ever to consider risks of reversal—compounded by physical climate risks—during due diligence and planning of land-based investments.
Advances in academia are being made to incorporate climate risks into ecosystem modeling and adaptation planning, drawing from both top-down climate modeling and empirical place-based research.
In parallel, government agencies and financiers are evolving their approaches for planning and due diligence of forestry and agriculture projects. Below, we profile trends in physical climate risk and approaches to better assess, insure, and mitigate such risk—ranging from those solely focused on risk screening to those linked explicitly to ecosystem-based adaptation.
These approaches help target investment toward better-designed initiatives that last the test of time and deliver greater value for money.
A Moving Target
Forest restoration and regenerative agriculture are among the most effective climate change solutions. Yet changing climate conditions affect the ecoregions suitable for tree, crop, and associated wildlife species. Dryer, hotter weather brought about by climate change in the American West, for instance, has led to the most devastating forest fires in California’s history. Across the world in Inner Mongolia, China, desertification, successive years of drought, and lowering water tables are affecting tree survival and crop yields.
Past a certain threshold of risk, investments become no longer economically viable. Historically, stranded assets are commonly understood in the context of fossil fuel industry and divestment. While more differentiated in risk, assets in forestry and agriculture are also at risk of becoming stranded due to physical climate risks, alongside regulatory and technology risks. The total value of agricultural investments alone at risk of stranding is estimated at USD 6.3 trillion to USD 11.2 trillion.
Stranded forest and agricultural assets affect actors all along the value chain. Small landowners and other small-scale users in poorer areas may be especially susceptible to land degradation because they lack resources to invest in adaptation measures or diversify their livelihoods.
Compared with agriculture, forestry is more challenging because of the upfront investment and time required before the first cash flows from the investment. While conservation practices can enhance production and resilience against environmental shocks, many producers find it cost-prohibitive to obtain sustainability certification. Physical climate stressors compound pressure for producers to meet low-carbon and sustainability standards.
These factors are exacerbated by urbanization and an aging labor force in many countries. With their children in cities, farmers are unclear how their land will be managed as they age or pass away. It is no surprise then that they often plant monocultures of common species with shorter rotations instead of a mix of longer-rotation, high-value species. This phenomenon challenges us to think about mechanisms for incentivizing sustainable forestry, agriculture, and landscape restoration in rural areas facing population decline.
The European Union has taken steps to mainstream climate risk and vulnerability assessments into environmental impact assessment (EIA) and strategic environmental assessments (SEA), which is a key juncture for government and financier approval of large-scale projects. EIA/SEA legislation in other countries usually does not mandate coverage of climate issues, which has led to slow integration of such assessments and limited awareness of the interlinkages.
Development banks and international financial institutions provide entry-points for stronger climate-risk integration. The World Bank Group has mainstreamed the use of Climate and Disaster Risk Screening Tools to assess projects and national-level plans for climate risks and inform planning of resilience measures. Regional multilateral development banks have rolled out their own sector-specific climate risk screening and management tools for agriculture and natural resources. Such tools could use more guidance and resources to support users to incorporate appropriate climate data and information.
In the private sector, investment management firms are adopting tools to assess and manage climate-related risks as one of many environmental, social, and governance (ESG) issues in their investment portfolios. Such tools generally take a rapid assessment approach, some using scenario analysis to explore how climate impacts could affect investment performance through lower yields or physical damages. They may be supplemented with tailored analysis where more in-depth understanding of climate risks is needed to inform project design.
Carbon finance actors continue to run into issues with the lack of permanence in land-use projects. Under forest carbon and other land-use offset projects, landowners, project developers, and governments may commit up to 100 years of sustainable land management. A certain percentage of a project’s carbon offsets—representing emission reductions—are typically set aside as a buffer pool. Buffer pools under industry-leading standards for forest carbon activities range from 10-25% of total offset credits, where reversals by forest fires or other drivers would trigger retirement of the same volume of credits from the buffer pool.
A forest carbon offset project in the United States financed by New Forests in California was terminated after forest fires released 45% of the carbon the project had sequestered, and has led to calls for more robust buffer pools to handle increasing reversal risks.
Carbon offset standards including the industry-leading Verified Carbon Standard and emergent REDD+ Environmental Excellency Standard (TREES) have developed methodologies to enhance the long-term environmental and social integrity of emission reductions generated through forestry, agriculture, and other land use activities.
Conservation easements in the United States include an obligation for a land trust or government agency to protect a land parcel’s conservation values “in perpetuity.” Easement contracts are now evolving to include more flexible language that enables amendments of the original language to accommodate changing environmental circumstances.
Force majeure provisions in contracts (ranging from lending agreements to land tenure agreements and buyer agreements) also require a change in their parameters, as extreme weather and changing precipitation patterns change the norm of what is deemed unforeseeable or abnormal.
Farmers’ reliance on subsidized crop insurance is growing, with insurance costing the US federal government and taxpayers USD 9 billion a year. While crop insurance provides a safety net of income support for farmers, overreliance on subsidies creates a perverse incentive for producers—especially large cash crop farms—to maintain conventional practices rather than invest in more suitable species or climate-resilient practices. The US Department of Agriculture’s Risk Management Agency has been addressing this issue by starting to offer discounts on crop insurance for farms that adopt certain conservation practices such as cover cropping that enhance soil health and water retention.
The reinsurance industry is ahead of the curve in integrating climate risk considerations into its risk management, underwriting, and asset management. Increasing frequency and severity of weather events such as droughts, floods, and pest and disease outbreak are leading insurers and reinsurers to revalue previously accepted risks and raise insurance premiums.
Munich Re, the world’s largest reinsurer, has developed a new risk map for select US states to support wildfire risk management, drawing from the latest hazard levels and considering potential losses from wildfires. Swiss Re also models natural catastrophe risk alongside manmade and geopolitical risks, updating their models regularly to incorporate new scientific findings in collaboration with academic institutions.
Communications and Reporting
Natural capital valuation can help communicate the materiality of impacts from stranded assets in monetary terms, and in doing so inform longer-term planning, investment, and operational decision making.
The Task Force on Climate-related Financial Disclosures (TCFD) includes voluntary guidelines for publicly listed companies to provide annual financial reporting. Disclosure enables corporate shareholders and investors to transparently price climate risks and support a shift toward more climate-resilient activities. Indicators for forestry and agriculture cover risk adaptation and mitigation, water, and greenhouse gas emissions, aligned with internationally accepted reporting standards.
Some financiers have shifted from a pure risk screening approach to paying for ecosystem-based adaptation. Examples include Blue Forest Conservation’s Forest Resilience Bond, where performance is measured based on reduced wildfire severity, improvements in water quantity and quality, avoided carbon emissions, and job creation.
Other actors complement their impact investment arms with relevant technical assistance for investees. In response to increasing climate shocks to the coffee supply chains it supports, nonprofit social investment fund Root Capital launched a Coffee Farmer Resilience Fund that provides technical assistance to producers on climate-resilient agricultural practices.
The Way Forward
Countries are integrating terrestrial nature-based solutions as part of their commitments to the Paris Agreement, restoration, and zero-deforestation targets. For the land use sector to truly become sustainable requires mainstreaming climate risk management into these commitments as part of land use planning and cross-sectoral decision making, beyond the silo of environmental finance. There is great potential to restore degraded land, e.g. using marginal or disaster-affected land for landscape restoration with more suitable tree species. In the forest industry, more investment could be targeted to scaling mixed-species plantations that deliver greater stand-level productivity and climate resilience relative to monocultures, which remain the dominant plantation model.
In realizing these efforts, more needs to be done to account for shifting suitability based on climate projections—and to ensure patient capital is in place to incentivize practices in line with our long-term vision.
At Indufor, we advise on the climate change mitigation and adaptation potential of public and private sector investments in conservation, restoration, and industry across forestry, agriculture, and other land use sectors. We conduct scenario planning and cost-benefit analysis for clients considering investing in climate-resilient practices, helping to value financial, environmental, and social impacts in landscapes and along supply chains. Beyond conducting initial due diligence, we provide field-based and remote sensing monitoring to track the survival and health of landscapes, providing the basis for adaptive management over the years.Indufor is a global leader in natural resource management, investment advisory, and strategic industrial development consulting. We support our customers to compete and sustainably grow in international markets. We have offices in Finland, New Zealand, Australia and the United States, and representation in China. We have close to 40 years of experience in more than 100 countries. Our services support our clients to make the world more sustainable.
More Information Daphne Yin