What if capital markets were engaged to transform the UN’s SDGS?

The pre-conception is that sustainability comes with a direct cost to governments and society; that improvement cannot be self-funding. Just consider if that was not the reality and then read on. Is there indeed a better way of fighting climate change, poverty and hunger than relying on governments and international aid organisations? What if, instead of giving money as a form of “charity” or national expense, capital markets invested to reverse climate change and transform communities struggling with poverty and hunger?

Research at the Aid Files has been looking for examples of Impact Finance that unlocks huge global capital markets for investment in social and economic improvements. We have clearly established through our research that people in crisis (hunger, poverty, displacement)  have skills, knowledge and resources that are untapped simply because of their current circumstances. Investing in these communities in a way that profits all participants sustainably and with dignity  is an inspiring vision.

Across the world the reality has (mostly) sunk in that the effects of climate change must be reversed. The impacts of extreme weather are loss of life, hunger, extreme poverty, mass migration and conflict. But the impacts depend on where you live in the world: infrastructure, services and economic reserves can all mitigate the worst impact. Poorer places fare worse; the wealthy ‘global north’ has subcontracted the worst impacts of its degradation of the climate to less resilient places. As reported at COP27, Africa holds just 18% of global population yet accounts for 2% of emissions. We also know that 85% of the officially classified global ‘poor’ (700 million people) live in sub-Saharan Africa and South Asia; these are the people most severely impacted by adverse events; the cycle of poverty and hunger is reinforced by climate change.

The global aid and development ‘market’ in all channels (UN, National and NGOs) is estimated at $500 billion per year[1]. The Sharetrust, in its recent report[2], analyses the profound ineffectiveness of spending on aid and development. They point to the imperative to be more locally focused in funding and delivery. Key points from this report are:

  • International salaries comprise as much as 67% of ODA and $billions more are spent on overheads – the proportion of cash reaching real people in need is relatively small
  • Local intermediaries could deliver programming that is 32% more cost effective
  • There is a clear need to shift the international aid architecture to new ways of working and reconceptualize intermediary structures

The current economic situation and in the context of the war in Ukraine is reducing aid and development funding; we must find ways to spend a reduced sum better. The recent COP 27 agreed to the principle of reparations for climate change but failed to put in place climate change prevention or mitigation measures[3]. A cynical viewpoint would be that the developed worlds is content to pay post hoc for damage in order to continue polluting; this may be a cruel characterisation but it is not too far from reality. Reparations do nothing to relieve poverty and suffering and will definitely not improve local outcomes.

The world needs to invest in the ‘new ways of working’ that drive improved outcomes for the very poor from both a climate and a welfare perspective. Be in no doubt, there is cash available for investment when the governance/risk return combination is acceptable. The global investment market in pensions alone is estimated at $56 trillion[4] or circa 100 times what is spent in Aid and Development[5].

The billion dollar question is how to put together investment packages where the return is based on social outcomes.  We have been investigating the use of what is called Impact Capital for some time. While the principal that private capital can be invested against social economic returns is straightforward; the questions of measurement of social outcomes and who contracts to pay an appropriate return are areas where we have struggled to find practical examples.

We recently encountered an idea involving investment in farming combined with carbon offset trading that could possibly solve this dilemma in relation to climate change, life on land, poverty, and hunger. It can seem complex, and there are still questions that need to be answered about the detail, but on the face of it this idea looks promising.

Carbon Plus Capital[6] provides a good example of how the idea of carbon offset trading could be combined with investment by offering:

  • “… a private investment manager specialised in the development and financing of climate change mitigation and adaptation projects based on the protection of forests.
  • ….. expertise from the fields of biodiversity conservation and private capital finance in the structuring, marketing and managing of biocarbon investment opportunities.”
  • “…..solutions to society’s transition to a low carbon economy [and the] need to include measures to protect the world’s forests
  • ….. bringing investment capital alongside best environmental practices
  • …… [rewards for investors] participating in activities that protect the integrity and future of the world’s precious natural resources, the health of habitats and the sustainability of local communities and livelihoods.”

The key to reducing poverty and hunger in Sub-Saharan Africa and South Asia is agriculture. A recurring theme of our research at The Aid Files has been the potential to increase productivity and performance of agriculture based on the right expertise and inputs. We have been able to visit and witness examples as follows:

  • Dam building and water management in Orissa (India) supported by Goonj which doubles the rice crops per year
  • Agriculture improvements promoted by CEAL in Northern Ghana and managed by Issifu Jobila; they are showing a 50% to 100% uplift in farmers income
  • Jo Male and his Avail Group based in Uganda who are improving farming yields and land management to a remarkable degree
  • Christie Peacock with her Sidai business in Kenya which improves the performance and sustainability of pastoralists

The combination of the right skills and sufficient of the right inputs can easily lift the net income of a small farm by $1000; if that is put together with better routes to market, crop fertilisation, preservation, and storage, plus land management, the outlook for farmers can be transformational. Since these people are ranked among the poorest and their families are in hunger, these improvements can drive attainment of the Sustainable Development Goals significantly. 

Working through Living Carbon International, its joint venture with Regen Farm Platform, a specialist in regenerative farming, Carbon-Plus Capital claims to have identified revenue and investment return streams through a sustainable landscape management intervention model, that could improve the lives of farmers, enhance land management, and create re-forestation. We need to do more work to fully understand the business model, but the investment in land, farming, and re-forestation creates certified carbon offsets for large corporations and governments to purchase on their route to net zero (where they cannot easily or economically eliminate their use of fossil fuels).  The carbon ‘price’ has risen from an average low of $5 per tonne in 2017 to n average of around $25 in 2022, and some forecasters predicting $100 per tonne within 5 years; the prospect of investment return has transformed.

It looks promising and it’s beginning to generate some excitement in the world of international development.

Rob Day wrote in November 2022 in Forbes[7]: “….the carbon commodities ecosystem is broad-reaching and oftentimes extremely complicated. In simplistic terms, in order to generate and sell offsets, one must engage with, at a minimum, a project developer, a third-party auditor, a carbon offset program/registry, and some sort of broker or credit purchaser.”  

And that is pretty much the story from Carbon Plus Capital which, through Living Carbon International, their joint venture with Regen Farm Platform, has a project in northern Nigeria covering 100,000 hectares and involving thousands of farmers. CPC is the project manager and works through a local aggregator. That local engagement and consent is crucial as the investment is to help farmers increase yield in the fields and in their markets in exchange for cooperative action to enable substantial re-forestation. The deal for the farmers is compelling: increased yields, support with inputs and better routes to market with higher prices. The claim is that they can double their incomes even after repaying the input support and giving the aggregator a cut. The farmers also get a small cut from the climate credits that are sold on the project. The imporoved soil management and forest planting is the means to sequester carbon; its performance is audited independently as part of the carbon market process.

Capital markets are essentially lazy – investors want most of the risk and all of the work removed. The product with a benchmarked risk-return yield needs to be presented on a plate and what’s more it needs to be tradeable. The project manager needs a remarkable range of skills to assemble this reliably and then place its day-to-day management in the hands of the local agent or aggregator. It becomes not unlike a Co-Operative where an investor creates the organisation and can then realise his return through the carbon markets.

The Forbes article points out this that this represents a new generation of investment manager – integrating investment activities with projects that embrace the principles of sustainable finance: environmentally sound, socially productive, commercially robust.

There is no denying that it is relatively complex with more moving parts than most investments – there are lots of details that we need to understand. But the opportunity to earn while improving the condition of the poorest and helping fix the climate is compelling. It is indeed a ‘sextuple whammy’:

  • Poverty down,
  • Hunger down,
  • Climate CO2 down
  • Life on land better
  • Locally empowered
  • Investment grade returns

The skills that make this all happen rest with the Project Manager and the Local Agent / Aggregator; how that works in detail will be the key to working with vulnerable communities with dignity.

Our research and due diligence will continue and we will report further in the coming weeks including the reaction of our agricultural experts in Africa.

Alan Braithwaite – December 2022

[1] This estimate includes UN, National and International NGOs and is more than double the OECD measure on a narrower base

[2] Passing the Buck: The Economics of Localizing International Assistance — The Share Trust

[3] COP27: Summit agrees to help climate victims. But it does nothing to stop fossil fuels | CNN

[4] Global pension statistics – OECD

[5] Investments Market Size 2022 And Growth Analysis (thebusinessresearchcompany.com)

[6] Carbon Finance, Investment Managment, Climate Mitigation Services (carbonpluscapital.com)

[7] Carbon Offset Markets: Why Are Investors Jumping In? (forbes.com)