- Designing a financial mechanism is about matching investor and producer needs.
- Initiatives should involve financial institutions from the outset, to increase interest and ensure proposals make sense.
- Different kinds of investor may be suited to different financial frameworks.
The financial mechanism in context
Overall, there are three stages that sustainable landscape initiatives need to go through to create a financial mechanism:
The business case. Putting together a business case requires understanding of the financial requirements of landholders and the cost of providing enabling services. This can also include costs of conservation and livelihood-related activities. This is the stage reached in the Mato Grosso pilot project. This project was particularly complex, involving a huge agricultural sector spread over a vast area.
Once the business case is understood, sustainable landscape initiatives need an investment plan. This incorporates an assessment of investment needs, potential outcomes in land-use and potential risks. It also aims to identify stakeholders who can make it happen on the ground. In essence, the implementation plan is a roadmap for putting the business case into action. This is the stage reached in the Acre pilot project.
Finally, the financial mechanism is the architecture of how finance will flow to producers on the ground, in order to cover expenses in inputs, technologies, technical assistance and monitoring. Often it can be made up of several financial instruments and other elements. This has been achieved in the San Martin project.
The infographic (below) shows the proposed funding structure for the Unlocking Forest Finance project in San Martin, Peru.
There are a wide range of different instruments and mechanisms which may be appropriate. Overall, defining the financial mechanism should be an iterative process. Funding the project will ideally be a consideration from the outset so that the whole project and its financing can evolve at the same time. It may be much more difficult to design a financial mechanism to fit other aspects of the project which are already in motion.
Designing the investment model for landscapes is similar to other, more traditional investments. It comes down to bringing people together: those who need investment, those who are interested in investing, and those that can make it happen. This matchmaking process is key to building a mechanism which works for everyone, aligning projects with investors’ needs when it comes to returns and their appetite for risk. In practical terms, this may mean getting all parties involved into a room at the same time.
Timing is a major consideration. It is necessary to ensure that finance comes on-stream when farmers need it. Similarly, the return period should suit investor needs.
Working with current policies
It may be most effective to base landscape finance around already-existing mechanisms. For example, agriculture already receives huge subsidies in many countries. Competing with this will be difficult – for example, it may be difficult to offer loans with more competitive rates, if farmers already receive subsidised loans for unsustainable methods. A more fruitful approach may be to tweak currently available financial flows to incorporate environmental objectives.