P+ Special: Financing climate adaptation

    Wennie Waeijen

    Dutch Fund for Climate and Development restores critical landscapes

    It is an unprecedented collaboration. To generate more money for climate projects, development bank FMO, the commercial Climate Fund Managers, development organization SNV and the international World Wildlife Fund have joined forces in the Dutch Fund for Climate and Development. This surprising combination is expected to produce a stream of bankable projects and win over private investors. “It’s absurd when you think about it, that we always worked separately from each other in the past.”

    P+ Magazine covers CSR and sustainable entrepreneurship news. In the March ’21 edition, P+ interviewed the DFCD consortium partners on their unusual collaboration. You can read the full Dutch edition of the magazine online (click here) or find the English translation below.

    It was in late January, at the online Climate Adaptation Summit hosted by the Netherlands, that Dutch Prime Minister Rutte told the gathered world leaders – via video link – that adaptation to the inevitable global warming is priority number one. “Climate change is happening now, and it is already affecting the lives of millions of people. If we don’t adapt to this new situation, the consequences will be devastating.” Climate adaptation will require at least as much money the prevention of further global warming. This is a challenge of huge proportions. But it can be met, says Rutte, by mobilizing much larger investments from the private sector with public money. Whereupon the Dutch Prime Minister presented the Dutch Fund for Climate and Development (DFCD) to the world as an example. Set up in 2019, this fund, an initiative of the Ministry of Foreign Affairs, aims to mobilize at least half a billion in private investments with €160 million in public money. Or more: one billion in additional funds also seems attainable.

    Sigrid Kaag, the Dutch Minister for Foreign Trade and Development Cooperation, also referred to the new fund in her speech at the conference: “We know what the problem is and know what to do about it. But if there aren’t any projects and programs which are suitable for private investment, we won’t get very far. We plan to bridge that gap with the DFCD.”

    Looking back on these speeches, the question we have for Aart Mulder, DFCD fund manager, previously of development bank FMO, is whether all this praise for a fund that has only just started – and has yet to prove itself – made him feel a little uncomfortable? “The pressure is definitely on,” he admits, “but more importantly to me our approach was given an international platform this way. We have great ambitions and hopefully the attention we received will contribute to achieving our goals.”

    The Summit was rightly highlighting the need for global adaptation, Mulder says. “Even if we achieve the Paris climate goals, the consequences of climate change are going to be substantial. Climate change hits the most vulnerable people hardest. They deserve protection. Minister Kaag has embraced that principle, and our fund is currently one of the most concrete initiatives worldwide. That is the reason it was mentioned so prominently.  Linked to an appeal to other countries to also pursue this path.”

    The costs of the adaptations which need to be made in developing countries have previously been estimated at €100 billion per year, but may reach three times that amount by 2030. It seems unlikely that the industrialized countries will actually foot this bill (as promised in Paris). That is why hope is now focused on the private sector, however, until now it has shown very little interest. Why should that suddenly change? “The viewpoint has always been that governments are responsible for building higher dikes, and so on,” says Mulder. “But the realization is growing that governments cannot possibly achieve this on their own. The private sector needs to be mobilized. And that will only happen if they can realize acceptable returns.”

    That means a considerably greater number of investment-worthy climate projects need to be established in developing countries. There are plenty of promising initiatives, but more often than not they do not reach maturity. A start-up in Africa often approaches banks in vain in their own country and they won’t show up on the radar of development banks or Western venture investors, even though they’re often not asking for millions. What they do want is a soft loan, and sometimes technical support. Precisely for this reason, Dutch development organization SNV and the World Wildlife Fund (WWF) have become partners in the DFCD. They are used to rolling up their sleeves, their daily work consists of initiating and supporting projects in local communities. As such they are the ideal party to select promising initiatives and to present them to commercial partners.

    “The extensive local networks of SNV and WWF are worth their weight in gold,” Mulder observes. “FMO and Climate Fund Managers don’t have that kind of access. And as non-governmental organizations (NGOs) they also operate differently than a development bank or a fund manager would. They first identify what the vulnerabilities are in an area, and what opportunities are present there. And only then do they look at the specific projects. With the help of FMO and CFM, they are now looking to see where upscaling is possible. That is essential for the DFCD because we want to achieve a structural impact. This collaboration is helping each of the partners to expand their horizons.”

    That sounds great, but does it also work in practice? The differences between the four partners are considerable, how do you forge a unity out of that?

    “The distance between the partners is indeed quite large. Even the language used by the different parties varies significantly. As does the content of their work. The cooperation between such different parties is quite tricky to begin with, but over the long term much more can be done. If everyone goes their own way, you’ll miss out. You can carry out all kinds of nice adaptation projects on a micro level, but from a larger perspective it won’t make much of a mark. Or, conversely, you look only at scale and don’t see the value of the small projects and deals anymore.”

    “It is almost absurd to think about how long NGOs, development banks and impact investors have been working separately, alongside each other. While around 90 percent of their objective is the same, I think. They sometimes even see each other as opponents, without realizing how much they need each other. Our fund can set an example. Structural cooperation between very different partners pays off – that is the essence of our story.”

    How do you get private investors involved?

    That has to be done step by step. We have completed the first stage of getting used to each other and properly organizing the cooperative structure. Now it’s time to harvest. We want every investment on our part to be matched by the same amount from a third party. This could be another development bank or a commercial party. Think of Oikocredit, for example. In time, possibly also pension funds. We are in talks with Rabobank about the Carbon Bank they are setting up; this links farmers to large companies. We want to help extend that to small farmers in developing countries. My hope is that we will succeed in developing joint projects with them before the end of this year.”

    Climate Fund Managers

    A step forward in public-private partnership

    “That sounds terribly inefficient.” That was how colleagues in the financial world generally responded when Darren Moens of Climate Fund Managers told them about the partnership of the four parties in the DFCD.

    Laughing, he adds that now he is sensing jealousy from the very same people: “The partnership with SNV and WWF opens up markets that they too would like to have access to.”

    Moens, Canadian by birth, has been working in the Netherlands for ten years. First for FMO, then for the Climate Fund Managers (CFM) set up in part by the development bank. That fund has grown to a portfolio of $850 million in a few years and is one of the world’s leading investors in sustainable energy and water projects in emerging markets. The DFCD fits in well with the usual working method of CFM, which works with a mix of public and private money. “For me, the collaboration with NGOs feels like the logical next step,” says Moens. “It’s not easy, we have yet to discover how it’s going to work exactly. But we all think this is the way things will be done in the future.”

    When asked for an example, Moens mentions a project being established in Kenya in cooperation with the Finnish company Solar Water Solutions. Kitui County, a region between the capital Nairobi and the port city of Mombasa, is vulnerable to climate change. The quality of the local drinking water (from wells) is deteriorating rapidly, due to salinization and an excess of fluoride. This problem can be tackled with mobile water purification installations in containers developed by Solar Water Solutions, which run entirely on solar energy. Residents can use their mobile phone to tank purified water from the installation for a small fee. The idea is to eventually place 200 units, enough for 400,000 people to benefit from.

    SNV is involved in the first pilot phase. The development organization will explore whether this technology is suitable for this area. As well as investigating whether residents are willing to pay for clean drinking water. And looking for solutions for the people who are not able to. Moens: “Until now, we haven’t had operations in Kenya, and we wouldn’t have been likely to become involved here without SNV. But they are very active there and know the local situation. That gives us the confidence needed to get on board.” The project can get started with the support of the DFCD investment. Climate Fund Managers is working with development banks and commercial parties to finance the later rollout. “I think it’s going to be a success.”

    Moens praises the set-up of the DFCD, in which the two participating NGOs are allocated a budget to identify projects which are promising and eligible for upscaling. “Initiatives that we in the private sector would not consider, because we are completely unaware of the local situation. Some of those will be early stage and may fail, but others will succeed. To me this is an exciting model.”

    SNV

    Looking for system change

    “The first results are very promising. The approach is sound. But this new approach is not a silver bullet.” Albert Bokkestijn, DFCD project manager at SNV Netherlands Development Organization, would like to emphasize that point.

    “Where possible, you should scale up local projects. But in the poorest countries and regions this is often still not an option. There you have to invest mainly in small farmers and communities. The DFCD will not replace our normal work there. But it is certainly good to reach beyond your comfort zone. And to work with other parties.”

    It sounds good, but in practice can still be quite challenging. “It took me at least six months to decipher the jargon of a development bank and a fund manager,” says Bokkestijn. “And I’ve been working in the international cooperation field for 35 years.” There was more. The first projects that the development organization put forward for DFCD funding were all scuttled. Too small, too little perspective. “We then recruited extra capacity, people with a background in the banking world. That’s working better. We have now developed seven projects that are eligible for upscaling. I think we’re making remarkable progress”

    His colleague Tigere Muzenda, regional investment officer for SNV in Africa, is one of the people who was expressly recruited for the DFCD program. “I come from the world of project financing, I worked at the World Bank subsidiary IFC. There, a minimum loan starts at $10 million. While at SNV $100,000 is already considered quite a large amount. Many people in my network were skeptical about the possibility of making these kinds of small projects scalable. But in Africa there are very few companies or projects that can make good use of a loan of $10 million. So if you want to tackle poverty, you have to start at a much lower level. The way in which DFCD supervises initiatives is very efficient. And they work very quickly, compared with how much time it normally takes investors to make a decision.”

    He, too, refers to the Solar Water project in Kenya. “Our input is crucial to stop technology from being supplied that doesn’t work there, or that the local population doesn’t actually benefit from at all, as has so often been the case with well-intentioned projects.” SNV wants to contribute to system change, says Muzenda. “Making large groups of people less vulnerable to climate change fits into our organization’s purview very well.”

    World Wildlife Fund

    Landscapes central

    “It’s getting worse every year,” sighs DFCD project manager Khanh Ton, referring to the effects of climate change in Vietnam.

    The WWF representative is referring in particular to the Annamite Mountains, the magnificent 1100km-long mountain range between Vietnam and Laos. The World Wildlife Fund has been active here for decades, especially in the central part, where cyclones and floods are an annual reality. But in November last year it was worse than ever. “In the last 20 to 25 years, the number of annual tropical storms has been growing,” says Khanh Ton, “with increasingly serious consequences.” The latter also comes from the advances in human activities: agriculture and massive deforestation in the higher mountain areas, plus the construction of hydropower plants, resulting in large-scale landslides.

    “It has a very hard impact on the economy and people,” the Vietnamese project manager tells us in a zoom conversation. Adaptation is therefore desperately needed. He and his team have now selected four projects that are eligible for DFCD funding. This mainly concerns pushing back against deforestation by establishing acacia plantations and harvesting rattan from the forests (for furniture production) and stimulating sustainable coffee production. The funding required per project varies from $1.3 to $9 million.

    “We are now also getting commercial banks involved in the acacia and rattan production,” Khanh Ton says. “One million small farmers in Vietnam are engaged in this. Until recently, no bank wanted to touch it. Far too much risk, they thought. FMO and the DFCD can open it up.”

    How new is this approach for the WWF? “It’s not new for me,” says Khanh Ton, who himself has a banking background. “But it is for our people in the field. They are involved in nature conservation and work together with the local population who depend on this nature. Attention to bankable projects is not part of their mindset. It is up to us to show them that these things can go well together. But it takes time.”

    This sentiment is mirrored by his colleague Jean-Marc Champagne, who operates from Hong Kong as WWF’s Head of Environmental Finance and is responsible for the regional coordination of the DFCD. The search for investment worthy projects goes hand in hand with the introduction of a landscape approach. “A more holistic approach, instead of setting up separate, individual projects. What are the ecological vulnerabilities in the region, who is dependent on that nature, and who do you need to get something started? This is a complicated approach that takes a lot of time. But it delivers much better results because you bring everything together. If you are doing a project down river, you have to pay attention to what is happening upstream.”

    The WWF has identified a number of crucial landscapes worldwide. The mountainous region between Vietnam and Laos is one of them. Champagne’s department has been specially set up to raise private money for nature conservation projects in these landscapes. He is very pleased with the DFCD. “There is a lot of money in the market, but it’s still difficult for us to attract financing. The Dutch fund is really helping to change that. Especially because we can now establish a track record with projects of this kind; the first investors are already knocking on our door. Within our own organization there were also a lot of doubts about the usefulness of our work, and now that’s changing too.”