How to reduce the risk of failure for environmental projects
The One Billion Trees Programme promises to deliver combined benefits, not only by offsetting greenhouse gas emissions, but also reducing erosion on marginal land. However, unless funding is closely tied to successful outcomes, this public investment risks failing in its environmental and political ambitions.
We have developed a results-based bond financing scheme that would remove the risk from forest planting and could be applied to forest and landscape restoration initiatives elsewhere in the world.
The Coldplay conundrum
Globally, we face a major financing gap to fund the infrastructure required to mitigate the causes of climate change and to adapt to the consequences. The scale of global investment isn't equal to the scale of the challenge. The Global Commission on the Economy and Climate estimates that core infrastructure investment needs to nearly double to about $6 trillion annually up until 2030.
The barriers to investment are many, but one is simply the risk of failure. I call this "the Coldplay conundrum", after the British soft-rock band's attempt to offset the greenhouse gas emissions created by their second album, A Rush of Blood to the Head. Money was transferred to southern India for the planting of 10,000 mango trees, yet, some years later, much of it hadn't made it to landowners and, as a result, few trees survived. Coldplay, for all their green ambitions, ended up with egg on their face.
Politicians face the same risk when they embark on projects to deliver environmental outcomes. Although voters expect governments to deliver various public goods, there is also an expectation that public money will be managed effectively, efficiently and responsibly in doing so. Failing on either front could attract the wrath of the electorate.
The New Zealand government faces just this conundrum over its plan to plant a billion trees over the coming decade. It already manages various grants schemes, such as the Afforestation Grant Scheme and Erosion Control Funding Programme. But upscaling these could produce poor results if funding isn't closely tied to successful outcomes.
A better solution
Results-based financing helps to manage this political risk. The idea is that governments only hand over the money once the desired outcomes are successfully delivered. The New Zealand government might guarantee to pay for trees that are successfully established, thereby attracting private and social sector parties to do this work – and to do it well. This contrasts with more common funding models, such as grants or output-based contracts, which might lead to success, but might also go the way of Coldplay.
My collaborator, investment specialist Sam Lindsay, and I have designed the Native Forest Bond Scheme, a results-based financing structure that would take the risk out of forest planting for the government, to enable innovation over business-as-usual. It is specifically designed to address the challenge of establishing continuous native forest on erosion-prone marginal land.
This is one of New Zealand's most pressing environmental challenges. About 11% of the country's total land area is mildly to severely erosion-prone but currently in pasture. Extreme weather events – which are expected to increase as a consequence of climate change – can trigger mass erosion, with costly damage to public and private property. Pastoral land, or land where forest was recently cleared, is particularly vulnerable.
Recent events in the Tasman District and Tolaga Bay, where torrents of sediment and forestry debris were flushed out of vulnerable catchments onto neighbouring properties and waterways, are a hint of the adaptation challenges to come.
Establishing permanent forest on this land is a no-brainer. It would increase land resilience and create large carbon stocks to offset emissions from elsewhere in New Zealand's economy. A succession of reports, most recently by Vivid Economics and the Productivity Commission, have all highlighted the essential role of afforestation in meeting New Zealand's Paris Agreement commitments. But landowners need help, because they often lack the cash, time or expertise to establish forests successfully.
Riding the global trend
The Native Forest Bond Scheme brings together parties around this common cause. Government provides the guarantee to pay for successful forest outcomes that generate significant public value through erosion control, carbon sequestration, meaningful regional jobs and greater biodiversity. Investors provide upfront capital for forest planting by purchasing the bond.
If outcome targets are successfully met, then investors are rewarded with interest payments, but if the planting programme underperforms, then investors bear the risk of project failure. By reallocating risks and incentives, the scheme enables parties to do what otherwise might not have been done.
Globally, other organisations are turning to results-based financing to create greener landscapes. At the city level, DC Water successfully issued such a bond to establish green infrastructure in Washington D.C., purchased by Goldman Sachs and the Calvert Foundation. At the international level, The Nature Conservancy and Climate Bonds Initiative are exploring the feasibility of sustainable land bonds, where developing countries would issue bonds to raise capital for land use change, and developed countries would then offset the interest payments as long as these changes are successful.
The Native Forest Bond Scheme is a tool for more effective financing of environmental outcomes. By tying funding to results, it creates a more credible commitment to the expectations of the Paris Agreement and UN Sustainable Development Goals. Without rethinking public investment, noble ambitions may ring hollow.