The challenge of financing the bioeconomy

By Mike Gardner

Under Brazil’s presidency of the G20 group of countries, the G20 Initiative on Bioeconomy (GIB) was introduced, culminating in a set of High-Level Principles for the Bioeconomy. Brazil also requested a report on financing the bioeconomy as a sustainable concept to which a wide range of organisations made contributions. The report notes that a diversity of financing approaches has evolved to address the wide range of activities and sectors the bioeconomy encompasses.

The report “Financing a Sustainable Bioeconomy” distinguishes between three basic types of bioeconomy, the Nature Intensive Bioeconomy, the Advanced Bioeconomy and the High-Tech Bioeconomy. Financing in the latter relies on venture capital, corporate investments and strategic alliances between technology companies and institutions. Activities here focus e.g. on medical biotechnology, industrial bioprocesses and high-value products which are bio-based.

The Advanced Bioeconomy, meanwhile, is based on the integration of innovative technologies and innovative businesses. Operations in this area, especially among start-ups in the biotechnology, bio-fuels and bio-based materials sectors, are supported by venture capital and private equity, with governments providing additional input via innovation funds and subsidising progress in research and development.

Payments for Ecosystem Services

Subsidies also play a key role in finance, markets and supply chains which sectors such as agriculture, forestry, marine resources and fisheries operate within the Nature Intensive Bioeconomy. Concessionary support involving financing or loans on more generous terms than those on the market may be provided to smaller enterprises via public financing institutions. In wealthier countries, e.g. in the European Union, farmers can obtain concessionary support as direct payments and via rural development funds, as through the EU’s Common Agricultural Policy (CAP).

Payments for ecosystem services (PES) represent an innovative financing approach which provides financial incentives for landowners and resource managers who maintain and enhance ecosystem services such as climate change mitigation, biodiversity conservation and restoration. These schemes integrate nature conservation with economic benefits.        

One of the examples the GIB report refers to here is Costa Rica’s National PES programme, which is managed by the country’s National Forestry Financing Fund (FONAFIFO) and supported by international development assistance. The programme incentivises landowners to engage in conservation activities such as forest conservation, reforestation and agroforestry. For 60 per cent of the landowners participating in this PES, payments amount to over 50 per cent of their annual income.

Another example, the Moringa Fund, is an impact investment fund. Such funds seek to invest in enterprises generating both a measurable positive impact on society or the environment and a financial return. The Moringa Fund provides finance for large-scale agroforestry projects in Latin America and sub-Saharan Africa with a proven potential for high environmental and social impact in regions with rich biodiversity. The Fund applies a blended finance concept involving investments from impact investors as well as multilateral sources such as the Global Environment Facility (GEF) and equity from institutions like the African Development Bank (AfDB) or the Development Bank of Latin America (CAF).

The PES schemes also include carbon credit markets and, recently biodiversity credit markets. Such markets exist both in nature-rich countries largely with smallholder farming, especially in sub-Saharan Africa, and in Latin America, Europe and Australasia, where new nature credit markets are emerging.

The flipside of nature credit markets

However, voluntary carbon offsets have come in for criticism by the UN Secretary General’s task force on climate finance, which argues that “Carbon credits used cannot be counted as their [polluters’] own emission reductions when purchased in voluntary markets outside of government-regulated schemes in which companies can trade permits giving them the right to pollute”. There is also concern among stakeholders regarding the potential risks of internationally traded biocredit markets in terms of “equivalence” in seeking to offset damage to one ecosystem with investments in another. A lack of clear rules, standardisation, and reliable data has been criticised, and there are fears of greenwashing and negative impacts which practices could have on local communities and biodiversity.

Global efforts addressing these issues are underway, including through the International Advisory Panel on Biodiversity Credits (IAPB) established in June 2023 to catalyse improved biodiversity outcomes through the development of high integrity biocredit markets. They are aimed at enhancing potential financing and ensuring that biocredits not only generate financial returns but also observe environmental and social responsibility standards.

The Tropical Asia Forest Fund II is an example of combining different financing approaches. Set up by New Forests Asia in 2023, this blended fund invests in forestry plantations and wood processing, as well as conservation and community development projects. Its finance structure combines institutional investors with concessional capital to allow for a higher sustainability impact. Climate finance is integrated in the returns to investors, with one class of investors seeking risk-adjusted returns for investing in Southeast Asia and the other with lower returns from investments aimed at increased environmental and community impacts. Half of the investments made by the latter class is earmarked e.g. for restoration projects, community agroforestry initiatives and community-based conservation efforts. These impact activities are not required to generate returns. Investments generating carbon offsets are sold under a long-term agreement with two of the investors which reduces risks regarding carbon offset cashflows. Initial investments have included a peatlands restoration and community livelihood investment in Southern Thailand and a forestry and wood processing investment in Laos.  

The report stresses that financing the Nature Intensive Bioeconomy entails several critical risks, given that temperatures across the world are set to exceed 1.5 degrees Celsius above pre-industrial levels in many places. Rising insurance rates, escalating subsidy costs and degraded landscapes can significantly strain financial and natural resources. And increasingly frequent and severe climate-related events result in higher insurance premiums and hence higher costs for enterprises. Mounting subsidies required to support these sectors could become unsustainable for governments. Landscapes degraded through climate change can undermine the productivity and viability of natural resource-based industries, calling for ever greater investments in restoration and adaptation measures. All this can put a damper on investing in the Nature Intensive Bioeconomy. The report concludes that addressing the above risks will be essential to ensuring its long-term sustainability and resilience.

Mike Gardner is a free-lance journalist based in Bonn, Germany and is German, Swiss and Austrian Correspondent for University World News.
Contact: mike.gardner(@)zaehlwerk.net