Category: Real World Impact Initiative of the Year (shortlisted)
In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2019.
Project overview, objectives, and reasons for undertaking it
The Land Degradation Neutrality (LDN) Fund is an impact investment fund created to invest in projects that reduce or reverse land degradation. It is linked to the UN’s Sustainable Development Goal 15.3, the aim of which is to create a ‘land degradation-neutral’ world by 2030. Mirova, a subsidiary of Natixis Investment Managers, structured the fund and will manage it on behalf of the United Nations Convention to Combat Desertification (UNCCD).
The fund was founded as part of a drive to catalyse the huge available pool of private capital by leveraging the limited public resources available to achieve land degradation neutrality. The central objective is to generate positive environmental and socio-economic impacts, alongside financial returns. Reducing land degradation via the LDN Fund could reap enormous benefits to the environment and society, which include:
- Land degradation neutrality: investments should directly result in the large-scale reversal or reduction of land degradation.
- Climate change mitigation: LDN projects should store a significant amount of additional CO2, and will also reduce greenhouse-gas emissions compared to business-as-usual approaches.
- Climate change adaption: sustainable land management (SLM) approaches will increase resilience for project areas, and the people that depend on them.
- Improved livelihoods: fund projects should support jobs, predominantly in rural areas of developing countries, helping to lift people out of poverty.
- Equality and inclusion: the fund will promote gender equality and social inclusion from project design through to implementation on the ground.
- Improved biodiversity: LDN projects will use biodiversity-friendly sustainable land management practices.
Financial scale of the project and impact
The target size of the fund is US$300m. It will use public money to attract private capital by offering investors a ‘first-loss capital’ structure. Of the US$300m raised, between 20% and 30% will be first-loss capital, mostly coming from public investors.
At project-level, the fund will typically take mezzanine positions in its investments, attracting additional commercial financing to help projects to reach a greater scale, and increase their positive impacts.
The LDN Fund plans to transition 500,000 hectares of land to SLM practices, and demonstrate the economic viability of this transition to the global investment community. By reducing and reversing land degradation, the LDN Fund will significantly increase above-and-below-ground carbon storage. It is estimated that fund projects will result in the storage of an additional 35 million tons of CO2 equivalent. Adopting SLM practices can also reduce emissions, and increase climate resilience.
Fund projects should create or support 100,000 jobs, predominantly in rural areas of developing countries, helping to lift people out of poverty. In addition, the fund will promote gender equality and social inclusion from project design through to implementation on the ground.
Project delivery and challenges overcome
The governments of France, Luxembourg, Norway, and the Rockefeller Foundation, supported the UNCCD in setting up the fund – as well as an advisory group that brought together representatives from public financial institutions, international NGOs and academia. NGOs represented in the Advisory Group include WWF, The Nature Conservancy, and the Rainforest Alliance. Mirova won the mandate to structure and manage the fund after an international public tender in July 2015, which was announced during the UNFCCC’s COP21 in Paris.
The main challenges were around fundraising, particularly in finding a fund structure that was appropriate for both private and public investors. Mirova overcame this by engaging with potential investors to understand their exact requirements and restrictions, and using Mirova’s fund structuring expertise to develop a suitable design.
Measuring success and lessons learned
The LDN Fund has reached the following milestones
- It reached its first closing on December 14, 2018 at US$60m (out of US$100m of soft commitments), and is now fully operational.
- It executed its first transaction right after the closing, investing in the Urapi Sustainable Land Use Programme, an agroforestry programme developed by Canadian Developer Ecotierra, with a first sub-project supporting fair-trade organic cooperatives of smallholder coffee farmers in Peru.
- The first strategic board meeting was held on January 15, 2019, with board members including the executive secretaries of the three Rio Conventions (climate change, biodiversity, desertification) as well as representatives of the civil society and science communities. The role of the strategic board is to provide strategic guidance, and ensure alignment between the fund and sustainable development objectives, especially on climate and land degradation.
- The LDN Fund Technical Assistance Facility, managed by Dutch sustainable trade foundation IDH, became operational on January 15 with a €3m grant from the French Development Agency (AFD), in addition to a US$2m grant from the Global Environment Facility. Technical assistance plays a key role in enabling transactions, reducing risks, and increasing development impact. The technical assistance facility will assist with pre-investment preparation, post-investment implementation, impact monitoring, and knowledge sharing.
- As donors/public investors are the backbone of blended finance, identifying a public partner as early as possible is critical. Private investors can then be involved progressively, after ramp up, especially in the fund design.
- Development finance institutions and multilateral development banks serve as driving engines – since donor governments may lack the track record and experience to engage in complex blended finance structures, so they often look towards intermediaries for support.
- A coalition between public institutions, private entities and the civil society is a powerful tool to ‘connect the dots’, align visions and coordinate various initiatives to maximise the impact