‘I see similar signals to those we saw when renewable energy was developing’: Investors on tackling land degradation

The UN estimates the global economy will lose $23trn by 2050 through land degradation

The G20 launched the Global Initiative on Reducing Land Degradation last month, in the latest sign that land fertility is finding itself on the radar of policymakers the world over. But while investors talk increasingly about biodiversity and deforestation, less talked about is the final element of SDG15 (Life on Land): to combat desertification, and half and reverse land degradation. 

Desertification and land degradation undoubtedly pose risks to global food systems – and the wider economy and finance. Scientists have warned that 24 billion tonnes of fertile soil is being lost per year, largely due to unsustainable agriculture practices, and the UN estimates the global economy will lose a whopping $23trn by 2050 through land degradation. 

There could be stranded assets, too, warns BNP Paribas Asset Management's ESG analyst and biodiversity specialist Robert-Alexandre Poujade. “Land can become degraded to the point that it can’t support agriculture. If you have investments exposed there, it could be stranded even within, say, 10 years – meaning you'll have no return at all from the land.”

But land degradation is also tightly intertwined with other environmental issues that it makes it hard to model. It is a major cause of climate change, and increases the vulnerability of ecosystems to the impacts of climate change, as well as threatening the availability of essential resources like water. 

“We hear a lot about regenerative agriculture from big brands, but to date, we’re not seeing anything in terms of quantitative data… As investors, this is something we’re discussing with them, but we’re not getting the full picture” – BNP Paribas Asset Management 's Poujade

Some investors say understanding of natural capital isn’t nearly granular enough yet to dig down into what land degradation and desertification could mean for investment. “There’s such limited awareness in our industry right now of biodiversity loss, and what it means for business impact. We don't have the data, and what we do have we don’t know how to deal with, she says. “It's not integrated into our decision making systems.” says Emine Isciel, Senior Sustainability Analyst at Norway’s Storebrand Asset Management.  

Poujade agrees that, for equities and fixed-income, data can be an issue, but says there are ways investors can start to circumvent the gaps to get a sense of what levels of land degradation risk companies are exposed to. It is possible to estimate the land footprint of a company in the agribusiness sector, for example, based on the type and amount of product they make, and then make assumptions about the required land conversion, taking into account the product and where the land is. 

Poujade says carbon content in the soil could be used as a proxy indicator for land degradation levels going forward because even small increases in soil carbon stock improve soil fertility and agricultural production, as well as contributing to sequestering carbon in the ground. This is something corporates are talking about increasingly, he notes, but the data isn’t yet there to back it up. “We hear a lot about regenerative agriculture from big brands, but to date, we’re not seeing anything in terms of quantitative data. They're claiming a lot of things, but there is no accounting methodology yet to account for this carbon sequestration potential of the soil. As investors, this is something we’re discussing with them, but we’re not getting the full picture.”

This looks set to change in the near future, though, with a Greenhouse Gas Protocol working group – which includes representation from Carbone 4, CDP, the European Investment Bank and WWF – currently developing new standards and guidance on how companies’ greenhouse gas inventories report on carbon removals and storage, land use and land use change. The new standards are also likely to be adopted by key programmes and initiatives such as the Science Based Targets initiative. 

Jonty Knox, Senior Programme Officer for Business and Biodiversity at the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC), says there are data and tools for assessing land- and nature-related risks and dependencies in the wider market, and they’re developing fast. 

“We finance what is needed to restore the land, and we’re repaid by the sale of sustainable coffee, for example” – Gautier Quéru discussing Mirova's Land Degradation Neutrality Fund

“It boils down to the basic argument of impacts and dependencies: a company’s assets will impact biodiversity, but they are also dependent upon it, and they can cause desertification and wider land degradation, which could impact supply chains,” he explains, adding that those interested in quantifying and mapping risk can start by engaging with UNEP’s WCMC tool, the Spatial Finance Initiative and the Natural Capital Finance Alliance’s ENCORE initiative (Exploring Natural Capital Opportunities, Risks and Exposure. 

“ENCORE looks at sector-by-sector impacts and dependencies, so you can understand risks for the sector you’re investing in. But that’s not going to be of use unless you have spatial elements of the asset portfolio, so the Spatial Finance Initiative has been making key strides in this area – quantifying spatial footprints and using remote sensing to monitor nature impacts and dependencies.”

Knox says there’s a need for a common language when it comes to quantifying risk and dependencies. “As it stands, there are multiple different metrics used by multiple different institutions,” he observes. “It becomes a very noisy space and it can be counterproductive.” 

Knox and UNEP-WCMC are at the forefront of efforts to identify KPI frameworks for understanding this space, for example through their Aligning Biodiversity Measures for Business collaboration and E&S Knowledge Exchange Network, holding workshops to align biodiversity and climate metrics. “It’s been super productive, but also scary in a way because of the amount of different metrics everybody is using,” he says. “It’s relatively new and we're still learning, but we're trying to align stuff across the board so there’s a common language between investors.”

There are investment opportunities too. Gautier Quéru, the Land Degradation Neutrality Fund (LDN Fund) project manager at Mirova, says investing in new solutions can come with risks, but blended finance plays a crucial role. “The challenge is that business models in that space are still unproven, or need to demonstrate a longer track record; but thanks to blended finance, we can actually accelerate this path and convince private investors to jump in.”

Back in 2016, when Mirova won a mandate from the UN Convention to Combat Desertification to create the LDN Fund – a fund providing long-term finance to land restoration and sustainable land management – the challenge was for the LDN Fund to show solutions are investible. Quéru admits it was a learning process. “We understood that there was an issue with land degradation, but it was not clear to us how this could be turned into an opportunity for investment funds and for private investors.” Mirova did a two-year feasibility study working with the European Investment Bank and the French Development Agency to refine the fund’s strategy and environmental and social standards.

So far, it has raised $150m, from mainstream investors such as Allianz, BNP Paribas and Natixis Insurance, and has invested more than $50m in projects from sustainable coffee production in Peru and Colombia, to wood production in West and East Africa. It takes a project finance approach, providing long-term mezzanine debt to projects. “We finance what is needed to restore the land, and we’re repaid by the sale of sustainable coffee, for example,” Quéru says. “Returns with a debt strategy are in the single digits space, but it's going to be attractive, especially because of the derisking.”

He believes the space could attract the same strong investor appetite seen for infrastructure, because of its similar, long-term yields. Plus it has the additional advantage of having sustainability built in. “The market is ready to scale up and the projects are ready to move to fully-fledged commercial operations that are really attractive.“ 

Quéru says there are similar investment approaches to sustainable land use as there are for renewable energy. “You can finance the projects themselves, the technology or service providers, or the operators or utilities involved,” he says. “There are also some private equity strategies that are possible in technology and service providers in the space, and also in some projects where we anticipate some potential consolidation in the market.”

Knox agrees that parallels can be drawn with renewable energy. “I see similar signals to those we saw when renewable energy was developing back in 2002 to 2003, or with the carbon markets from 2006, where real sectors were emerging,” he says. “We see many of the conditions now for the creation of a land restoration economy, and a financial sector to support these economic developments.”