Restoration: How to close the funding gap

The market often decides

Corporations have market-​driven incentives to meet their carbon reduction commitments, to promote sustainability in supply chains, and for impact and sustainable branding opportunities. Such priorities tend to favour restoration through agroforestry in areas with business presence, or active restoration projects deemed to have potential for carbon draw-down and story-​telling. However, limited knowledge and lack of a strong business case often limits corporate willingness to fund restoration. This is especially true for natural regeneration approaches.  

Few projects fit investment finance

Unlike corporations, asset managers are driven primarily by Return on Investment (ROI). Investment finance from asset managers therefore prioritise low-​risk restoration projects from which commodities can be derived, such as timber or agricultural products, or credits from restoration benefit markets. Yet, there are few available projects in the pipeline that meet such criteria. Investors in general deem forest and landscape restoration as a high-​risk, unknown asset class, with ROI that is too low to justify investment risks.

Löfqvist’s study finds that market-based incentives alone drive corporate finance to fund active restoration and agroforestry type of restoration approaches. "This is promising," says Löfqvist. "However, it also indicates that there is, to some extent, a mismatch between financial restoration feasibility and restoration priority." Prior scholarship has identified the global tropics to be of highest priority for restoration interventions (based on biodiversity, climate change mitigation, and cost minimization), but private actors often shy away from such areas due to perceived high risk. Further, there is low interest in natural regeneration approaches, which in some cases is the approach that is most suitable to recover functionality of ecosystems.

Approaches for policy and financial solutions

"There is a strong interest from private actors to finance restoration, but stronger public support is needed to scale this finance and to guide it towards projects that promote ecological integrity and equity in landscapes" asserts Sara Löfqvist. To achieve this goal, there is a requirement for stronger policy mandates, expanded and diversified markets for restoration benefits, and financial instruments such as green bonds and blended finance instruments that decrease investment risks. "These measures could help scale private finance towards ecologically sound projects whilst also accounting for social and environmental justice objectives", Löfqvist concludes.