Each year, thousands of stakeholders invested in climate mitigation convene in New York City for Climate Week: seven full days of programming that seek to tackle the greatest challenges in protecting our planet. This year, AFF teamed up with 1t.org US Chapter and the Doris Duke Foundation to convene leaders in the natural climate solutions space to discuss why new approaches to financing carbon projects are needed to maximize the climate impact of nature-based solutions. Featuring speakers from the Doris Duke Foundation, Gordian Knot Strategies, REI Co-op and others, we asked participants what barriers they currently face in financing carbon projects and what solutions may exist in scaling investment in the market.  

Access to sustainable sources of financing is a fundamental challenge to implementing forest carbon projects. At AFF, we believe the quality of projects and their outcomes are inextricably linked to how they are initially financed. Most carbon projects today are financed through traditional commodity financing approaches where investors provide funding based on the expectation of a steady and predictable flow of revenue. Thus, a project’s financial viability is deeply reliant on its ability to produce and sell a specific number of carbon credits consistently. This may lead some developers to utilize projected baselines that may incorporate unrealistic assumptions to allow for earlier credit generation.

Barriers and friction arise when groups act outside of their core competencies. For corporate buyers of carbon credits, friction arises when companies face the decision of determining which carbon projects to invest in and which credits are high integrity. To support a company’s journey of understanding the market, Taldi Harrison, Director of Community & Government Affairs at REI Co-op, shared how REI works with carbon credit rating agencies and consultants to determine which projects and credits match the mission and needs of their company. Groups such as rating agencies and consultants can be viewed as translators, assisting with the language barrier across business and science communities.  

A central theme discussed throughout the event involved the need for blended finance to sustainably support project developers and overcome risk gaps throughout their various development stages, particularly in catalyzing projects in their early stages. In the early stages of development, there are risks involved in initial project design and implementation. There is a higher uncertainty of carbon outcomes as much of a developer’s performance and carbon delivery track record are in the discovery phases. As explained on the panel by Sacha Spector, Program Director for the Environment at Doris Duke Foundation, private philanthropy can step in with at-risk capital here where it might not make sense yet for other financial actors to engage. AFF president and CEO, Rita Hite, shared on the panel how philanthropy and government funding could be pooled together as a sustainable source of low-cost capital to support project developers and get projects off the ground.

The corporate sector also has a role to play in catalyzing early-stage nature-based projects. One other idea shared by Rita is the concept of new, equity-based contracting models for corporate carbon buyers to consider. Currently, most buyers purchase carbon credits from the spot market or through unit-contingent offtake agreements. Neither address the inherent uncertainty of nature-based projects. Rita shared how equity-based models could allow buyers to come in on the “ground floor,” sharing in both the risk of project underperformance and the reward of project overperformance. This aligns incentives across stakeholders, providing equity stakes for the corporate buyer while also preserving equity for the project developer and landowner communities. 

The call to action from all speakers was clear: innovative financing is needed to invest in natural climate solutions across the voluntary carbon market. Companies and organizations like those who took part in Climate Week are already on the cutting edge of these solutions, but more partners are needed to make the VCM as powerful as we know it can be.  

Join us by contacting AFF to learn how your business or organization can be a part of a movement to protect forests, uplift the small rural landowners who manage them and create sustainable climate mitigation to protect future generations. For more information, email media@forestfoundation.org.