Expert view: Making sustainable land use attractive to private investors

Sustainable land use investments have the potential to become a new asset class but there is a shortage of investable projects. IDH aims to close the gap between motivated investors and innovative project developers.

IDH, The Sustainable Trade Initiative works with businesses, financiers, governments and civil society to realise sustainable trade in global value chains. It is financially supported by the Dutch, Danish and Swiss governments, and it operates in different landscapes and sectors in over 40 countries worldwide.

In Indonesia, the IDH Landscape Finance program has supported the use of agroforestry to rehabilitate 4,000 hectares of degraded community-owned land with a mix of local trees, fast-growing trees and cash crops. This innovative form of restoration finance has now developed into a for-profit social venture that is set to scale up with significant private investment.

This example illustrates the program’s approach, which is based on the belief that land use must be managed intelligently to halt land and forest degradation.

Technical assistance

“The integrated landscape program was started a couple of years ago”, explains Nienke Stam, head of the program. Supported by the Dutch and Norwegian governments, the program establishes multi-stakeholder colaborations in the landscapes and drafts green growth plans with supporting business cases. “We soon realised that this approach needs to be accompanied with innovative finance options that de-risk and leverage investment by the financial and private sector.”

This resulted in the establishment of IDH Landscape Finance program, which aims to mobilise inclusive investment in sustainable production, restoration and protection of natural resources in the target landscapes. The program also manages the technical assistance for three sustainable land management funds: LDN Fund, &Green Fund and AGRI3 Fund.

According to Stam, “well-structured technical assistance can help reduce risk, and support more and better investments in sustainable and inclusive development, in and beyond the supply chains and landscapes where IDH works.”

Another fund the Landscape Finance program works with is IDH’s own FarmfitFund. This private-public initiative aims to unlock investment in smallholder agriculture that are now perceived too risky. The €100m IDH Farmfit Fundfund is backed by the Dutch government, companies including Unilever, Mondelez, Jacobs DE and Rabobank, and a US treasury guarantee. The €30m IDH Farmfit Business Support fund is funded by the UK government and the Bill & Melinda Gates Foundation.

Preparing projects for investment

“There is a clear rise in forward-thinking banks, companies, and other investors seeking to invest in sustainable land use, taking into account both socially equitable and environmental returns along with financial returns. However, at the same time, there also is a shortage of investable projects as they often require new types of collaborations. Also, the ESG criteria of the investment funds can be challenging to meet for local operators.”

Another problem for the projects is that with blended finance the ticket sizes are often too big, starting with at a minimum of €5 million. Many financial institutions even prefer to do business with investments of at least €10 million. “There are very few projects able to absorb that.”

Through its technical assistance facilities, each linked to one of the specific investment funds, the Landscape Finance program prepares projects for investment, reduce risks, builds capacity and establishes dataflows for increasing impact. Simultaneously, it also supports program teams in IDH landscapes to develop investable propositions and assist in learning and knowledge-sharing from successful models.

Stam adds: “Our role is often also in the design phase of projects to push for maximization of impact and inclusiveness. Such as securing and strengthening community and farmer’s land rights and land governance. But also developing business models and agronomical solutions that create opportunities for smallholders, youth and women. On the environmental side, it is about restoration impact, regenerative agricultural impact, and forest protection.”

Blended finance

The Landscape Finance program recently produced, together with WWF, an in-depth guide to landscape finance. The guide helps project organisers identify landscape projects, and to make them investment-ready and capable of attracting the funding needed to support truly sustainable landscapes. 

“Although they can have shared interests, green investors and NGOs often struggle to work together. This guide can bring shared language and a step-by-step approach, so that more projects can be developed up to the level where they are investment-ready and capable of attracting the funding needed to support truly sustainable landscapes,” she says.

In the coming years, the IDH Landscape Finance program wants to focus more on ways to combine seed capital with investments. “And we want to pay even closer attention to who bears the risk in these types of projects. Smallholders need more support in this regard. If you want blended finance to be inclusive, you actually need a different blend. With more grants, and results-based payments. That can assist them with the necessary transition.”