Macquarie and Partners Build $25 Million Partnership to Find REDD Projects

Hannah Kett

Profit-minded banking group Macquarie has tapped the expertise of environmental non-profit Flora and Fauna International in the past to identify endangered rainforests that can generate carbon credits if saved. Now they’ve formed a partnership to scale up the activity, and they have $25 million to invest.

31 August 2011 | Building successful carbon projects is difficult. Even if you have the on-the-ground knowledge to navigate the carbon standards and work with community partnerships, you still need the financial backing to begin the project.

A new partnership between the Macquarie Group and Fauna and Flora International (FFI) is trying to address this challenge by launching the BioCarbon Group Pte Limited to identify and fund REDD projects around the world.

“We believe this is a truly unique arrangement,” says Brer Adams, an Associate Director of Macquarie. “What makes this very different is this is a global agreement between BioCarbon and FFI. It covers all forest conservation opportunities that might suit commercial investment across FFI’s 41 countries.”

The two groups have complimentary strengths that provide a strong basis for developing successful projects. FFI brings the on-the-ground experience with a global network of projects and the ability to scope potential sites for commercially viable REDD projects, says Paul Herberston, the Environmental Markets Programme Director of FFI. He says that Macquarie has the ability to raise capital and provide legal support.

“It looked like a really nice combination of two very distinct organizations with very different approaches and outlooks, working together on a program of work that we thought was a real opportunity for moving forward with the investment of conservation in tropical forests,” says Herbertson.

Macquarie has recruited two additional investors for BioCarbon: International Finance Corporation (IFC) and Global Forestry Partners.

“One of the things we have grown to appreciate is the need for innovative partnerships which requires financial organizations, organizations with ground capability and proven conservation and community development tools and unique partnerships that up until now have not been well done” in the forest carbon sector, says David Gibson Campbell, a Senior Environment and Social Specialist at IFC.

In total $25 million has been committed to BioCarbon by these three organizations and is now available for projects. These partners are all equal shareholders who will share in the benefits.

Now that the money is there, the for-profit company and NGO partners must bring their vision together to ensure that this financing is used for the best projects.

The Beginning of Something Great

Four years ago, FFI gained some publicity for a carbon sequestration project they had completed through a partnership with Merrill Lynch. The project, which was in the Aceh region of Indonesia, was the first REDD project to be certified under the CCBA standards.

So when Macquarie became interested in exploring opportunities around REDD, they approached FFI. The two signed a three-year agreement just over three years ago.

“It was sort of a cooperative development agreement,” says Herbertson. “The idea was that we would work together and play off our strengths…to try and explore different opportunities for investment in REDD projects globally.”

The initial focus of this partnership was developing projects in Indonesia, focusing in on specific sites. Though they ran into the challenges of a changing economic and political climate, the two groups continued forward.

“FFI really saw it as an opportunity to build our own internal resources and to get areas of land under conservation management for the long-term and having that financed through innovative mechanism such as REDD,” says Herbertson.

Starting in Indonesia

During the three year agreement, a focus has been the Danau Siawan Belida REDD+ project in the Kalimantan region of Indonesia. With its wetland and peat swamp forest, the 46,000 hectare project site performs critical ecosystem services in support of the Kapuas River—a source of food and livelihood for 3.7 million people in the West Kalimantan Province.

The site is under threat from the possibility of an oil palm plantation; indeed, licenses for oil palm have already been distributed for areas bordering the site to the north, south and west. The project team has focused on reducing this threat to the site, by working closely with the impacted communities and the region’s government.

Beyond the water regulation services, this project site is biodiversity rich and includes some of the last remaining Indonesian orangutan populations. In addition, there are a number of fish and plant species—some of which cannot be found anywhere else in the world.

The project site is also a source of food and livelihood for the villages in the region. Community wellbeing is central to the project’s objectives and the team works closely with community representatives to carry out the project. Community members will be trained to participate in the carbon, biodiversity and even community monitoring.

This project is not complete; it is currently undergoing both the VCS and CCB certification processes. In fact, it continues to be a focus as Macquarie and FFI renew their partnership in the form of BioCarbon.

“Last year, we took the decision to expand our activity in REDD and to raise additional capital with a small number of investors so we could scale up our forest carbon business,” says Adams. With this in mind, they formed BioCarbon and asked FFI to be a partner, providing on-the-ground support.

Defining the Goal

Partnerships between for-profit and non-profit enterprises can be tricky because the two groups often have different goals in their work. And Macquarie does not hide its central goal.

“We will only go forward on a project if we are confident that it’s sustainable financially. For us, that means it needs to earn a commercial return,” says Adams. “That is true across all of our projects.”

In the case of BioCarbon, this has meant focusing on forest carbon projects.

“I am confident about the macro-trends in recognizing forest in future carbon and climate change agreements. In the mean time, we are seeing sufficient depth in the voluntary market to support this business,” says Adams. “We, as BioCarbon, see market links as the best way to enable sustainable finance for forests. That is certainly what the policy makers say.”

“We think this is a very exciting initiative and a very strong demonstration of how markets can invest in conservation of forests and contribute to reduce deforestation,” he adds.

IFC sees the same financial opportunity with this partnership. While they have been presented with a number of forest carbon projects, this was the first project they decided to fund. “This was the first that we thought had the right blend of financial upside and some real ground-breaking replication capability,” says Gibson Campbell.

This focus on financial return does not overshadow the ability to create forest carbon projects that benefit the environment and the communities that exist in and around the forests. “We do very much try to align the project with the investor. There is no reason why these projects can’t have the added value for FFI in terms of conserving areas of really high biodiversity value,” says Herbertson.

And if it looks like the project is missing something, the on-the-ground partners are there to ensure changes are made. FFI’s long relationship with Macquarie has made this especially possible.

“We are able to be quite transparent and open about the work that we have been doing and communicate our concerns extremely early if we are concerned about certain options,” says Herbertson.

And Herbertson sees this as an opportunity to further develop forest carbon projects. “We really see this as an innovative and exciting collaboration that is not without its challenges but the potential for creating projects that are sustainably financed over a long period,” he says.

Building Projects

Beyond the commercial viability of projects, the environmental and community benefits are central to BioCarbon’s decision to fund the project.

“We are working extremely hard to ensure that those projects are successful and that those projects really do provide and offer the biodiversity and community benefits that are promised. It’s a big promise but it’s a big opportunity,” says Herbertson.

FFI has the ability to follow-through on this promise because of its diverse background.

“FFI operates in 41 countries globally and this gives them the opportunity to come forward and recommend good quality, commercially viable REDD projects and for BioCarbon to invest in those projects,” says Adams.

Though FFI is not the only organization with projects funded by BioCarbon, they are the main implementing partner. For FFI, this includes a position on BioCarbon’s advisory board as well as FFI staff holding roles on the steering committee with BioCarbon staff.

This type of involvement is to “ensure that we are really making the best value both for BioCarbon as a business and obviously for FFI as a conservation organization wanting to have impact in managing areas of land and protected forests,” says Herberston.

BioCarbon does look to a variety of sources for viable projects. In fact, they have a number of projects in development and in the pipeline that are not directly tied to FFI. According to Adams, this expanding portfolio of projects will allow them to increase BioCarbon’s work as carbon markets develop.

Continuing to scale up projects is important for investors because it will increase the return. Without replication, according to Gibson Campbell, the cost of certifying a single project is too high. BioCarbon is an opportunity to scale-up, replicate projects and bring the transactions costs down.

With an eye on the financial viability, Macquarie develops and finances projects that take into consideration both the carbon value of the forests and the support of such a conservation project by locals. Macquarie’s own projects are developed with support from a team of forest carbon experts as well as FFI’s community-engagement expertise.

“FFI has a real strength in community-engagement and livelihood support. We look to them to undertake that community assessment in any project,” says Adams.

“The organization is really set up to do that, do it at scale, replicate it, and ensure quality result at the bottom level and some assurances to offtakers that carbon is real,” says Gibson Campbell.

This assessment comes in the form of the Free, Prior and Informed Consent model. Community support is a central-focus of FFI in all REDD projects as they have full-time community specialists on each project ensuring that the correct safeguards are in place.

“It is something that is really core to our beliefs in the way that REDD should be implemented,” says Herberston. “It is extremely important from our perspective that that engagement is done effectively, transparently and in a way that really benefits those communities and helps them understand the opportunities as well as the risks.”

Community support, which could be in the form of local communities, local landowners, concession holders or governments, is essential for projects moving forward. “That helps us to be confident about the risks and helps to minimize risks of the project,” says Adams.

“We believe that are strong supported by local communities that live within a forest or adjoining a forest or depend on a forest is very important to the long-term success of any project,” he adds.

Considering Standards

Community support and financial viability go hand-in-hand, especially when considering carbon credit verification.

“We need to be confident that in any project, there is a methodology already available or we can develop one that will meet the best standards of the day,” says Adams. “For us, that is the verified carbon standard and we also have a commitment to seek Community, Climate Biodiversity standard. We need to be confident that we have a methodology that can get us through both of those standards.”

These standards add the additional concern of biodiversity—which is an essential aspect of the FFI project model. “By properly addressing the biodiversity and community safeguards, they are actually incorporating that into their risk analysis,” says Herberston. “That is a really fundamental thing they need to get a grip of and understand if they are hoping to have these projects remain profitable in the future.”

IFC is in agreement. Though they do not endorse any specific standard, Gibson Campbell thinks that any forest carbon project needs to have a direct impact on biodiversity and local communities. “We are reasonably articulate in looking for an environment and social management system that rolls all the way through that,” he says. “I think that is very much part of the business proposition here.”

With these standards as the ultimate goal for the developing projects, the partnership seems to have a solid basis. But since it is new, the success of this partnership to achieve these standards remains to be seen.

An Example for Others

The decision to continue BioCarbon’s work after the first $25 million has been invested in forest carbon projects will be in the hands of the board. But even beyond that, the partners think that the projects and BioCarbon can serve as a model for others.

According to Gibson Campbell, replication is something IFC looks for in an investment. “What we are interested in is replication, mobility and agility,” he says. “That is what we find fascinating about this partnership; they have got a good market focus, they are credible and they have a partnership with a very solid ground capability within the conservation areas.”

“I think it’s an extremely exciting model that I hope can be a demonstration to other organizations that are thinking about this sort of approach and wondering how they can finance some of the opportunities that are available through this,” says Herbertson.