Market Potential Of Nature-based Solutions In Southeast Asia
By Joan Shang 24 August, 2021
Nature absorbs 50% of CO2 emissions but is chronically underfunded. What are the opportunities in SEA? RS Groups' Shang shares key takeaways from their study
Read more from Joan Shang →
To meet climate change, biodiversity and land degradation targets, the world needs to close a USD 4.1 trillion financing gap in nature by 2050. With its wealth of natural capital, Asia can be a strong player here. What is the situation at the moment? What does Asia need to do to develop its natural capital sector?
To answer these questions and more, we sat down with Joan Shang from RS Group, a Hong Kong-based family office dedicated to sustainable investment and impact investing. As part of the Group’s Climate Change Initiative, Natural Capital Initiative (NCI), it recently conducted a feasibility study on nature-based solutions in Asia and released a report on its findings, “Executive summary of feasibility study on market potential and drivers of nature-based businesses in Southeast Asia with Terranomics & Sustain Value”. The full report can be found here.
CWR: Congratulations on the release of the “Executive Summary of Feasibility study on market potential and drivers of nature-based businesses in Southeast Asia with Terranomics & Sustain Value”! Before we dive into that, can you share a little about the RS Group and its Natural Capital Initiative (NCI)?
Joan Shang (JS): RS Group is a mid-sized Hong Kong-based family office committed to creating a paradigm shift in people’s values and priorities so that economic growth will support, instead of jeopardize, human development and environmental sustainability. We have been active in growing Asia’s sustainable investing landscape, leveraging private markets into the impact space.
Nature absorbs 50% of CO2 emissions & provides US$72 trn/yr, yet it is chronically underfunded…
…so, we launched NCI
In 2019, we increased our focus on climate change and identified natural capital as our focus area. Nature absorbs 50% of carbon dioxide emissions from human activities and annually provides over US$72 trillion worth of self-renewing and sustainable essential goods and services—worth more than four times the US economy.
Yet nature remains chronically underfunded, by over US$700 billion/year, if not exploited. We, therefore, saw investing in natural capital as the most efficient and effective way of mitigating climate change and protecting the natural assets critical for our existence.
We launched the Natural Capital Initiative (NCI) to strengthen Asia’s natural capital sector, including attracting more capital into the sector, providing enterprise building support, and bringing experienced talent into the sector. The first allocation of NCI is a blended finance window created in partnership with Convergence Blended Finance, supporting the selected projects with seed or proof of concept funding, to carry out their solutions preventing erosion of natural capital while providing a livelihood to the community.
CWR: So, the feasibility study. What were the aims of the study and can you outline the methodology used? Plus, how will the study help you strengthen Asia’s natural capital sector?
JS: In launching NCI, we are responding to the need to build more viable business models, demonstrate success/track record (both financial and impact), and scale innovative natural capital solutions in Asia. To this end, we began exploring the idea of setting up a venture builder for nature-based solutions to provide seed funding and hands-on support to entrepreneurs in Asia, until they reach a stage of attracting institutional capital.
The study reviewed >50 business models within 5 complementary socio-economic transitions
The first step in this exploration was the commissioning of this feasibility study, to allow us to accurately understand nature-based or focused businesses’ potential in Southeast Asia. The study reviewed over 50 different business models within five complementary socio-economic transitions that could together place food, land, and ocean use on a pathway to sustainable development, including:
- Ecosystem restoration and avoided land and ocean use expansion
- Productive and regenerative agriculture & commodities
- Sustainable management of the ocean and its resources
- Sustainable management of forests
- Transparent and sustainable supply chains
A scoring methodology was then used to rank the business models based on:
- Strength of the positive environmental and social impact pathways
- Prevalence of public domain examples of viable businesses
- Assessment of growth potential (based on policy, market and other drivers)
- Interviewee sentiment (degree to which interviewees highlighted the model)
Top-scoring business models were prioritized for the next phase
The top-scoring business models were subsequently presented and discussed with us for prioritization in the next phase of the study, during which we looked at the selected business models’ potential for scaling and replication, as well as the challenges they face.
CWR: With over 50 different business models assessed in the study, can you share which were the top-scoring and if they had anything in common?
After reviewing the top scorers, and in consideration of RS Group’s funding priorities, we decided to pursue business models along two ‘vertical’ categories—Terrestrial and Marine, focusing on those that integrate multiple revenue streams to enhance their resilience and likelihood of long-lasting impact. Under each vertical category, we also selected three prioritized business models, as we share below:
The selected models all integrate carbon credit generation into their business models as a key revenue source.
Top models all integrated carbon credit generation
Among the selected business models, we also saw the importance of diversified revenue streams to ensure long-term viability of the projects, such as the combination of agroforestry commodities with carbon credit generation. Ultimately, we expect to see mostly integrated projects, combining one or more elements of the other business models.
CWR: Interesting. Why is the carbon credit generation element so important? And what is the potential for the carbon market in Southeast Asia (SEA)?
JS: Carbon offsetting as part of holistic climate change mitigation strategy have gained credibility, and voluntary carbon projects are expected to play an integral role in meeting global climate targets. As a result, there have been a sharp increase in demand for voluntary carbon projects, driven by corporate buyers. However, the supply side have yet to react fully to the surge in demand, and the pool of carbon opportunities remain insufficient to fulfill demand.
Carbon projects are key in meeting climate targets…
…but the carbon market needs to grow 15x…
…Asia could be a strong player
In addition, the quality of carbon projects can vary significantly, and demand has especially been accelerating for high-quality carbon projects that demonstrate robust ESG integration and stringent quantification of emission reduction and removal. The carbon market overall also remains nascent, and is estimated it will need to grow by at least 15 times to enable reaching IPCC’s 1.5-degree goal by 2030.
Given this backdrop, we see the development of high-quality carbon projects, particularly in Asia, as a crucial gap to be bridged. With its rich natural resources, Asia holds high potential to become a strong player in the global carbon market. However, it also presents several areas of weakness, including lack of developers with technical capacity, lack of early-stage finance, uneven project quality, unclear land ownership, and lack of standardization. These are all challenges we seek to solve via our Nature Venture Builder.
CWR: The study also identified several innovative business models that have not been implemented in SEA. Can you share some of these and how applicable they are for the region?
JS: The study did identify a wide range of innovative business models across all five socio-economic transitions outside of Southeast Asia.
Given the diversity of models already in SEA, we will focus on them
These include soil carbon project development, 3D coral printing, blue bonds & insurance, and DNA/isotope traceability, just to name a few. While they all have potential for replication in Southeast Asia, we feel given the diversity of business models we are able to find already on the ground, we lean towards prioritizing existing models over the replication of models from outside Southeast Asia. That being said, we would certainly be open to consider such models if there are entrepreneurs ready to lead their replication in the region.
CWR: In conducting this feasibility study, what are some challenges you see for Asia’s development of its natural capital sector?
JS: As natural capital is still a nascent sector in Asia, it does not lack challenges. However, we see key challenges in 4 areas:
- Pipeline: There is a lack of suitable and available established natural capital projects, as well as a lack of appropriately skilled talent to implement the projects to a level required by investors.
- Carbon Knowledge and Pricing: As mentioned above, the lack of standardization and measurement protocols is a weakness in Asia’s carbon market. It has also been impacted by the global carbon market’s demand and pricing fluctuations.
- Community: For natural capital projects to succeed, complex multi-stakeholder partnerships need to be managed, and benefit sharing mechanisms also need to be established. Some investors are deterred by the high up-front costs and large investment needed in local stakeholder and community engagement.
- Policy: Like any venture, nature-based projects require sufficiently strong rule of law and political stability to succeed. Furthermore, it also requires supportive government regulations and standards, as well as public subsidies and policies to incentivize the adoption of new production methods. These are not often forthcoming.
CWR: Finally, you mentioned earlier about solving challenges in this space with your Nature Venture Builder. Can you elaborate on this? How does the study fit it and is there a way for interested people to get involved?
JS: We hope via our Nature Venture Builder to bridge the “missing middle” of post-concept to growth phase natural capital projects in Asia.
Nature Venture Builder will bridge the “missing middle” of natural capital projects in Asia
Our Nature Venture Builder will provide targeted resources and expertise to accelerate the growth of enterprises that tackle the climate and biodiversity loss crisis through nature-based business models until they reach a stage of attracting institutional capital.
Many of these enterprises lack capital investment, and require a longer engagement period and venture building expertise to bridge the “Valley of Death”. Our venture builder will therefore seek to provide hands-on support including:
- Business Basics
- ESG and Impact Measurement
- Corporate and Financial Development
- Specialized Carbon Market Experience
We are now actively developing the Nature Venture Builder, and looking for investors, pipeline, and local talents to join us in co-developing the venture builder together. Please do reach out to us if you fit the bill!
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