Introducing Green Impact Units
A new innovation designed to democratise climate finance
There’s a gap in climate finance that needs to be filled fast. More than ever, urgent action is required to finance the protection and restoration of nature. Doing so offers the only option we have for a sustainable future that addresses both climate change and biodiversity loss. Our previous article explored the various options available to finance ecosystem restoration, alongside their effectiveness and limitations. In this article we’ll be looking at a new innovation developed to democratise climate finance and accelerate the financing of projects that restore ecosystems and accelerate the transition to renewable energy. Introducing Green Impact Units. After this short read you’ll understand what they are, what they are not, and how they work.
As with anything context is king — we need to understand the current landscape and where gaps in finance exist for green initiatives before identifying solutions. New government-backed initiatives are being launched to support large scale restoration projects, meanwhile private finance has only grown. Yet key stakeholders in our fight against ecosystem degradation are being left out: local communities and small project developers. We need ecosystem restoration and climate action at the local level, but on a global scale. Local communities and project developers understand and value a local habitat more than anyone; they live with it on a day-to-day basis and have a vested interest in its preservation. However, financing options for these stakeholders is limited. Grants and private financing offer primary sources of funding. Grants offer attractive funding but are extremely competitive and do not provide sustainable long-term finance. Private finance offers an alternative option, yet financiers expect a high rate of return and investments are fairly illiquid, deterring most from offering funding. Of those that do finance projects (carbon retailers) they typically want at least 30% of the future carbon credits the project will generated — a very high cost for project developers.
A new mechanism is needed to fill this gap, one that is more liquid for funders and more cost-effective for project developers. Introducing Green Impact Units, a new fundraising instrument developed by Biodiversity & Ecosystem Futures (BEF).
What are Green Impact Units?
Green Impact Units are a new funding mechanism whereby the proceeds are exclusively applied to finance, in part or in full, new and / or existing eligible green projects that generate environmental assets (e.g. carbon credits).
Sold by certified project developers, Green Impact Units are the sale of fractional entitlements to environmental assets. Through providing funding towards a project, financiers are entitled to a percentage of the environmental assets generated by the green project throughout the duration of the Green Impact Units.
Let’s run through an example. Imagine a small NGO located in Brazil wants to conduct a reforestation project in the Amazon covering 10,000 hectares of deforested land. By completing the project not only will local biodiversity benefit, but 80,000 voluntary carbon credits would be generated annually due to the carbon sequestered by the restored habitat. To initiate the project the NGO needs $100,000, however after the first 2 years the annual revenue generated from the sale of the voluntary carbon credits will finance the project without the need for further funding. In exchange for the $100,000 the NGO is willing to give up 10% of the voluntary carbon credits generated by the project over a 5-year period.
After passing BEF’s due diligence checks, the NGO creates 1 million Green Impact Units. 900,000 units are retained by the NGO, whilst the remaining 100,000 units are offered for sale at $1.00 each.
Along comes 3 different organisations that purchase different amounts of the available 100,000 units. They have purchased the units because they wish to use any future voluntary carbon credits received from the project to support their net zero targets. The breakdown of organisation funding contribution is as follows:
Organisation A: $50,000 (50,000 units)
Organisation B: $30,000 (30,000 units)
Organisation C: $20,000 (20,000 units)
Now the NGO has achieved its fundraising target it begins the reforestation project. It takes 1 year to begin generating carbon credits, of which it generates 80,000 annually. For the remaining 4 years 10% (8,000 carbon credits) are distributed annually to the funding organisations. The allocation per funder is as follows:
Organisation A: 4,000 carbon credits annually, 16,000 carbon credits in total
Organisation B: 2,400 carbon credits annually, 9,600 carbon credits in total
Organisation C: 1,600 carbon credits annually, 6,400 carbon credits in total
Once the duration of the Green Impact Units’ has been surpassed the NGO no longer has to share any of the voluntary carbon credits with the funders.
So what are the benefits?
From the perspective of the funders, funding through Green Impact Units enables them to proactively support a green project and lock-in environmental assets for the future. Let’s go back to the example. A conservative market value per voluntary carbon credits for the next 5 years is $8.00. To purchase the equivalent number of voluntary carbon credits (16,000 units) Organisation A would need to spend $128,000. For taking a risk in supporting a project, funders not only receive environmental assets below the market price, but lock-in environmental assets and avoid future price variation. In addition, because more than one Green Impact Unit is created it enables a funder to commit to a percentage of the fundraise target rather than the entire amount, enabling them to spread their funds across a number of projects to diversity their risk.
An additional benefit to funders is flexibility. Green Impact Units can be resold by funders to enable them to adjust their risk. Provided there is an interested buyer, the funder can sell all or a portion of their Green Impact Units to another organisation to reduce or increase their risk profile.
Looking at the other side of the equation, the fundraiser (in our example this was the Brazilian NGO) is able to access funding at pace and with greater flexibility. Unlike other private financing options, Green Impact Units enable fundraisers to access finance from a broader range of funders at a relatively low cost when compared to alternative options. This also enables project developers to access finance from a global set of organisations with little to no existing relationships with the funders prior to the fundraise.
What Green Impact Units are not.
It is important to distinguish what Green Impact Units are not to prevent any misunderstanding.
Owning a Green Impact Unit does not:
· Give you any equity or rights towards the underlying project or fundraiser.
· Give you a right to receive financial payment from the fundraiser.
· Give you the right to require repayment of the amount committed.
Owning a Green Impact Unit gives the owner fractional entitlements to environmental assets generated by the project within the duration of the Green Impact Unit.
To learn more about Green Impact Units and explore whether your project could be eligible to fundraise through them, reach out to us via collaborate@bef.earth.
