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New Impact Investment Mechanism to Restore Cloud Forests in Latin America

In Latin America, 50 percent of cloud forests – tropical rainforests that form along high-altitude mountainsides regularly immersed in low-lying cloud cover – lie within hydropower watersheds. These vital and uniquely biodiverse forests help to increase volume and flow regularity to hydropower reservoirs, reduce soil erosion and subsequent sediment inflows, and ultimately strengthen energy security.

To date, however, nearly 50 percent of cloud forests have been lost across Latin America, primarily due to land conversion for agriculture and cattle grazing.

A cutting-edge impact investment instrument developed by Conservation International and The Nature Conservancy (TNC) aims to restore and conserve degraded cloud forests while increasing hydropower profitability. The Cloud Forest Blue Energy Mechanism brings together payment for environmental services with a pay-for-success model to create a first-of-its-kind financing technique that targets developing countries.

“Cloud forests are among the most water-productive of any tropical forest ecosystem, are uniquely biodiverse and deliver a multitude of clear benefits, but finance for conserving and restoring forests has fallen short of the need,” said Justus Raepple, conservation finance lead for TNC’s Global Water division. “There aren’t many connections in nature like this, where the benefits are so profound to a single beneficiary that the restoration actions can potentially pay for themselves.”

“Restoring cloud forests helps hydropower operators reduce significant sedimentation management costs, and also prolongs the life of the plants, so it avoids having to build more dams, or finding the energy in less environmentally friendly ways,” explained Romas Garbaliauskas, senior director of Conservation Finance at Conservation International.

Incubated by the Global Innovation Lab for Climate Finance (The Lab), the Cloud Forest Blue Energy Mechanism recently reached its US$ 1 million fundraising target to finance the development of three pilot projects through financial closure across Latin America. Participants in the funding consortium include the Dutch development bank FMO as lead anchor, the Nordic Development Fund, the Global Environment Facility as a member of the Latin American Water Funds Partnership and Conservation International. 

“FMO is proud to be an anchor partner in this phase of the initiative,” said Linda Broekhuizen, Chief Investment Officer of FMO. “The project brings together two of FMO’s focus sectors— energy and agribusiness—in an innovative way. As the project combines a business case for our hydropower clients with strong positive climate impacts and benefits for the local community, it fully aligns with our strategic ambitions.”

According to Leena Klossner, vice president and deputy managing director of the Nordic Development Fund (NDF), “The Cloud Forest Blue Energy Mechanism has significant potential in establishing an innovative financial instrument to support sustainable hydropower production in Latin America. Moreover, the project is well aligned with NDF’s Mandate and Strategy, given its strong focus in identifying and addressing emerging climate change issues. At NDF, we value the potential to scale-up and replicate the mechanism’s model in different ecosystems, and particularly in Africa.” 

“Restoration of degraded cloud forests in Latin America is crucial for climate resilience, but more investment is needed,” said Dr. Barbara Buchner, Executive Director of Climate Policy Initiative and Secretariat of The Lab. “The Cloud Forest Blue Energy Mechanism is an innovative and high-impact solution that will restore cloud forests and also provide economic opportunities. The Lab is proud to have helped develop it and excited to see it take off.”

Assuming the three pilot studies succeed and have similar characteristics to one of the proposed pilot catchments in Colombia, the instrument has the potential to sequester 11.4 million tons of CO2over 20 years through reforestation of 27,000 hectares of cloud forest and conserving a further 54,000 hectares. The mechanism also aims to increase water and energy security, support local economic activity, and reduce communities’ exposure to extreme climate events such as landslides, flooding and droughts.

“Natural climate solutions – like restoring and conserving cloud forests that provide important goods and services that we need on a daily basis – can deliver up to 30% of emission reductions needed by 2030 to achieve the goals of the Paris Agreement,” Garbaliauskas added.

With the fundraising target secured, Conservation International and TNC are conducting a series of exploratory conversations with prospective hydropower clients in Latin America and have identified preliminary interest in countries such as Bolivia, Colombia, Peru and Ecuador. Opportunities are being benchmarked against an enabling conditions matrix, including existing local conservation implementation efforts, such as members of the Latin American Water Funds Partnership, to leverage on-the-ground capacity.

About Conservation International

Conservation International uses science, policy and partnerships to protect the nature that people rely on for food, fresh water and livelihoods. Founded in 1987, Conservation International works in more than 30 countries on six continents to ensure a healthy, prosperous planet that supports us all. Learn more about Conservation International, the groundbreaking "Nature Is Speaking" campaign and its series of virtual reality projects: "My Africa"“Under the Canopy"and "Valen's Reef." Follow Conservation International’s work on our Human Nature blogFacebookTwitterInstagram, and YouTube.  

About The Lab

The Lab identifies, develops, and launches sustainable finance instruments that can drive billions to a low-carbon economy. The Lab’s programs have been funded by Bloomberg Philanthropies, the David and Lucile Packard Foundation, the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety (BMU), the Netherlands Ministry for Foreign Affairs, Oak Foundation, The Rockefeller Foundation, Shakti Sustainable Energy Foundation, the UK Department for Business, Energy & Industrial Strategy, and the U.S. Department of State. Climate Policy Initiative serves as Secretariat.

The Nature Conservancy is a global conservation organization dedicated to conserving the lands and waters on which all life depends. Guided by science, we create innovative, on-the-ground solutions to our world's toughest challenges so that nature and people can thrive together. We are tackling climate change, conserving lands, waters and oceans at an unprecedented scale, providing food and water sustainably and helping make cities more sustainable. Working in 72 countries, we use a collaborative approach that engages local communities, governments, the private sector, and other partners. To learn more, visit www.nature.org or follow @nature_press on Twitter.