What is ReFi?

Just imagine clear blue water lapping up against mangrove forests in the sunset - these mangrove forests have been restored, that in itself is valuable. They provide high quality carbon removal from the atmosphere, removing up to five times more carbon than any other type of forest.  But the benefits don’t stop there, the restoration brings biodiversity benefits, providing valuable habitats for marine wildlife and key “nursery” environments for young fish, rich with food. They also provide new jobs and wellbeing to local people linked to the mangroves, whilst the carbon sequestration creates verified carbon credits and the biodiversity benefits also provide nature credits, helping to tick the “financial returns” box for capital investment.  As well as those benefits, the mangrove forests can continue to protect the local land from flooding and tsunamis, offering climate resilience benefits in a world which is increasingly leaving the idea of a maximum 1.5 degrees average temperature rise behind.

Flowing capital to projects that seek environmental and/or nature restoration, together with social and community benefits, can be described under a category of finance called “ReFi”. Our mangrove example above is taken directly from reality and describes the focus of “blue carbon” ReFi projects being undertaken now by organisations such as Vlinder, amongst others.

The term “regenerative finance” or “ReFi” describes finance for projects that are designed to increase prosperity in terms of regenerating environment, nature and that also have community aspects, aiming to provide a more sustainable future for all. Underlying the conjunction of “regeneration” and “finance” is the idea that the extractive or consumptive nature of traditional financial instruments, systems and services is stripped away and rebuilt so they regenerate rather than exploit. ReFi takes an evolved perspective on the power and benefits of targeted capital deployment to achieve positive “human plus nature” outcomes, and generally relies on technological solutions, like blockchain, to connect real world results with top level investment.

More than impact finance…

ReFi is similar to impact investment, but as we have mentioned there is commonly a fundamental digital element, typically employing blockchain, which may be used to simplify tracking of payments, to embed automated smart contract functionality or to make monitoring, reporting and verification (MRV) of real world results both transparent and credible.

Below we discuss some examples of ReFi projects employing different methodologies and digital solutions for project enhancement. The focus of each venture is different – they include projects aiming to provide banking services to small (environmentally friendly) farmholders, projects tackling climate change by preserving and restoring pristine rainforest, and projects encouraging regenerative land use - they generally seek to put capital in, and to create carbon, biodiversity or other credits (nature credits) as part of the output, together with providing social and community benefits. The nature credits are another key aspect of the ways in which ReFi interacts with blockchain technology - a number of the exchanges on which such nature credits trade use blockchain-based systems for listing. As a result, the technology is fundamentally integrated to the way that these projects work right from the ground up to the voluntary trading market.

At present these projects are relatively small scale, and we note that terminology usage remains mixed with some preferring to focus specifically on regenerative agriculture, for example, whilst others discuss such projects under a broader category of “natural capital”. However, we think it is helpful to explore ReFi, meaning the technology-enabled regenerative finance space, in a category of its own. We expect that these themes will be a significant area of focus for financial institutions in 2024 and will discuss why we see this moving up the agenda after the case studies.

EthicHub – regenerative farming

EthicHub is a crowdfunding platform which connects investors and unbanked small farmholders (mainly in South America) allowing them to access finance and also sell their crops (predominantly coffee) to markets worldwide.  Many small farmholders only have access to loans within their own communities at interest rates exceeding 100% per annum, due to a lack of access to finance, land being ineligible for collateral and a lack of credit records.  So even if these farmers are able to make reliable payments on loans, they are still considered to be a high investment risk.  EthicHub provides a solution for these farmers so they can directly access capital from investors at low interest rates and build a credit score.

Although this venture helps individual farmers, it also has the co-benefit of reaching people who own some of the greenest areas of the world (80% of global coffee production comes from small farmers). By including them in the global financial system and offering nature credit rewards, they are further compensated for using (and are incentivised to continue to use) regenerative farming techniques and to produce biodiversity benefits. 

EthicHub provides a decentralised finance (DeFi) system which connects the lender (investor) and borrower (farmer) without an intermediary.  Investors can lend capital to farmers or stake collateral on their behalf in the form of a token (Ethix) and there is a compensation system for lenders based on the tokens.  EthicHub employs blockchain and smart contracts to make value transfers via the internet in a fast and transparent manner.   

Savimbo – indigenous communities cleaning the world’s air

Savimbo works with indigenous people and local communities (IPLC) with a simple mission “to clean the world’s air”.  The work that Savimbo and IPLC do in the Colombian rainforest is mainly about protection and conservation of existing ecosystems and biodiversity, alongside some reforestation work. Through the preservation of forests and protection of biodiversity,  they support a number of projects which create different types of nature credits (including relating to carbon, biodiversity, water, trees and agrobiodiversity).  They pay subsistence farmers monthly micropayments to assist in the preservation of natural ecosystems, which work creates credits which are then certified and sold.  They share their gross revenue and their not-for-profit arm helps farmers who may need funds to participate initially.

Indigenous peoples and local communities have co-developed Savimbo’s biodiversity credit methodology and this has then been translated for use in global markets.  The methodology is intentionally simple and relies on indicator species (i.e. flora and fauna which can only survive in intact ecosystems).  Savimbo has deliberately avoided many of the usual scientific quantification methods, such as identification of individuals, eDNA/scientific methods, ecosystem or habitat quantification and species richness metrics.  This is to ensure that the methods are democratised (i.e. assessment can be performed by the local and indigenous peoples) and accessible (given that it is difficult to access scientific laboratories from the rainforest).  Savimbo is very focused on ensuring that local and indigenous peoples are front and centre in the development of natural capital markets, particularly in the context of biodiversity credits, as they are the main conservers of biodiversity on Earth (as noted by Savimbo, indigenous groups are 6% of the planet’s population, guarding 80% of its biodiversity and conserving 31% of the planet’s land).

Savimbo uses blockchain in relation to source data tracking and for some payments applications. They are also engaging with blockchain technology for purposes of registration and trading of the credits being generated. In order to get nature credits certified, their generation must meet the standards set out by credible verification agencies, at which point they become valuable and tradable on voluntary markets. Savimbo has been pursuing verification with Cercarbano, registration with Ecoregistry and listing on Senken, each of which rely on blockchain technology underpinning their nature credit-related services.

CreditNature

CreditNature provides “a suite of green fintech products and services” to connect landowners and investors for nature positive projects, particularly ecosystem restoration and rewilding.  They aim to catalyse investments to forge “a path to ‘rewild half the planet by 2050’”.  They combine their Natural Asset Recovery Investment Analytics (NARIA) framework, a suite of metrics measuring ecosystem integrity, with tokenisation of the assets (generating Nature Impact Tokens and Nature and Climate Impact Tokens) which tokens enable ownership of a stake in each relevant project.  The NARIA framework means that the real world consequences of investments can be measured, tracked and then directly reported to the owners.

CreditNature states that the NARIA metrics align with the Kunming-Montreal Biodiversity Framework, the Taskforce for Nature-related Financial Disclosure (TNFD), the Science Based Targets Network and Article 9 of the Sustainable Finance Disclosure Regulation (SFDR).  These global standards, as used by the financial community, enable alignment with investment policies and so meet stakeholder requirements to enable compliant investment.  Once a nature positive impact arising from a project has been verified, the resulting certified Nature Impact Units can also be issued as a tradable biodiversity credit.  The model is currently being used in England and Scotland and is being adapted for use in Africa, Central and Southern America and South East Asia. 

The Nature Impact Tokens and Nature and Climate Impact Tokens are blockchain-based tokens representing a relevant project stake, and blockchain is used for authentication of ownership, provenance and legacy. As common themes in ReFi projects, blockchain is used to support provenance and source tracking and to help avoid issues like double-counting and double-selling of nature credits. Blockchain systems also support efficient value exchange and transfer mechanisms – given that there is generally a lack of scale in ReFi projects at present, and because they are often seeking to provide distributed community benefits, being able to handle micro-payments and fractional unit asset transfers efficiently is essential to these models.

Scaling the models – drivers of change

Projects such as those featured above provide essential foundations for scaling ReFi over the coming years. Drivers include the climate emergency – many of the projects have carbon benefits associated – stakeholder motivation to drive capital towards sustainable investments, heightened awareness of climate and nature risk across the corporate world broadly and also the growing scope of international frameworks and the trend from voluntary to mandatory reporting. As a general trend, corporates are increasingly making not just carbon and climate-related commitments, but also nature-positive commitments and are choosing, for example, to disclose nature-related dependencies, impacts, risks and opportunities under the Taskforce on Nature-related Financial Disclosures (TNFD) framework (which is currently voluntary). Companies falling in scope for the EU Corporate Sustainability Reporting Directive (CSRD) may also be required to disclose about biodiversity (CSRD is mandatory for in-scope companies) and the ISSB has also been asked to prioritise adding biodiversity-related disclosure standards to its existing framework in its next two-year work plan which will be announced in early 2024.  As a result, we expect investment demand for ReFi projects to grow considerably over the coming years as corporates will increasingly need to find credible, certified projects to meet their commitments and offset relevant risks. 

There are also other relevant local initiatives in many jurisdictions around the world – one key development in England, is the introduction of the concept of Biodiversity Net Gain (BNG) requirements in planning law, meaning that developers will be required to deliver a 10% BNG for their projects (i.e. development must result in more or better quality natural habitat than was there before).  Preferably this would be achieved by enhancing and restoring biodiversity on-site, however, developers will be able to achieve this by using statutory biodiversity credits from the government.  In order to create appropriate credit supply, landowners will be able to apply to register their land as biodiversity gain sites if they meet certain criteria, and will be able to directly extract value from ecosystem preservation and improvement in this way. There are already examples of biodiversity projects in England, such as the Ilford Estate Biodiversity Project, which aim to combine landscape and habitat restoration (generating BNG units) and maintain use for food production.

The introduction of schemes like BNG aim to drive more sustainable land use by requiring an increased valuation to be given to nature during development and planning decision-making processes. Demand for credits is expected to create enhanced investment in credit generating projects and so we expect ReFi to play its part here.

Mind the gap

Clearly this all sounds like great progress for nature – and it is - but there are challenges and drawbacks both in the technological aspects of ReFi and in the biodiversity and nature methodologies underpinning these projects, which tend to be complex and also highly specific to the relevant ecosystem.  There is a risk that the use of tokenisation and blockchain can make investments and credits more complex than they need to be (rather than simplifying and increasing the credibility of particular processes). Conversely, even if the use of blockchain and tokenisation is entirely appropriate for a particular project or to achieve a specific benefit, it is not a “fix-all” solution. If the methodology underpinning the project is flawed and it ultimately does not achieve the applicable carbon, nature and/or biodiversity aims, then the planet will not see the impact it needs (no matter how safe and transparent the relevant technology is).

Participants in the biodiversity and nature-related project space clearly see the aligned benefits of using blockchain technology (specifically systems developed using low energy consumption consensus mechanisms) to offer enhanced functionality in various ways that are particularly relevant to regenerative finance – given the evolving international legal, regulatory and reporting landscape and other key biodiversity and nature drivers noted above, our expectation is that ReFi will grow quickly once the benefits have been sufficiently demonstrated through smaller scale projects such as those featured here.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area. 

This note is intended to be a general guide and covers questions of law and practice.  It does not constitute legal advice.

Authored by Emily Julier, Bryony Widdup.