As you might have picked up from my last few months of writing, I’ve been focusing a lot of my energy trying to understanding how the private sector depends on nature and where/why they have a reason to pay for it. Voluntarily.

As we see governments around the world struggle to pass regulation to protect the public good, and in many cases going in the wrong direction, I’ve been trying to figure out where the private sector might have a clear business case for leading the way. And by clear business case, I mean a financially material business case based purely on long-term financial health of the company itself.

The hypothesis being, if we can show corporates that investing in securing their nature dependencies and reducing their nature risk will pay dividends, they will pay to protect/restore those dependencies.

But there is one key assumption that underpins this entire hypothesis, businesses will invest in place instead of shifting their supply chain/operations somewhere else. For this first time last week, I heard a term for this, “Stickyness”.

Stickyness

Stickyness is the extent to which a business’ financial wellbeing is inextricably tied to a specific place. I heard this term last week down in Sao Paulo in a discussion focused on whether nature dependencies/risk could drive corporate investment into protecting and restoring the Amazon. The term so perfectly captures what I think may be the most important factor in determining if a business will voluntarily pay for nature, how stuck are they?

Let’s take a trip to the Amazon to ground this dynamic in reality. The Xingu River Basin is the fourth largest tributary basin in the Amazon and with 507,000 km² and it is nearly the size of France.

Two-thirds of the Basin is in the state of Pará; the remaining one-third is in the state of Mato Grosso.

The headwaters of the Xingu are in the Cerrado and about 200km after Altamira the river enters into the main Amazon River. Note that the areas in dark green are within Indigenous Territories or National Park protected areas.

The Xingu basin is at the confluence of many forces within the Amazon. Land prospecting, cattle, soy and wheat expansion, alongside growing cacao production especially as there’s been a collapse in West Africa, as well as mining and minerals refining plants in the region. And near Altamira, sits Brazils 5th largest hydroelectric plant, Belo Monte, which produces 5-10% of Brazil’s total energy consumption in any given moment.

Hydroelectric Power - Max Stickyness

The Belo Monte Dam cost approximately US$18.5 billion to build. And if the Xingu river, which has experienced major droughts in the last two years, ceases to flow, that is one giant stranded asset.

The Belo Monte dam is unique in that it has a shallow reservoir and depends on annual flows to remain consistent to produce maximum energy. A drop of 5m in reservoir height and the dam can no longer produce energy. It actually doesn’t produce energy in the dry season for precisely this reason.

Belo Monte is an example of high stickyness, the company that owns Belo Monte and all of it’s investors have a strong incentive to maintain forest cover and ensure rainfall in the Xingu basin to ensure the flows stay intact.

Agriculture - Min Stickyness (or maybe not…)

Some of you may have seen a recent Economist Brazil article, Deforestation is costing Brazilian farmers millions.

It highlights, "In areas where more than 80% of the forest has been cleared, the onset of the rainy season has been delayed by 76 days since 1980. Between 1999 and 2019, rainfall in these same areas fell by 40% in the soyabean-cropping season and 23% at maize-cropping time. Maximum air temperatures increased by approximately 2.5°C over the same period (from 30°C to 32.5°C). Less rain and hotter days mean smaller harvests and smaller revenues.”

The Xingu basin is surrounded by agricultural crops that are dependent on rainfall from a functioning Amazon biome and more regional hydrological dynamics.

Now you might say, wow, what a clear case for agricultural companies sourcing from the Cerrado to invest in protecting and restoring the Amazon to ensure rainfall!

Well hold on a second. Yes, deforestation is costing Brazilian farmers millions, but is it costing large corporates that are purchasing from those farmers?

As we’ve seen with cacao companies shifting their sourcing to South America and away from Africa, agriculture is notoriously not sticky. The world’s largest agriculture commodity buyers are constantly assessing where production is best today and where production may be best tomorrow. The relative stickyness of agricultural corporates is largely dependent on processing plants and transportation infrastructure. Commodities that require more, are likely more sticky, but only if the corporate owns those assets.

And I want to note here, it is the landowners and local companies and governments that will feel the pain, the farmers. As we see farmers around the world pushing back against the environmental movement, how can we help them to understand that they will be the ones holding the bag at the end of the day? I’d love to put my heads together with folks to think through this potential angle to drive government action where corporates aren’t “sticky” and what it would take to catalyze it.

So the big question when it comes to the stickyness of agriculture if you want to get the large corporates to pay, is whether they have anywhere else to run? To get corporates to invest in place, you not only need to show them how dependent their business is on ecosystem services in that place, but also that it will be more expensive for them to shift their sourcing elsewhere. And if there is no where else to run, they are “stuck”. High Stickyness.

But there is one other angle that is worth highlighting that one corporate shared. If clients (consumer brands) demand a “sustainable”, “climate-smart”, “regenerative” product, then corporates have an incentive to invest in place to level up farmers and get those products certified. That investment can often increase the stickyness factor and give corporates a greater reason to commit to place. From conversations with some of the larger ag companies, this was the primary reason they were investing in better on field practices and deforestation free supply chains, both due to consumer pressure and regulation.

One last note, agribusiness in the Cerrado is largely dependent on barges on the Tapajos river to export an increasing amount of their production to ports at the mouth of the Amazon. In 2023, about 34% of Brazil’s soybean exports went through northern ports in the Amazon basin​. In late 2023, a severe drought in the Amazon halted barge traffic on key waterways and pushed up logistics costs, threatening the export of Pará’s corn and soy harvests​.

On the Tapajós and Madeira Rivers – vital corridors linking Mato Grosso’s grain to Pará’s ports – water levels dropped so low that barge capacity was cut by ~40%, and some routes were temporarily suspended​. Companies had to reroute shipments to longer overland paths or southern ports. This added an estimated US$21 per ton in transportation costs for grain diverted from an Amazon port (Barcarena, PA) to a southeastern port (Santos, SP)​.

Many agribusiness companies have invested hundreds of millions of dollars in barge and port export infrastructure dependent on streamflow continuing in the Tapajos. This dependency is far more “sticky” for agribusiness and shows that ecosystem service dependencies operate at multiple geographic scopes. The challenge is designing a mechanism that captures as much of that dependency as possible, but isn’t so large with complex number of actors that you can’t overcome the “freerider” pronlem.

Implications

If you are a policymaker, project developer, startup, financier or otherwise trying to internalize the value of nature into the economy without depending on regulation, start by focusing on regions and corporates that have high stickyness. The less the stickyness, the less likely a corporate will take voluntary action and the greater need for regulation.

The easiest route is to focus on places where you have only one or two corporates that have a dependency on services from a specific ecosystem, smaller in size. This is how most traditional water funds have been applied to date. As you grow the size of the ecosystem and you grow the number of entities that have dependencies, it gets harder and harder to structure a mechanism because you need to get more corporates, often competitors, to commit together. This is where regulation and government can play a role, to get all of these actors to commit together and work together because if they all commit, they all benefit.

So let’s say you are able to structure a mechanism, then comes the convincing of corporates and the narrative. At the end of the day, the real question for Brazil and so many other countries in the world is how to translate investment in nature from a cost, into an asset. Brazil is currently one of the breadbaskets of the world, but if the Amazon turns into a desert, so does Brazil.

And this is where I may be changing my own personal tune. So much of my focus lately has been on risk. Where is it that corporates are likely to feel pain and therefore take action to avoid that pain? But, as we have seen time and time again, by the time the private sector is feeling enough pain to take action, it is often too late.

Perhaps my main takeaway from my time in Brazil is that we need to assess risk, but not for the purpose of showing where things could get worse, but for the purpose of showing where investments could be made to make business more attractive. If I was Brazilian companies, I would be investing in protecting and restoring the Amazon to make Brazil the safest agricultural investment in the world in the face of climate change. How can we make this case?

Somehow, we need flip the story of nature from avoiding loss, to ensuring a thriving future. To transform action from a cost, into an investment and an asset. We need to value nature.

Many folks in the circles I run in have disagreements over the best way to do this. If nature is fundamentally a public good, should we be looking at how we can capture private capital flows to pay for that good? Is there a way to maintain nature as a public good but get private beneficiaries on the hook for paying for it? Is there a way to do this without needing regulation.

And are there ways to do it that keep the power with the land stewards that are stewarding that land and providing those services to others? The concept of attribution rights is interesting in this regard, perhaps one I’ll write about in a future article.

For the time being, I see groups like The Landbanking Group and the Intrinsic Exchange Group that are tinkering with different models and making progress among many others. But we need many more brilliant minds working on this problem.

While the two are inextricably intertwined, I wonder where we’d be if we had as many smart people working to internalize the benefits of nature into the economy as we have working to internalize the costs of climate change.

A Simple Solution - 1% for the Amazon

I’ll end this piece with one last reflection I had in Brazil.

The path that I described above is very complex and wrought with hurdles, likely two steps forward and one step back over many years. Progress will not be linear, but I do think it’s worth doing the long and hard yards to truly quantify the value of nature and make the case that we should be paying for it. This is the system shift that will not happen over night, but once in place, could transform the global economy to work within planetary boundaries.

But maybe there’s another approach we should pursue in parallel.

Over dinner, a friend and mentor far wiser than me asked me a question. “Your job is to unlock finance for nature, what’s the simplest solution?”

And that night as I was lying in bed, I began to think. What is a “single-step” solution? One that with one action, leads to a shift. Instead of what I described above which requires many many steps and hypotheses still to be proven out.

And this popped into my head.

Corporates that operate in Brazil have a combined annual profit of ~$100B USD from Brazil operations.

If those corporates committed just 1% of their profit annually to protect and restore the Amazon, that would be $1B, essentially doubling the current amount of annual funding.

Now I’m not saying that it would be easy to get corporates to commit, but I wonder if they would think that keeping the Amazon intact is worth 1% of their profits, even for those corporates that don’t have a direct dependency on it for their business success. And I wonder if consumers would feel the same? And not just consumers in Brazil, but maybe also consumers from around the world.

You can find a thousand reasons not to try this approach, but maybe it’s worth a shot. I feel like sometimes those of us working on solutions in the nature finance and climate finance spaces are too smart for our own good. Maybe we should be looking for solutions that are, “just dumb enough to work”…

This is perhaps another flavor of the “Twin Trail” that Justin Adams has written about. Perhaps at the same time as we pursue complex approaches that will take time but could fully internalize the value of nature into our economic system, we should also pursue the simplest solutions that aren’t a long-term fix, but could get real movement going today.

As always, food for thought, and welcome your feedback 🙂

- Eric