The Kakariki Carbon Fund was established to offer finance and liquidity to carbon projects primarily outside of the Australian carbon market, with the aim of driving decarbonisation where the capital is needed most.
Their thesis is focussed on identifying projects in the international voluntary market that deliver broad benefits beyond carbon, including improving biodiversity and the livelihoods of local communities. Many of these projects are in developing countries, which are not well understood by traditional institutional investors. However Kakariki believes this is where the funding is needed most and where the best returns will be generated . At the same time, they do deep research and into the project development partners to ensure they’re having a positive impact on the land and the communities in which they operate.
OnImpact spoke with Izzy Jensen, founder and chief investment officer of Kakariki Capital about the nature of carbon markets today, her team’s analytical approach and the opportunities they’ve identified in funding high impact carbon projects.
The Kakariki Project Focus
The Kakariki Carbon Fund is focussed on carbon sequestration and carbon abatement, but it also helps projects delivering biodiversity benefits, or broader benefits to local communities. All projects are aligned with the Sustainable Development Goals (SDG).
The Fund is based in Australia, however the majority of their investments are offshore, in developing countries like Zimbabwe, Cambodia and Indonesia. Not only do they feel this is where the capital is needed most, meaning they can have the most impact, it is also where they see the greatest opportunities for mispriced assets.
“We are heavily focused on nature based projects, and they naturally tend to be avoided deforestation (REDD+) projects, afforestation projects, or blue carbon (mangrove) projects. Within nature based projects, the majority of projects operating today are REDD+, because the marginal cost of those projects is lower. As the carbon price increases, we expect to see more blue carbon and afforestation projects registered” Izzy says.
“We will invest in REDD+ projects overseas, but we won’t invest in avoided clearing (AC) or avoided deforestation (AD) projects in Australia, because we find it difficult to see how they’re additional, as the likelihood of the land being cleared in Australia is very low.”
The fund has a broad remit in terms of where in the cycle they can invest. The team has a detailed analytical process, and looks at opportunities all along the value chain.
“We invest at all stages of the project cycle; from project finance, for example providing the funding to plant mangroves or trees, to offtakes from the projects, to one-off spot transactions.” Izzy says.
“Depending on where the developers are at in the project development cycle, we can target various levels of risk. We provide flexibility to help the developers for their unique stage of development. For example, a developer might struggle to access capital, whether that may be due to their geography or methodology choice, if we think the projects are really important and will deliver an appropriate financial, environmental, and social return, we will step in and provide capital.”
Controlling risk in offshore projects
Investing in opportunities that others have not recognised is one way to generate alpha, but it can also come with higher risk. Izzy and the team relish the ‘blue carbon’ opportunities they’ve identified, and they work to manage risk with thorough diligence on the developers that are developing and managing the projects.
“We spend a lot of time getting to know the developers before we invest. It’s important to understand their prior development experience, their process, but also, to understand how they have aligned the project with the local communities. Strong community alignment is really important, given most projects have permanence periods of 30 to 50 years on average” Izzy says.
“For that, you need positive engagement with the local communities. If you think about a REDD+ project, you’re essentially saying to that local community; you can’t clear this land, which up until now you relied on for your income and your livelihood. And if the project isn’t aligned with them, the chance of them continuing to clear the land is very high, which greatly increases the non-permanence risk for that project.”
This work is a vital risk mitigator, and it’s the projects that are structured well that have the highest likelihood of lasting for the life of the project. Plus, it also helps to deliver on the fund’s social impact goals.
“We work with developers on issues beyond just carbon sequestration. We also look at programmes that provide an alternative source of income, as well as how they share the revenue from the sale of the credits with those communities. That may be direct cash payments, or setting up a fund that will invest in community projects, like building schools, or health clinics.”
Carbon Credits for Social Impact
The fund aims to have a dual benefit, across both carbon reduction and social impact. They recognise that the countries in which they operate will likely be the first countries to be affected by climate change.
These countries tend to operate differently, and lack reliable financial institutions, which means many institutional investors and corporates avoid the projects.
“We think that’s unfair. These people don’t have the power or the capital themselves to develop projects, but we can because we’re able to diversify risk. We’re able to help get capital into these markets, and then help deliver benefits for those communities.One or two of those projects may fall over, but in terms of our investors, the returns will be fine, because we manage risk across the portfolio as a whole.” Izzy says.
The Fund Invests For the Long-Term
Global carbon markets are nascent, formal structures are still developing, but also, financial norms are not yet established, which offers both opportunity and risk.
Kakariki have a deep understanding of both the financial potential of carbon credits, but also the importance of driving capital towards the incentivisation of keeping trees (ie carbon) in the ground and preserving natural capital.
While the fund does a small amount of short-term trading, the bulk of their gains will come from a long-term buy and hold strategy, timed to make the most of the growing demand.
“The fund is largely a capital appreciation play, it’s not a yield play.” Izzy says.
“We intend to hold most of these credits for the long term, with the view that the price of carbon will be increasing, because of the supply demand dynamics that are emerging.”
The fund will buy and hold a range of credits from high quality projects, patiently identifying the most opportune time to sell to parties, like large companies, looking to acquire credits to retire in order to offset operational emissions.
“It’s quite hard to put timing around when that kind of catalyst point will be.” Izzy says.
“However, 2030 will likely be an inflection point. A lot of countries have 2030 NDC targets, and companies also have 2030 net zero targets. We’re expecting that at the latest, it will be two or three years before then, as companies start to realise they can’t meet their targets, and demand for high-quality offsets will peak.”
NB. Kakariki Means Green in Maori. It’s also the name of an agile bird, fighting back after losing much of its natural habitat to a changing world.