Sustainable entrepreneurship, a promising avenue for climate finance?

Increasing concerns about rising greenhouse gas emissions and climate change vulnerability due to deforestation and forest degradation has led to the creation of numerous policy frameworks. The United Nations REDD+ scheme is, perhaps, the most prominent of them.

The launch of REDD+ generated a buzz in the environmental policy arena, presenting a prospect to obtain large scale funding for cost-efficient emission reductions with corresponding development possibilities. Essentially, REDD+ is a climate finance mechanism designed to reduce emissions from forest related activities whilst at the same time fostering development and preserving biodiversity in the Global South. However, just like many other initiatives of this kind, REDD+ has been severely challenged in living up to its expectations.

Climate finance: challenges and opportunities  

It has become apparent that development solutions based on external monetary inflow, be it foreign aid or climate finance, often fail to deliver sustainable outcomes. A core issue is a built-in dependency on a continuous inflow of external finance. Not only is it unsustainable, as many projects seize to exist once the money well dries out, it also cements the already prevailing power imbalance between the Global North and the Global South.

Furthermore, financial transfers implemented by state actors in countries with corruption issues and weak institutional capacity can only deliver sub-optimal value.. Additionally, lack of knowledge about challenges on-the-ground and weak governance capacities play to the disadvantage of top-down approaches in climate finance. Many of these issues are intensified by obscure land titling, which makes it harder to ensure that profits end up in the right hands.

Project plans designed by development partners overseas often risk neglecting aspirations of the local communities. As a result, many initiatives like REDD+ may end up producing strict conservation areas, displacing forest communities from their homes and denying them their livelihoods. And when forest communities are gone, so is their knowledge about forest management. Besides the obvious moral issues with this, studies show that when sustainable forest management initiatives don’t provide accepted alternative livelihood options, there is a higher risk of so called deforestation leakage, meaning that deforestation is simply shifted to another area.

With the above in mind, it is essential to look for new ways to utilize climate finance resources. Climate finance needs to realize environmental objectives by empowering communities on the ground to develop on their own accords. Investing in sustainable entrepreneurship may be one such solution.

Sustainable entrepreneurship

Over the last decade the concept of sustainable entrepreneurship has attracted increased curiosity. Unlike the conventional approach to business which is primarily focused on financial gains, sustainable entrepreneurship seeks to simultaneously generate social, environmental, and financial value. These qualities create a perfect fit with REDD+, the Bonn Challenge, and other climate finance supported initiatives.

What is more, many scholars argue that an increasing number of empowered local entrepreneurs in a country can potentially drive institutional change, shaping institutions in a manner that favours sustainable businesses. Some scholars even go to the extent of stating that sustainable entrepreneurship is imperative for sustainable development in the Global South. Yet, despite this perceived breakthrough potential, sustainable entrepreneurship is rarely a go-to approach for the implementation of climate finance schemes.

It does not, however, mean there has not been any successful applications. Both within REDD+ and in other climate finance initiatives, there are case studies that demonstrate positive potential of projects implemented according to models based on sustainable entrepreneurship. Two such examples are the Kulera REDD+ project in Malawi and the Chocó project in Ecuador.

The Kulera REDD+ project is funded by carbon credits and supported by the social enterprise Terra Global in combination with the local NGO Total LandCare and community associations. Deforestation in the project area had previously been driven by unsustainable corn production. The project supported the community with enhanced crop varieties and capacity building on conservation and agriculture, decreasing the need for further deforestation. After discussions with the community the project furthermore initiated entrepreneurship built on agroforestry, solar panels, and wood stoves. As a result, farmers in the project area established financially self-reliant agroforestry businesses and poverty levels went down. The project also reduced deforestation, partly due to a business model which depends on standing forests.

Another example is the Chocó project in Ecuador, supported by the university of Sussex and a range of private and public donors. The business plan is to produce high end organic cacao in an area where deforestation previously was driven by unsustainable cacao production. This business plan was designed based on the aspirations of the local farmers. The enterprises were set up in combination with a protected area that also hosts a research centre on sustainability. The research centre employs local people, hence providing jobs and increasing education levels in the area. Through capacity building, enhanced crop varieties, and by means of shorter supply chains, cacao from the project area is now sold at five times of the original price. This has reduced poverty in the area as well deforestation.

The key to success of this project is in its set-up. Focusing on community needs and aspirations from the start resulted in a solution that provides options for alternative livelihoods that rely on the protection of the surrounding forest.

Looking ahead

The Kulera REDD+ project and the Chocó cases illustrate how sustainable entrepreneurship can address environmental problems in a way that generates financial profit. Sustainable businesses alleviate poverty whilst creating and strengthening social, economic, and environmental resilience. And climate finance scheme, such as the REDD+, could help foster such initiatives.

One way to avoid the issues with top-down finance approaches mentioned above is to provide climate finance directly to local non-governmental organizations (NGOs). These NGOs tend to know the local challenges and dynamics better, and can work as important conduits between sustainable enterprises and markets. Climate finance can then be channelled through NGOs, providing “boosts” to cover start-up costs for the new sustainable businesses.

Over time the need for external finance will decrease and ideally disappear, as the sustainable enterprise would develop a financial engine of its own. In this way, development projects would have self-reliance as a core from the start, and base their project plan on a clear understanding that the source of finance is not infinite. This alone would be a great benefit, not only for empowerment of the forest communities, but also because lack of funding is a common struggle in many climate finance initiatives.

By all means, sustainable entrepreneurship isn’t a silver bullet for sustainable development, and it is important to note that entrepreneurship in the Global South often face institutional challenges. Furthermore, the pressure for deforestation is strong, and external finance still has a role in buffering this threat and supporting sustainable development in low-income countries. Yet, it is apparent that current approaches to avoided deforestation and poverty alleviation has not reached satisfactory results, and that there is a need for new approaches that genuinely put development aspirations of ecosystem dependent communities at heart.

Channelling climate finance to sustainable entrepreneurship may be one of the best available strategies to promote self-sufficient sustainable development of the countries in the Global South. Such use of climate finance could empower communities to take a leading role in their own sustainable development, and help untangle aid dependency.

Written by Sara Löfqvist. Sara works as a research assistant at the Institute of Environmental Decisions at ETH Zürich. Her research investigates various themes related to the role of capital in coupling environmental protection with poverty alleviation amongst ecosystem dependent communities. She finished her MSc in Environmental Economics and Management from SLU Sweden in 2017, after having spent the second year of her MSc at ETH Zürich. Prior to that Sara studied economics and sustainability at Uppsala University and University of British Columbia, she holds a BSc in Business and Economics from Uppsala University.