Unlocking Climate Capital: Navigating Regulation and Risk in Nature-Based Solutions

Calculus Carbon, a Temasek portfolio firm, enables institutional grade NbS sponsors in the Global South to access the entire spectrum of capital stack across Equity, Structured Debt and Project Financing, required to finance and scale their underlying assets.

The firm is currently engaged in sell-side mandates from 20+ high quality NbS sponsors across the Latin America, Africa and South/South East Asia with professional management teams and strong balance sheets, enabling them to raise financing via leveraging their extensive network of 25+ institutional asset managers across the Global North, each with an active mandate and committed pool of capital for NbS investments.

Neelesh Agrawal, CEO, Calculus Carbon shared his views on financing nature-based solutions, investor sentiments and the future outlook for the industry in an exclusive conversation with CarbonWire.

CarbonWire: You transitioned from traditional infrastructure and real asset finance into climate finance, founding Calculus Carbon in 2022 to treat nature-based solutions (NbS) like infrastructure. What specific moments or challenges motivated you to take this leap?

Neelesh: I spent the last decade of my career in real estate and infrastructure, undertaking institutional fundraising and/or Asset Management for large-scale infrastructure projects in South and SE Asia, including Telecom, Wind Energy, Hospitality, Toll Roads and Logistics Parks.

Over 3 years ago, I was introduced to the NbS market and over time I gradually picked up the underlying similarities with a long-term infrastructure asset. Any large privately managed forest, for instance, today has an economic useful life of 30 to 40 years, with a clear plan, plant and yield phase, wherein first comes the land scouting, nursery setup, and title agreements. This is followed typically with a 3-4 year capex phase where investments are made, seedlings are planted, and 5–7 years of growth are required before returns accrue. Subsequently, the trees provide economic outputs for 3-4 decades, generating carbon credits (via sequestering carbon) as well as commodities like timber, coffee, and cocoa, depending on the underlying species of vegetation. This is not too dissimilar and much akin to a design-build-operate phase for an infrastructure asset.

Subsequently, I brokered financing for a large-scale methane avoidance rice cultivation asset in India, with a German off-taker and commodity house. That early success served to offer the necessary confidence and proof-of-work towards attempting to build a large and meaningful setup in climate/NbS finance, which eventually culminated in the founding of Calculus Carbon.

CarbonWire: You operate across various geographies, engaging with Natural Capital Funds (NCFs) across Europe, the UK and Asia. How do you navigate regional differences in regulatory, cultural, or market expectations?

Neelesh: Calculus Carbon engages with NbS projects and businesses located in the Global South for their asset level and Hold Co level financing respectively, across Latin America, Southeast Asia, and Africa. However, most of the investors and capital providers within our network are invariably in the Global North particularly Europe and the UK with the exception of Singapore and Japan in Asia.

On the carbon front, land ownership is central. Carbon sequestered in principal belongs to the landowner, but in the Global South, most farmers have very small holdings and often just one hectare. This makes it impossible for them to earn meaningful income individually. Project developers therefore aggregate land parcels, secure the carbon rights, and put profit- or other benefit-sharing mechanisms in place for local farmers.

Because of this dynamic, regulatory clarity is foremost. Countries with clear regulations such as Brazil, Ghana, and the Philippines, enable smoother financing and project scaling. Others, such as India and Indonesia, are still to provide clear guidance, resulting in local financing/retirement of credits from projects in these geographies. I think the governments do need to deliberate seriously on carbon regulations particularly for NbS projects, since transfer of land and carbon rights are sovereign issues.

We at Calculus Carbon, typically operate as an investment bank, working as sell-side bankers for asset owners in the Global South. In our work, we work with NbS focused institutional investors, who are constantly on the lookout for high-quality institutional scale projects (that can absorb at least $10–30 million in capital), backed by experienced developers with solid balance sheets across the emerging markets. We’ve typically seen each investor having a list of preferred countries to invest in, driven by the local carbon regulations, the country’s sovereign credit rating and the quality/supply of projects locally, that dictates the geography from which we present them the assets.

CarbonWire: How are market sentiments shifting in light of the recent political changes in the USA?

Neelesh: In my experience, the United States was never a significant driver of the voluntary carbon market demand. Over the past 15 years, the most significant capital towards carbon (and NbS) assets in the Global South has come in from European corporates. Asian markets, driven by Singapore and Japan have meaningfully picked up in the last 2 years, supporting demand for assets in Global South geographies where these countries have an existing Article 6 arrangement. The Middle East, driven by UAE, Qatar and Saudi Arabia, is gearing to mandate carbon markets for its corporates next, which I believe it shall more than make up for the absence of demand from the States.

So far, the only real demand from the States was driven by high margin tech companies including Microsoft, Salesforce, Google and Apple. These companies invest voluntarily, often driven by the need to offset their footprint from carbon intensive data centers and aren’t subject to a change in the federal government’s stance on climate change. Mor importantly, these companies have only increased their commitments in recent months, in the post Trump era.

So, Trump’s presidency has a limited downside on the underlying market demand. The real growth in the run-up to 2030, is expected to be driven increasingly by Asia and the Middle East, where regulations continue to strengthen in the right direction. Meanwhile, European corporates including Total, Shell, and other energy/commodity giants, along with FMCG majors, continue to drive the European demand for NbS assets in the Global South.

To share further context with your readers, the institutional demand from Global North for carbon investments within the Global South, comes up in one of two ways. Firstly, corporates with high carbon footprints within their regulated geographies (inter alia, EU, Singapore, Japan) must comply with the local regulation and a portion of this compliance could be met through investing in allied countries within the Global South. Secondly, we have financial institutions (for instance Macquarie, Axa, Aviva, Marubeni), who have become significantly active in this market over the last two years. Their mandate ranges from either sourcing credits/projects for their corporate clients, thus acting as their buy-side investment banks, or investing directly in projects for a financial return, wherein they act as a bank or a trading house. This trading-oriented setup is picking up fast, wherein there’s a strong demand for financing capex for projects where corporate offtakes (payment upon delivery) have been locked. Four of our active transactions this year follow this trend, with upfront financing being provided by banks, or commodity trading houses, on the back of existing offtkes within these assets.

CarbonWire: Since founding Calculus Carbon in 2022, what changes have you observed in investors’ willingness to fund NbS projects?

Neelesh: The investors we work with typically manage committed capital pools with individual AUMs ranging in between $100 million to $500 million. Once these funds are raised, the capital must be deployed over the life of the fund, which typically ranges from 10 to 15 years, for this asset class. Each new fund that thus comes up, strengthens the market through establishing a relatively long term demand and the focus next is on finding high-quality assets that can generate the required returns and credits for the fund’s corporate LPs.

Over the last 3 years of our journey, we’ve seen multiple NbS funds being set up each year, driving confidence in the market and the asset class. As discussed previously, these are either structured as corporate pooling vehicles, such as CAM, Mirova where corporate LPs task these teams with scouting and investing in NbS projects for their own retirements subsequently; or they could be financial investors with a dedicated pool of capital to underwrite capital financing within this asset class for a financial return.

2030, being the first benchmark for the Paris Agreement for global stocktake, is a critical checkpoint for the overall market. Many corporate seeded funds are actively deploying capital in an effort to start generating credits before 2030, for retirements by these LPs towards their net zero goals. As a result, we expect the next five years to bode well for the asset class.

CarbonWire: How does your model protect investor interest and hold accountability?

Neelesh: The market has corrected itself to reduce risk. Today, no serious investor will back a project unless it can be proven viable; they would rather not invest than risk exposure. That makes the entire system more robust.

At Calculus Carbon, we have a purely success-based feel model, wherein we charge between 1–3% of mobilized capital depending on the nature of the underlying transaction. Typicallly, we’ve seen carbon projects take 12-18 months to close, with significant variability in diligence processes and thus our fees are towards the higher end of that spectrum. For commercial asset transactions, where ticket sizes are higher and the transaction timelines more predictable, our fees are towards the lower end in line with more mature asset classes.

Investors often approach us when they run out of projects within their own pipelines, that align with their IC’s investment thesis. At this point, we help understand their mandate in detail and line up assets from within our active sell-side mandates, that best fit their IC’s thesis.

Given we have a purely success-based fee model as of now (with no retainers), we are really vested in the quality of assets that we onboard for a sell-side engagement. We are particularly cognizant of the asset’s management team profiles, their ability to have raised and returned institutional capital in the past, a track record in terms of delivery of carbon credits from their previous projects, and securing offtakes from institutional investors or corporate buyers. While these aforementioned criteria are always sought after in NbS carbon assets, the second-order shortlisting metrics are typically dictated by what the demand side is actively seeking at any point and willing to pay a premium for.

CarbonWire: Looking forward 5 to 10 years down the road, which trends in climate finance do you think will be critical for scaling NbS globally?

Neelesh: Three years ago, a majority of capital available for project financing for NbS assets was channeled towards executed projects i.e. ones which with mature plantations and already yielding credits. The market thus was largely driven by spot transactions, wherein the project developer would underwrite all or most of the upfront capex financing required for undertaking the large-scale plantation, as well as the carbon validation and verification with the registry, from their own balance sheets.

With the markets gradually maturing since, there’s been a significant uplift in the appetite for pre-financing NbS carbon projects, particularly those with underlying de-risking factors such as professional management teams and successful past corporate offtakes. As the offtake agreements continue to become more legally reliable with increased purview of regulatory carbon pricing, we expect a rapid uptick in the spectrum of financing capital available to scale this asset class. We suspect that as offtake agreements evolve to serve as an underlying collateral for investments within the respective projects, a much wider and cheaper pool of capital such as bank financing would be available for project developers to tap, earlier in the project lifecycle.

This is not too dissimilar to the evolution of the available capital stack for any new infrastructure asset. In my previous role working as an asset manager for a portfolio of logistics parks in South Asia, we had seen a similar maturing of the profile of financing available to our asset portfolio – from an expensive purely private equity funded book towards a healthy, long term balance sheet funded majorly by bank and sovereign capital It’s similar to how road projects matured. In the early days, only limited financiers would invest until contracts became secure. Now, once a contract is awarded, banks are happy to step in. NbS is moving in that same direction.

Currently, within the NbS market, the project developers within the Global South are largely limited to corporate capital (pre-financing for future carbon delivery) and the recently emerged trading capital from financial institutions and commodity houses. My hope for this market over the coming decade, is further strengthening of the corporate demand pool via regulatory carbon pricing, thereby driving up the bankability of NbS carbon assets via the underlying corporate offtakes, to then crowd-in cheaper capital providers including infrastructure funds, sovereign wealth managers and banks respectively to unlock the subsequent ramp up in scaling, required for this asset class to deliver its intended potential of up to a third of mitigation required under the Paris Agreement goals globally.