Follow the money – from niche to norm

With approximately 40,000 islands and islets, Finland’s ‘Archipelago Sea’ is one of the largest island groups in the world. A top spot for tourism and agriculture, the region’s biggest environmental problem is the quality of the shallow Baltic sea. The Archipelago Sea’s drainage basin has been stu­died extensively in the past to calculate the impact of manure from domestic animals, sludge from water treatment plants, organic industrial waste, bio­waste, field bio­mass and reeds. With the problem still unsolved, the Finnish region is taking centre stage in a new Circular Economy initiative that’s being closely watched by funding experts. In focus are Environmental Impact Bonds (EIB) – a type of payment-by-results environmental fund. The idea is that private investors finance efforts necessary to achieve a given goal, and the public sector only pays for results.

From social to environmental

Finland already has experience with Social Impact Bonds (SIBs). Six such funds are currently in progress, under construction or planned, with targets ranging from rapidly integrating immigrants to promoting the well-being of children and young people. “We believe very strongly that SIBs are very useful tools for making systemic changes in the use of taxpayer money,“ says Mika Pyykkö. The Project Director for Impact Investing from Finnish Innovation Fund Sitra told EuroBiotech there’s a concer­ted effort to prove that the concept also works for environmental protection goals. Finland now wants to launch Europe’s first EIB in 2019. There are two specific projects so far. The first is the eutrophication of the Archipelago Sea. Finland produces more than 17 million tonnes of livestock manure each year, and it contains huge amounts of nitrogen and phosphorous. So why not kill two birds with one stone? Significantly reducing nutrient emissions into the Archipelago Sea goes hand-in-hand with the production of new, highly-refined manure products. Major benefits created by the project include upsides for recycled manure and tourism businesses. The second idea put forward by an EIB is related to municipalities, and how to help them switch to services produced in a carbon-neutral and resource-wise way. The project will include a group of municipalities willing to cooperate with companies and service providers. The aim is to cut greenhouse gas emissions in the participating towns and cities by 80%, while simultaneously decreasing the use of natural resources. As bonds are a fixed income investments, stakeholders loaning the money usually aren’t chasing high profits. Pyykkö expects investors interested in EIB to be similar to SIB investors: “They have some kind of social or environmental vision. In our case, SIB investors include, for example, the European Investment Fund, Finnish retail cooperative SOK Corp., the Orthodox Church of Finland and the City of Espoo.”

Northern Europe is a motor in the drive to establish the sustainable use of bio­resources. In 2015, the Nordic Bioeco­nomy Panel was set up with a mandate to develop a proposal for a joint Nordic bioeconomy strategy. One of its first actions was collecting 25 Nordic examples of the ‘new’ Nordic bioeconomy. Among them is Exilva, made by Norwegian firm Borregaard – a multifunctional additive for adhesives, coatings, agricultural chemicals and cosmetics. Made from micro­fibrillated cellulose, the aim behind its deve­lopment was to replace petroleum-based additives. Another example is Macro Cascade, aimed at proving the concept of the cascading marine macroalgal bio­refinery. Set up on the Faroe Islands, the project’s goal is to expand current biomass portfolios by adding seaweed. At the UN Climate Summit in Bonn last autumn, the Panel presented its five principles for a sustainable bioeconomy, and also commented on policy measures for driving change and business in the bioeconomy. Targeted public procurement is one of them. A label indicating levels of sustainable content in products might be another. To establish bio-based start-ups and help them scale, the Panel suggested establishing a cross-Nordic/Baltic fund for transformational bioeconomy start-ups that also issues specific “bioeconomy bonds or something similar”.
Both push and pull forces are seeking to encourage a sustainability financing sector in Scandinavia. At the Bio­economy Investment Summit in Helsinki in late 2017, Nordea Bank AB’s Head of Responsible Investments, Sasja Beslik, said the finance industry is starting to bond in whole new ways with the bioeconomy: “People discuss this subject with a verve that was unthinkable five years ago. People are talking about a revo­lution in financing – and the bioeconomy is a big part of that.”

A new InnovFin facility

The European Commission and European Investment Bank (EIB) are also setting up a new fund to stimulate private investment in the bio­economy: The Circular Bio­economy Thematic Investment Platform has been implemented within the Innov­Fin risk-sharing finance facility. Since its launch in 2014, tailored InnovFin products have been set up to serve niche markets with little access to financing – a complementary programme to the European Fund for Strategic Investments (EFSI). After an interim evaluation published in mid-2017, the InnovFin strategy is now set to be altered to better align with EFSI activities. InnovFin products are now subject to re­gular updates to reflect market evolution.

The Thematic Investment Platform (TIP) is one such update. Financing deployed by a TIP can include grants, loans, venture capital, venture debt, bridge equity and blends of all of the above. The European Commission has pledged to direct €100m from Horizon 2020 sources to the first installation: the Circular Bioeconomy TIP (CBTIP). “The platform will be established in 2018,” says Alexander Stubb. The EIB’s Vice President is also quick to point out the merits of his employer. “Together with the World Bank, we kicked-off the green bond market in 2007 with an AAA-rated issuance.” For the new platform, the EC and EIB are aiming to attract diverse sources of capital. It hopes banks, pension funds and venture capitalists will invest in a large public-private pot, along with Member States. The CBTIP will be managed by independent fund managers being scouted in early 2018, and the aim is to have it up and running by the end of the year. Thematically, the focus is on bio­economy projects that use terrestrial or aquatic biomass that is turned into bio-based products. Circularity is a plus, but not a must. Projects focussing mainly on renewable energy generation are not a priority. Time will show whether the Innov­Fin TIP can succeed at crowding-in private capital. Politicians appear confident they’ve found a way to de-risk new technologies, processes and business models: “The bioeconomy for me really is green alchemy,” said John Bell, Director of Bioeconomy at the European Commission’s Directorate-General for Research and Innovation. “And we want to help it go from niche to norm.”

“InnovFin products so far don’t reach the field.”

James Cogan, a Bioeconomy Industry & Policy Analyst working for Irish Ethanol Europe Renewables Ltd (EERL), applauds the new initiative, but also gives food for thought: “My research has led me to believe that InnovFin products are not reaching the field. Many of the banks the EIB lists as intermediaries had never heard of InnovFin when I called them, and clearly weren’t delivering the products to market.“ His verdict is likely being used by many banks as cheap finance for traditional lending secured by property and other near-cash assets. According to Cogan, what a refurbished Innov­Fin product like the TIP needs are effective delivery mechanisms, along with checks and balances on how they work.

Commercial-scale plants needed

The new fund is rooted in an EIB ana­lysis published last June which found that, while money is available in Europe for the R&D phase of bioeconomy projects, it’s much harder to attract funding for la­ter demonstration and commercialisation phases. Realisation of bio­economy-related projects like the construction of new bio­refineries is still risky in financial terms. At the same time, commercial-scale plants are needed to overcome bottlenecks and showcase how interesting returns on investments are possible.
The new fund complements other recent European Commission initiatives to foster a bioeconomy – most notably the Bio-based Industries Joint Undertaking (BBI JU). It’s a public-private partnership between the EC and the Bio-based Industries Consortium (BIC), a Brussels-based non-profit organisation with nearly 200 member companies. Exe­cutive Director Dirk Carrez regards the BIC as an “important bio-based platform for brin­ging together different sectors and entire value chains to collaborate on the bio­economy.”

BBI JU on repeat

The BBI JU has a total budget of €3.7bn. About €1bn comes from the EU‘s Horizon 2020 programme, the remainder from the industry. Discussions about a Horizon 2020 successor are already underway. The BIC, for example, called for a continued partnership with the European Commission in late 2017. The aim is to set up a Bio-based Industries Joint Undertaking 2.0: “A BBI JU 2.0 contributes to international and European objectives such as the Sustainable Development Goals and the Paris Agreement, as well as the Juncker Priorities, EU Circular Economy initiatives, the bioeconomy strategy, EU industrial policy, the Energy Union and the upcoming reform of the Common Agricultural Policy,” the statement reads. After three years of existence, the up-and-running BBI JU already has over 65 projects in 30 countries. They represent grants totalling €414m in public funding and €1.95bn of announced private investment in the European bioeconomy. In other words, for every €1 contributed so far by the EU, the private sector has invested €4.71. In terms of the goals stated when it was set up, the BBI JU is therefore a clear success. Since the joint undertaking began in 2014, 45 new bio-based building blocks have been developed, exceeding the 2020 target of 30. 90 new bio-based materials have also been developed (target of 50). Additionally, some 40 new bio-based consumer products were launched (target: 30).

The package of loan and equity instruments under the InnovFin brand are intended to make money available to technology and business innovators. However, when Cogan’s firm EERL was developing its first investment – Pannonia Ethanol at Dunaföldvár in Hungary – InnovFin and other EIB products were simply not an option. The plant‘s costs were about €150m, and financing was accomplished by a combination of equity from the company‘s Irish founders, equity from the owners of a US-based bio­refinery engineering company, and loans from two US deve­lopment banks. According to Cogan, the plant produces enough climate-friendly ethanol to fuel five million cars and enough protein-rich GMO-free feed supplement for 300 thousand head of cattle. “When EERL was first launched, the US provided most of the finance. With several years of solid results behind it, , and with all the risk and innovation behind them, European loan and equity providers have stepped in to replace them,” Cogan reports.

Kari Jordan, President and CEO of Finland’s Metsä Group, has a positive opinion about the investment landscape in Europe: “I’ve been working together with the EIB on financing our bioproduct mill project, and can only give high marks for the work done so far.” Project costs of €1.2bn include a €275m EIB loan and €75m guaranteed by the EFSI. That was topped up by a Horizon 2020 grant of €2.2m and a Finnish government grant of €32.1m. What’s glaringly absent from that list is Innov­Fin funding. But if the new TIP lives up to its promise and can be used to enhance the EFSI instrument, chances are good that in the future, higher-risk circular economy ventures can also count on financing later in the game.
“Again, the pledge to direct €100m from Horizon 2020 sources to the CBTIP to attract the financing sector is very good,” Cogan says. “But people in Brussels sometimes convince themselves that their efforts are big enough to turn around the supertankers in society. I’m not sure they can. Instead, these efforts are not even seen by the supertankers.” To get real progress, he says, you need EU po­licy expert campaigns for changes in legislation and EU member state policy: “These two levers (and market forces) are what turn the supertankers.”

First published in European Biotechnology Magazine, Spring 2018 edition