Why socially valuable projects struggle to become investment-ready

Over the last three months, I have been working with my team on a project related to a sustainable timber-to-housing supply chain in Brazil. Our project has an ambitious vision: to provide newly built timber housing for low-income riverside families at a price they can afford. However, is this project bankable? As we worked through the model to answer that question, I realized that this is exactly where many socially valuable projects struggle. They may have profound public value, but that does not automatically make them financeable. If a project with clear housing and environmental benefits still struggles to appear financially viable, that says something important about the limits of conventional finance.

One reason is that the financial profile of these projects does not fit what traditional investors usually want. Our project stretched across a long supply chain: securing green logs, processing them through sawmills and kilns, potentially investing in processing capacity, and then transporting the kits before housing construction could even begin. Meanwhile, many of the costs came upfront, while revenue would not be generated until the houses were completed, or close to completion. This meant the project faced a long period of negative cash flow. Capital had to be committed early across multiple stages.

Returns were also difficult to predict. In our project, our market analysis gave us a serviceable obtainable market of 8,888 housing units, but that did not mean real demand would match that number exactly. We still could not be sure whether the projected scale truly reflected what local families needed, or whether there might be oversupply or unmet demand. We also set housing prices based on official Brazilian income and subsidy data, which gave us a useful benchmark, but not certainty. On top of that, part of the project’s value might come from carbon and social credits, which cannot be fully captured by standard financial metrics. Clark et al. (2018) argue that private finance does not naturally flow into many sustainable development projects, especially when they are complex, long-term, and difficult to standardize. That argument felt very real in this project.

This is where sustainable finance, especially blended finance, becomes important. Before this project, I tended to think of sustainable finance mainly as “green investment.” Now I see it differently. It is also about making a socially useful project more financeable. In that sense, blended finance can serve as a bridge between public purpose and financial discipline. A project like ours, which focuses on housing, local development, and sustainable timber use, may not fit the return expectations of traditional investors on its own. But with support from a policy-oriented bank such as Caixa, part of the early risk and upfront burden can be absorbed in a different way, making the project more investable for other investors by improving its risk-return profile. This is consistent with Popovic et al. (2024), who find that blended finance can make long-term infrastructure investment more attractive by reducing risks in the early stages. Rode et al. (2019) similarly argue, based on the Unlocking Forest Finance project in Amazon regions of Brazil and Peru, that blended finance can help address the mismatch between sustainable land-use investments and the expectations of private investors.

To address this, we tried to build a model that incorporated a blended finance structure into the project. However, the modeling process also revealed a major data challenge. In many parts of the project, we had to make reasonable assumptions, including sawmill and kiln capacity, energy consumption, timber residue share, and construction efficiency. Even when we found useful benchmarks, we could not be fully sure that they matched the local reality in Pará. On one hand, this showed me why sensitivity analysis is so important. On the other hand, it became clear why there’s other technical partners in this project, as their expertise could help us verify our assumptions and make the model more realistic.

More than anything, this project changed my understanding of sustainable finance: I no longer see it simply as a way to invest in “green” projects. Instead, I see it as an effort to translate the needs of local families in Pará and the sustainability goals of the Amazon forest into a language of data and cash flow that investors can trust. Without that translation, even the most impactful projects remain unfunded.

References

Clark, R., Reed, J., & Sunderland, T. (2018). Bridging funding gaps for climate and Sustainable Development: Pitfalls, progress and potential of private finance. Land Use Policy, 71, 335–346. https://doi.org/10.1016/j.landusepol.2017.12.013 

Popovic, T., Lygnerud, K., Denk, I., Fransson, N., & Unluturk, B. (2024). Blended finance as a catalyst for accelerating the European Heat Transition? Smart Energy, 14, 100136. https://doi.org/10.1016/j.segy.2024.100136 

Rode, J., Pinzon, A., Stabile, M. C. C., Pirker, J., Bauch, S., Iribarrem, A., Sammon, P., Llerena, C. A., Muniz Alves, L., Orihuela, C. E., & Wittmer, H. (2019). Why ‘blended finance’ could help transitions to sustainable landscapes: Lessons from the Unlocking Forest Finance Project. Ecosystem Services, 37, 100917. https://doi.org/10.1016/j.ecoser.2019.100917