Theme 3: Financing opportunities and issues for mitigation and adaptation

Charlie Parker is Head of Policy for the Global Canopy Programme - a leading tropical forest conservation think-tank based in Oxford. Charlie is an MSc graduate in Environmental Economics and Policy from Imperial College, London. Following on from his studies he worked at the United Nations Framework Convention on Climate Change during the 28th meeting of the Subsidiary Bodies and COP 9 of the Convention on Biological Diversity. Charlie first graduated in 1997 from the University of Manchester with an MSc in Physics and Astrophysics. During his early career, he worked as a management consultant in Europe for PricewaterhouseCoopers before going on to Australia in 2001 to work for Accenture. Upon returning to the UK in 2005 Charlie formed his own consultancy company and worked in London for two years prior to restarting his studies.

Discussion Abstract

Understanding Forest Bonds: Why do we need to frontload forest finance?

Every year around 13 million hectares of forests around the world are cleared for purposes such as crop cultivation, pastures, logging and mining. Although the rate of loss has declined in some countries in recent years, the global deforestation rate is still alarmingly high and it remains particularly high in the world's main tropical forest regions. As forests are degraded, so are the ecosystems services they provide to humanity. These services are valued in the order of USD trillions per year for their role in underpinning livelihoods and supporting climate, food, energy and water security across the globe.

Conserving forests for the benefit of both current and future generations requires significant up-front investment. It requires investment: to plan - to undertake consultations and develop policies; to strengthen institutions such as land tenure and forest governance; and to monitor, report and verify that forest conservation has actually taken place. All the while, incentives that drive deforestation must decline and sustainable livelihoods must become more accessible and prosperous for current and future generations.

It is estimated that to do all of that and halve the rate of deforestation by 2020, the investment in the conservation and sustainable use of forests will have to increase to approximately USD 30 billion annually by 2020. A number of mechanisms exist to generate the needed funding, such as increasing the market share of forest-friendly agricultural products, implementing green fiscal reform, or increasing the use of ecosystem service markets, but to implement these mechanisms at the scale needed will take time. Forest bonds offer an opportunity to raise the needed large-scale finance for forests, and to raise it now.

What is a forest bond? Public or private institutions that need to raise large-scale, up-front finance often do so by selling bonds in to the global bond markets worth nearly USD 100 trillion. A bond is a tradable financial security representing a promise that the organisation that sold it will pay whomever holds the security a pre-specified interest payment at defined intervals over the bond's lifetime, and also pay the full face value of the bond upon maturity. The amount raised by selling the bond will be the amount investors are willing to pay based on the interest and face value payments that are being promised. Essentially, selling a bond is a way to borrow large amounts of finance from the global financial markets.

Bonds are a familiar financing mechanism in sectors such as water, energy, development and even health. Climate bonds have seen increasing use in recent years to finance investments in climate change mitigation and adaptation, and in some cases forest projects have been included in the portfolio of investments climate bonds finance. Considering the nature of the financing needs described above, however, bonds specifically dedicated to forest investment, i.e. forest bonds, could be a key component of a strategy to sustain the world's forests.

Who would invest in a forest bond? Two particular types of investors have been identified that may be interested in a forest bond. The first type is impact investors who, when comparing a forest bond to a normal corporate or government bond, are willing to take a slightly lower return on investment and compromise on other financial qualities of the bond as long as the environmental and social benefits are absolutely assured. The second type of investor is institutional investors, who control the majority of funds invested in global bond markets. These investors would not compromise on the financial aspects of the bond, but would be very attracted to a forest bond if it can be structured to suit their needs.

How would a forest bond work? As with any bond, in return for borrowing money from global bond markets, the issuer must payback a pre-specified amount of interest plus the face value of the bond once it has reached maturity. To do so, however, the issuer must generate revenues. As noted above, there are many mechanisms that can be used to generate revenues for forest finance. In general these revenues can be forest-based (e.g. price premiums on sustainable timber) or non-forest based (e.g. ODA), depending on the forest investment needs. The choice between these two types of revenue will have important implications for the type of activity that can be supported: ranging from capacity building activities and land tenure reform to investments in forest-friendly enterprises and projects that generate ecosystem service credits.

The finance raised from selling a bond and the revenue generated to pay it back can either be held on the financial accounts of the issuing institution (on balance sheet) or in a legally independent entity (off balance sheet). Combined with the choice of revenue generating mechanism, the choice of institutional arrangements has important implications for the risk to both the bond investor and the bond issuer. Generally if the bond is on balance sheet, the bondholder will be concerned with the risk of the bond issuer making repayments, while the issuer will be taking on risks associated with revenue generation. If the bond is off balance sheet than the bondholder will be directly exposed to the risks associated with revenue streams. In either case, measures will be required to mitigate some of the risks that are present and make a forest bond viable.

Where would forest bonds work? The type of forest bond that could work in a given country depends on the financial stability, level of political risk and current (and likely future) shape of forest policy in that country. Before purchasing a bond, potential bondholders would analyse these characteristics and the specific structure of the bond to determine which characteristics directly present a risk if they invest in the bond. Policy-makers must also consider these characteristics; particularly the shape of forest policy, to determine what type of bond would be useful for their country to issue or support. Although no type of forest bond is off limits to any particular tropical forest region, an initial evaluation indicates which type of bond could be most useful and/or successful in each of the world's three major tropical forest region. A forest bond issued by a forest nation or backed by commitments from one or more forest nations could be successful in Latin America, particularly the Amazon region. In contrast, Africa would likely get the most use out of a bond issued by a relevant multilateral development bank or backed by commitments from donor countries. Finally, in East and Southeast Asia, an off-balance-sheet forest bond backed by forest-based revenues currently seems the most viable option.

Gabriel Thoumi, CFA, Co-Founder, International Forest Carbon Association (IFCA), consults for the US Government where he is a forest carbon finance and carbon markets specialist, and is a Director at Terra Global Capital. He has 6 years of forest carbon scientific, social and environmental soundness, and financial consultant experience analyzing projects under 10 global forest carbon standards resulting in co-writing 8 project design documents under the CCB, CDM, VCS and CCX standards. He also participates in various technical and financial review committees for VCS, IUCN, and many other institutions. He has presented at numerous conferences globally and has published frequently on forest carbon finance, risk management, and financial accounting and has lectured at various universities on the same themes. He has obtained the CFA Charter from the Chartered Financial Analyst Institute.

IFCA is a new entity, dedicated in 2011 to developing a robust financial framework for private and civil society project development to maximise private capital investment in sustainable forest carbon activity. Momentum is building for a global REDD+ mechanism for forest protection and forest carbon stock enhancement. It is clear that significant private sector capital investment is required. Appropriately directed and managed by private companies and NGOs, such finance will be vital to protecting, restoring and growing forests at the scale needed for climate change mitigation and adaptation in developing countries, and enhancing other ecosystem services. Yet to be truly workable, such a framework must engage all carbon market stakeholders: indigenous and forest communities, landowners, governments, multilateral bodies, NGOs, standards bodies and certification and audit bodies.

These are defining principles for IFCA and relevant to the 'financing opportunities' discussion. Gabriel Thoumi aimed to stimulate discussion on defining how nested REDD+ could and should work: bridging the gap between the concept of measuring and monitoring REDD+ at a national level to ensure environmental integrity and mobilising private capital; bringing forward the lessons learnt at the project level for national and sub-national programme benefit; the role that project developers, standards, certification bodies and registries can play; developing financial accounting and audit mechanisms for forest carbon assets and liabilities; how to adequately recognise the rights and interests of landowners and local forest stakeholders in robust carbon asset and revenue generation models; and managing the risk that current climate policy and economic uncertainty causes a pull-back in private investment.

Albert Ackhurst is co-founder and scientific director of TheGreenTicket.org. He is qualified and experienced in both conservation sciences and human capital sciences. Ackhurst's focus is on landscape wide conservation and natural resource planning, climate change issues and human capital technical capacity across a spectrum of regional trans-boundary localities working for and with local authorities, international and provincial conservation and development institutions. With a special focus on local community participation and development, he has realised a sustainable indigenous forest economy based on forest rehabilitation, medicinal plants and invasive vegetation management. Ackhurst has also presented sustainable reforestation plans to parliament which is intended to lead to further development and discourse with national institutions. 

Discussion Abstract

Smart project models can combine a number of strategic national, corporate and business driving forces to converge to the point of enabling projects with readily available cash for mitigation and adaptation especially in declining forest areas. This approach is based on the understanding of the needs, capabilities and responsibilities of government, industry and business. 

The Green Ticket (TGT) is a non-profit organisation that aims to mobilise finance for mitigation and adaptation through restoration and forest rehabilitation alongside the socio-bio-economic mechanisms such as agroforestry and sustainable natural resource utilisation. TGT succeeded in receiving large sums of money in joint Corporate Social Investment ventures with e.g. national banks, municipalities (local government) and smaller business enterprises for projects aimed at uplifting the poor while restoring valuable forests in an area known for its historic decimation of natural forests.

In other (smaller) projects TGT received funding by combining the needs of industrial partners (e.g. tyre manufacturer) with the needs of a small business (herbal tea producer) and a number of local community micro-businesses (tree growers and subsistence nurseries) focussed on mitigation and adaptation.

These finance opportunities were enabled by brokering the component needs of role players and understanding their capabilities (finance, infrastructure and training), their responsibilities (environmental and social) and their requirements (tax rebates, compliance and balance score card points). TGT was successful in brokering these component needs into multi-partner projects that enable multiple-bottom line sustainable reforestation projects. The Green Ticket aims to develop green-collar jobs, adaptation knowledge and conservation economies related to reforestation and the mitigation of climate change.

Richard Gledhill leads an international network of more than 200 climate change and carbon market specialists in Pricewaterhouse Coopers. He specialises in climate policy, carbon markets and forest finance, advising both governments and private sector clients on the risks and opportunities associated with climate change. Clients include the World Bank, the UK government and the Rockefeller Foundation, as well as private sector companies and project developers. Richard advised on some of the earliest large transactions in the CDM, and is now advising on a number of REDD+ and reforestation projects around the world. He chaired the PwC-led team advising the UK government on funding options for REDD+ and the firm's work for the World Bank on Forest Benefit Sharing Mechanisms for REDD+. He is a member of the Network Council overseeing the work of the UK and Dutch government funded Climate and Development Knowledge Network, and is part of a PwC team advising the World Economic Forum on resource scarcity.

Discussion Abstract

Different experts have estimated that, just to achieve REDD, approximately USD 20 billion per year will be necessary to prevent 90% of deforestation and therefore reduce emissions. Should such financial resources be available, there are numerous challenges associated with using these resources effectively. One of these is identifying the appropriate mechanism for ensuring that the financial resources, once available to a country are actually used to effectively deliver the specified goal of reducing emissions from deforestation and degradation. In the case of REDD+, the latter is closely linked to how to ensure financial resources associated with such initiatives reach those who are using and managing forest resources. Much of the recent work in the area of REDD+ has pointed to how achieving REDD+ objectives will require getting right the distribution of benefits from the national or sub-national level to the local level.

There are numerous models that experts have indicated could provide insights into how to effectively transfer benefits. Lessons are extracted from community-based natural resource management models to national policy approaches. Building on this work, the Options Assessment Framework (OAF) - developed by PwC in partnership with and support from PROFOR - provides information and 'tools' to assist policy makers and development partners to design and develop nationally appropriate arrangements for transferring REDD+ benefits suited for a country's context, taking into account: the country's  approach to REDD+; Whether the national REDD+ programme is donor funded, based on payment for performance and/or linked to the international compliance carbon market; and the range and type of recipients that the arrangement has to reach. Working from the building blocks of a benefit sharing mechanism, the OAF provides tools for identifying and structuring the most suitable mechanism for a country at national and sub-national levels (e.g. at the local government or project level).