Forest Bonds: Realizing a Net Zero Deforestation, Forest-Friendly Economy

Heating and cooling, timber, water, food, habitat, energy, massive storehouses of carbon – forests provide an incredible amount of direct and indirect ecosystem services to humans, along with all other forms of life on earth. That’s especially true of tropical forests. Unfortunately, these services and products are grossly undervalued. While estimates put that value in the trillions of dollars, global tropical forest cover has been declining fast despite international efforts to slow down, if not halt, deforestation.

The Global Canopy Programme is out to change that. In the just released “Understanding Forest Bonds: A Guide to Raising Up-Front Finance for Tropical Forests,” the Oxford-based alliance of international scientific institutions lays out the whys and hows of forest conservation bonds – innovative debt securities that the organization believes can be used now to help raise the huge investments necessary to avoid deforestation and equitably and justly monetize the value tropical forests provide.

A market for forest conservation bonds would help slow down deforestation by raising investment capital from institutional and other investors, such as pension funds, in return for a steady stream of revenue from sustainable timber operations, carbon sequestration and other ecosystem services, according to Global Canopy, the Climate Bonds Initiative and the World Wildlife Fund.

The three organizations joined together in late September to urge government, financial institutions and forest stakeholders to participate in the creation of a global market for forest conservation bonds.

Thirty billion dollars a year invested in forest conservation bonds would cut deforestation rates in half, thereby assuring that the world’s forests will continue to function as sinks that soak up carbon dioxide from the atmosphere, the groups assert.

Climate Bonds Initiative chairman Sean Kidney believes that investors will flock to forest conservation bonds as they can be high credit quality debt securities that offer attractive returns, as well as provide diversification, even negative correlations, with stocks and other bonds.

“If you offer investors an AA-rated forest bond or an AA-rated oil bond, most of them will take the green option. You have to remember that 19 of the 20 largest pension funds are public sector funds and they’re concerned about climate,” Kidney was quoted as saying in an Alternative Asset Analysis news report.

Daunting Challenges

The costs associated with a “net zero deforestation” “forest-friendly economy” are staggering. The policy, economic and social changes required to assure the ongoing, long-term health and sustainability of tropical forests are daunting.

Making the transition could cost upwards of tens of billions of dollars annually and is unlikely to be achieved without public sector leveraging of private sector finance,” Global Canopy founder and executive director Andrew W. Mitchell writes in the report’s executive summary.

Perhaps even more challenging and problematic is the need to strengthen local, regional, national and international forest and financial institutions and organizations so that forest bond investors can rest assured that projects and supporting revenue are genuine, the risks and rewards quantifiable, and that some form of protection exists against fraud and abuse.

Yet an even more vexing challenge exists: getting government and industry to move towards creating markets that fairly value the wealth of ecosystems services tropical forests provide. That will require a radical restructuring of market incentives.

Relying on forest carbon markets through mandatory and voluntary emissions trading and carbon offset markets and the UN Clean Development Mechanism (CDM) isn’t getting the job done, according to Global Canopy.

“That is precisely where forest bonds can help. As part of a broad financial approach, forest bonds
would tap into global capital markets to deliver up-front finance at the scale and with the urgency required to maintain forests and their ecosystem services before they are lost,” Mitchell asserts.

A Window of Opportunity

Developing a global market for forest bonds offers a means of moving the world’s nations a way forward toward achieving a “forest-friendly economy” today, while governments, industry and societies continue to work out ways of addressing longer term structural issues, Global Canopy believes.

Moreover, ongoing turmoil in the global financial system offers an opportunity for innovative financial products such as forest bonds to take root and grow as Global Canopy sees it. The opportunity is enhanced further as UN negotiators from 194 nations around the world meet in Durban, South Africa to negotiate a global climate change treaty, which is to be followed by the Rio+20 Earth Summit in June, 2012.

“To achieve that transition, what is misvalued needs to be properly valued, and we need to be more open to business as un-usual. It is starkly obvious that the costs of degrading natural capital, such as forests, are undervalued and unrepresented in the price of goods profitably made from ecosystem conversion.

“The new green economy should recognize the full value of forests, including all of its ecosystem services worth trillions of dollars, and push business to act more sustainably in relation to this vital
natural capital.”