Trees have historically been worth more dead than alive. But a new financial instrument is being created to reverse that equation by turning the value of tomorrow into cash today. Forest bonds–financial instruments that turn revenue associated with forests into a consistent financial return–allow investors to create investment vehicles by buying carbon credits generated by living forests, which ensures their protection by making it valuable to keep a forest standing.
There is certainly the need. The Global Canopy Program estimates that the annual funding needs for tropical forest finance will amount to tens of billions of dollars by 2020. Even a fraction of the $100 trillion bond market would go a long way to stopping the 5 million square miles of forest lost each year.
Ireland recently became the first country in the world to recognize forest carbon credits in its tax system, paving the way for the issuance of forest bonds, according to the Bank of Ireland in Dublin. The law explicitly includes credits from projects that reduce emissions from deforestation and forest degradation (REDD). That makes buying forest carbon credits (and issuing forestry bonds) “very tax efficient, very cost-effective,” said Paul Harris, head of natural resources risk management at the Bank of Ireland in Dublin in Environmental Finance (subscription required). “This is part of the effort to ensure that Ireland offers the best possible environment for green finance.”
Forest bonds may become important financing tools because they can unlock the value stored in forests. While some investors may demand fast returns within months or years, others take the long view–particularly if there are other benefits. In return for an upfront investment, forest bond holders would be entitled to a stream of interest payments and the full value of the bond once it matures. This would not only offer a different risk and return profile compared to more conventional investments, but offer enormous environmental value in the form of reduced carbon emissions, biodiversity conservation, and expanded protection of forests for humans and wildlife.
Whether the instrument takes off depends on how well they perform, and the number of countries that incorporate them into their financial governance. For now, there aren’t many examples to choose from, despite the momentum building behind financing for REDD and climate mitigation.
Hat tip: CleanBizAsia