Published: December 10, 2024
With public and private investors mostly steering clear of forest restoration projects, could initiatives like the African Forestry Impact Platform be a step in the right direction?
Increasingly, sustainable finance is more than just a buzzword. As the green debt market gathers pace, we are seeing an ever-growing issuance of sustainability-linked instruments, for projects as diverse as electric trains, wind farms, and flood defences. This year, the world is on course to surpass US$1tn in climate bonds, up from just US$100bn in 2017.
This additional financing is great for areas like renewable energy, sustainable buildings and sustainable transport, each of which are receiving a sizeable proportion of the proceeds. However, only a tiny fraction of green bond proceeds are allocated to investments in land. That’s especially true in emerging markets, where just 3% were dedicated to land use in 2023.
Sustainable forestry in particular is not yet an established asset class, despite its overwhelming importance to the planet. Unless we halt and reverse deforestation, we are likely to face ever more climate chaos and species die-outs, along with diminishing food and water security.
But this is a sphere in which both public and private financing are faltering. Simply put, forest investment does not lend itself to quick fixes – and in an uncertain economic climate, long payback times will not suffice.
As Professor Rachael Garrett, Moran Professor of Conservation and Development at the University of Cambridge, explains, there is a fundamental mismatch between what society needs from forest restoration, and what financial actors hope to get out of it.
“The people who make decisions about how to use land and forests and where to direct capital often operate on very short time horizons, and are focused on meeting narrow individual interests,” she tells EMEA Finance. “Yet solving sustainability challenges requires making decisions over long time periods and at sufficient scale to generate positive benefits that can be given over to the public good.”
In a 2023 paper for Nature, Garrett and her collaborators spoke to asset managers and corporations, to find out what was stopping them from financing restoration. She found that, while many do want to invest sustainably, few were choosing forestry projects. That’s because, compared to areas like renewable energy, forest restoration takes a long time to realise its benefits. After all, trees don’t grow overnight.
The upshot is that forestry projects are often understood as high-risk and low reward, with too low a return on investment to justify taking the leap.
“The overall higher risk of restoration is the really big, structural part of the problem,” Garrett explains. “Some other challenges are more technical – restoration outcomes are difficult and costly to measure. There can be large livelihood concerns involved, as well as great regulatory and certification challenges. While I think there’s already a lot of momentum in restoration finance, it’s still too slow.”
As a result, we are nowhere near harnessing the kind of funding we need to protect and restore the world’s forests. According to the WWF, the costs are estimated at US$460bn a year, far eclipsing current allocations of US$2.2bn.
Making risky projects bankable
None of this is to say that forestry finance is being completely ignored, or that clever routes for attracting investment haven’t been attempted. As early as 2011, the WWF, the Global Canopy Programme and the Climate Bonds Initiative (CBI) came together to call for forest bonds. Credit support for these bonds, they argued, could be a way to leverage private-sector finance so that the public sector wasn’t alone in scaling up its funding.
In 2018, the CBI introduced its Forestry Criteria, which are designed to guide climate-resilient and low-carbon investments in forestry. They provide, in the CBI’s words, ‘a robust and credible way for this new asset type to enter the green bond market’.
And while issuance since then has remained low, there have been a handful of success stories. The most notable comes from Landshypotek Bank in Sweden,