Financing Sustainable Forest Landscapes

Abstract

Tropical deforestation is one of the defining issues of our time. Addressing it will require local solutions to a global problem that must be implemented within a narrow and closing window of time. This is no easy task and will require strong leadership and “joined-up” policy making. Addressing tropical deforestation will also require vast pools of capital, and much of it will need to come from the private sector. The good news is that this capital already exists at an enormous scale—an estimated US$225 trillion dollars of private capital is currently allocated through the world's financial markets. As a career banker, I have observed that the “financial economy” often facilitates much that takes place on the surface of the earth. While I am not rash enough to suggest that finance is the perfect solution that will enable sustainable forest landscapes, I strongly believe that the financial sector has a very important role to play in global forest conservation. One of the most promising mechanisms for channeling private capital to green economic growth more broadly—and to forest conservation more specifically—is Green Bonds. This belief was reinforced by a recent conversation with senior management of one of the world's largest Sovereign Wealth Funds who shared my excitement of the potential of these products. Although bonds themselves aren't new (they were used over 800 years ago in Renaissance Italy, for example), Green Bonds are a relatively recent innovation. Unprecedented interest from the world's largest investors is driving the transition from niche to mainstream at extraordinary pace. Bonds are simply an effective mechanism to borrow money, and are labelled “green” when the proceeds are dedicated to a specific set of “green activities.” In the context of forests, these activities will most likely have to address development far beyond the forest frontier, in sectors such as the agricultural, urban, transport and energy systems that can all impact the forests. Green bonds are essentially a mechanism for preferencing a holistic approach to “forest friendly” sustainable productive investments over alternative growth strategies in forest economies Green Bonds capitalize on a growing appetite for “purpose-driven” finance and are attractive to the financial sector for many reasons; they are a familiar product to the investment community and they represent the single largest pool of capital in the world. Importantly, they help reduce the risk and complexity of greener investing. They make product selection simple and standardized for investors and they outsource the social and environmental due diligence to credible third parties. From a policy perspective, they have the potential to create a virtuous cycle: uncovering the large-scale investor appetite we are seeing in the market will help to drive governments to develop forest friendly green growth frameworks in the knowledge that cheap private sector capital is eager and available. Investment requires clear indicators and measures of performance, and this is extremely relevant to complex topics like sustainable forest landscapes. We need to be clear about what we are trying to achieve and rigorous about how we measure it. We need to assist the financial sector by simplifying and standardizing. For that we need credible standards, and then third party verification of those standards. There is huge demand from the finance community for this. For the conservation community, this means rising to the challenge of producing clear yet comprehensive indicators and measures related to sustainable forest landscapes that large, responsible money managers can trust and use. The challenges related to sustainable forest landscapes are significant, but so are the opportunities. Engaging the financial sector and mobilizing private capital on a large scale is one of these opportunities. This will be no easy task, but working on the three areas above will we a considerable step in the right direction to realising the vision laid out by John Sawhill, the former President and CEO of TNC, who observed, “in the end, our society will be defined not only by what we create, but by what we refuse to destroy.”