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New Bond Aims To Unlock Private Investment To Protect Forests

Bruno Vander Velde

While most agree forests have a critical role to play in curbing climate change, forest protection programs continue to struggle to attract capital. But a new investment mechanism could help bridge the finance gap through a unique component that gives investors the option of receiving interest payments in the form of environmental impact. Called the Forests Bond, it supports a REDD project in Kenya’s Kasigau Corridor.

Originally posted on the Conservation International blog.

1 November 2016 | For years, a groundbreaking initiative to protect forests struggled to attract capital.

For years, private investors have been urging policymakers to help them invest in protecting forests.

A new, first-of-its-kind investment mechanism could bridge the gap by unlocking private financing to stimulate investor demand for reducing deforestation.

Launched today, the Forests Bond will provide investors the opportunity to invest in a traditional financial product that offers the unique option of receiving interest payments in the form of environmental impact — in this case, verified carbon credits generated through REDD, an initiative that rewards landholders for protecting forests, thereby reducing carbon emissions that worsen climate change. The development of the bond is a collaboration of the International Finance Corporation (IFC), a member of the World Bank Group, and BHP Billiton, a leading global resources company with technical support from Baker & McKenzie and Conservation International (CI).

REDD (short for Reducing Emissions from Deforestation and forest Degradation), which offers financial incentives to landholders in tropical countries to keep their forests standing, has met with mixed success since its launch in 2005, in part because the lack of a carbon market left it dependent on voluntary action and bereft of the certainty needed to attract private funding.

“If you look at the scale of the problem, roughly US$ 100 billion to 300 billion needed to cut deforestation by half over the next decade, it’s clear that we need to mobilize private institutional investors, who control vastly greater amounts than public or philanthropic aid can deliver,” said Agustin Silvani, CI’s vice president of conservation finance. “The REDD mechanism has mostly excluded them because it required specific carbon expertise or a specific interest in forests to engage with it.”

The bond could help create a new channel for private funding of forest protection, Silvani said. “There’s a difference between creating a new project or product that can be replicated, versus creating an entirely new asset class. With the Forests Bond, that’s what we’re trying to do here.”

How the bond works

The Forests Bond supports a REDD project in Kenya, and investors can choose between a cash or carbon credit coupon (the interest received from the bond), or a combination of both. This unique element of the bond is made possible by the price support that BHP Billiton is providing, which means that investors can either elect to take the carbon credits to offset corporate greenhouse gas emissions or sell them on the carbon market, or take a traditional financial return instead. This provides the certainty needed to attract institutional investors while still generating verified reductions in deforestation, in the form of REDD credits.

The bond, which will be listed on the London Stock Exchange, brings the global deforestation challenge to the forefront of the climate agenda, said Jingdong Hua, IFC vice president and treasurer.

Each year, the world loses around 5.5 million hectares (13.6 million acres) of tropical forest — an area approximately the size of Costa Rica — and deforestation accounts for nearly 11 percent of global greenhouse gas emissions caused by humans, comparable to the emissions from all of the cars and trucks on Earth combined. Protecting forests is critical to achieving the global climate commitment of keeping the global warming under 2 degrees Celsius.

“To do that, we need to mobilize US$ 75 billion to 300 billion in the next decade, and much of this needs to come from the private sector,” Hua said. “The IFC Forests Bond demonstrates that innovative capital market mechanisms can be a powerful way to channel private sector funds into forest protection in emerging markets.”

The REDD project that the Forests Bond will support takes place in the Kasigau Corridor in eastern Kenya; it aims to achieve emissions reductions through a combination of forest protection and community development activities that support alternative livelihoods. Forest protection activities include forest and biodiversity monitoring, funding for community wildlife scouts, forest patrols, social monitoring and carbon inventory monitoring. Community development activities include reforestation of Mount Kasigau; establishment of an eco-charcoal production facility; support to community-based organizations; and expanding an organic clothing facility.

To ensure that the bond is not a one-off, BHP Billiton has helped develop a Knowledge Sharing Platform, in partnership with Conservation International and law firm Baker & McKenzie, to encourage investment in REDD initiatives, using the Forests Bond as an example.

“The platform aims to build a global community of practice among project developers, governments, donors and the private sector to explore how to overcome key market, governance and financial bottlenecks to replicate investment products like the Forests Bond,” said BHP Billiton Vice President of Sustainability and Climate Change Dr. Fiona Wild.

Bruno Vander Velde is Conservation International’s editorial director. 

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  • Terence Herlihy

    Any sentence that starts with a “carbon tax” discussion gets instantly deleted so your approach as an investment in “emission reductions” deserves further reading. The way to measure progress as this effort turns global is not to monitor temperature rise but rather the reduction of CO2 in the air. An installation of a CO2 monitor in times square is the kind of thing I have in mind. I read about the deliberately fraudulent billion dollar fiasco known as the Kemper County plant in Mississippi brought to us by Southern Company (who authored the solar panel killing referendum in FL). That project was designed to sequester 100 million tons of carbon which, if the California quote I saw recently is right, is worth $1.2 billion a year if it works. Its cost of construction in the tens of billions probably means it will never recover what it cost.
    I am a contractor and I don’t even bid, let alone start, anything until there is a design, a schedule, and a budget. The problem is too much CO2. Let one of your grade school children do the math: start with 14.7 lbs of air per square inch of earth’s 97 million square miles which includes 26 trillion tons of CO2. In 1950 we had 300 ppm of CO2 so we need to get rid of 6 trillion tons of it by sequestering 2 trillion tons of carbon. If we use plants, the released oxygen goes back into the atmosphere. Remember Dr. Kevorkian? He used CO2 exclusively.
    Almost forgot the budget. We all got to laugh at the Big Short last year at the movies but Lewis’ previous book, Flash Boys, shows us the money we need to completely finance this thing. The hedge funds move money all over the globe and only trade in countries like this one which are controlled by governments owned by the filthy rich and don’t tax financial asset transactions. (We are the Cayman Islands they talk about.) We need a quorum of members of the United Nations to give the United Nations taxing power over such trades at a rate of maybe a quarter of one percent. A lot of the trades are computer driven high speed transactions doing activities such as front-running so the current quadrillion dollar volume would ease off a bit and the market would be more honest. Even so a billion refugees could be paid a few thousand dollars a year to plant stuff like trees, kelp,sod, prairie grass, grapes, whatever. Authorize the UN to issue carbon credits to sell to polluters after the CO2 is down to 300 ppm.
    And finally, schedule: sorry folks but the increase in forest/bog fires and melting methane ice already is more than the human contribution to CO2 it it stopped today, so let’s hurry!