Even though the private sector is a hard-to-quantify source of finance, its potential to support the scaling up of investments in the forest pathways is significant. There is growing awareness that the loss of ecosystem services provided by forests presents risks that affect the profitability of companies, the financial sector and entire economies, prompting increased attention and investment in the pathways by the private sector.
Private investments in forest conservation and restoration appear to be ramping up
Private companies are increasingly engaging in forest conservation and restoration. According to the World Bank, most of the top ten investment instruments with high feasibility in emerging markets are relevant to forestry (Figure 20).358 The instrument rated to have the highest potential is corporate sustainable timber bonds, which are bonds issued by timber-based companies (relevant to the halting-deforestation, restoration and sustainable-use pathways), followed by green commodity private equity funds supporting sustainable commodities (halting deforestation and sustainable use); biodiversity/sustainability-linked loans – loans granted based on environmental indicators (halting deforestation, restoration, and sustainable use); timber investment management organizations and private equity (halting deforestation, restoration); corporate green commodity debt funds, which provide loans for sustainable commodities (halting deforestation); private debt funds for conservation businesses, which provide loans to small and medium-sized businesses delivering conservation impacts (halting deforestation); fisheries debt funds – providing loans for sustainable fishing activities (less relevant to forests, although potentially important for mangroves and other coastal forests); conservation private equity funds, which offer private equity to conservation businesses (halting deforestation); ecotourism debt funds, which provide loans for ecotourism businesses (restoration); and ecosystem-based carbon-offset funds, which support carbon-offset strategies through ecosystem conservation/restoration projects (halting deforestation, restoration).
Figure 20TOP TEN INVESTMENT IN STRUMENTS WITH HIGH FEASIBILITY IN EMERGING MARKETS, SCORED ACCORDING TO POTENTIAL
The private sector is developing new business models that integrate multiple sources of finance. For example, Sealaska – a native-owned corporation in Alaska, United States of America – is using an integrated land management approach for its old-growth forest concession in the Tongass National Forest. Traditionally, Sealaska has relied heavily on income from logging but in 2015 it gained access to California’s carbon markets, providing a way for the company to diversify its activities. Between 2015 and 2019, the company made USD 100 million selling carbon credits to oil companies.359 A partnership between a non-governmental organization and a global furniture outlet to create more sustainable wood value chains in Southeast Asia is another example of the financing of transitions to greener value chains (Box 18).
Box 18SUSTAINABLE FORESTRY AND PRODUCTION OF WOOD PRODUCTS – RELEVANT TO THE SUSTAINABLE-USE PATHWAY
In 2006, the World Wide Fund for Nature and IKEA formed a partnership to transform the market landscape for key forest commodities in the Mekong region of Southeast Asia, including acacia plantations in Viet Nam. The partnership aimed to create more sustainable supply chains in which smallholders and forest plantation companies delivered Forest Stewardship Council (FSC)-certified timber for IKEA’s global markets.360 This market link has been instrumental in enabling smallholders to become certified,361 with the FSC issuing a certificate in 2016 for more than 4 000 hectares of acacia grown by small forest owners. Better business planning and longer harvest cycles produce more valuable timber, and commitment from buyers like IKEA means better prices. This model has increased incomes for plantation households, which sell FSC-certified timber at prices that are 10–18 percent higher than those for non-certified timber.362 By 2016, the total transaction value between IKEA and its Vietnamese suppliers had reached approximately EUR 100 million (USD 118 million) annually, indicating that opportunities exist to increase market share for those suppliers able to meet certain forestry standards.363 The improved standards have helped Viet Nam’s wood industry, which has set an example for developing tropical countries on how the plantation forestry and wood-product sectors can increase rural development, rural livelihoods and national income.364
Blended finance models could help de-risk private investments that have significant public value but insufficiently attractive risk–return profiles
The OECD defines blended finance as “the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries”, with “additional finance” referring primarily to commercial finance.365 Blended finance refers to financing models pooling together different sources of capital with different returns and maturity expectations. Such models can enable the mobilization of public, private and international sources of financing by investment funds. They are increasingly being explored by international public funding mechanisms such as the Global Environment Facility in support of global environmental goals. In such approaches, public finance helps unlock private capital, thus increasing the finance available for investments that traditional investors consider too risky. Box 19 presents three recent examples of blended-finance approaches with the potential to support the three pathways. Several forest companies are engaged in structuring blended-finance vehicles to invest in sustainable forest management, with conservation and restoration co-benefits.
Box 19Examples of blended-finance efforts to raise money for sustainable forestry
New Forests’ Tropical Asia Forest Fund 2. A group of institutional investors, development finance institutions, endowments and corporate investors are attempting to raise USD 300 million with a view to investing in sustainable, Forest Stewardship Council-certified plantation forestry in Southeast Asia (Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia and Viet Nam) to meet rising timber demand in domestic and export markets. Blended finance would comprise 10–15 percent of impact/“concessional” equity for funding activities such as environmental habitat restoration, peatland rewetting and community outgrower schemes in the fund’s plantation companies. Investors in the fund are also interested in long-term carbon credit offtake from fund activities.366
The Green Climate Fund’s new Amazon Bioeconomy Fund. The USD 600 million programme will include an investment of USD 279 million from the Green Climate Fund, and it will be implemented with the Inter-American Development Bank. It will encourage private investment in six key areas of the bioeconomy: (1) sustainable agroforestry; (2) native palm cultivation; (3) non-timber natural forest products; (4) growing native-species timber; (5) aquaculture; and (6) community-led nature tourism.367
Komaza Smallholder Forestry Vehicle. The aim of Komaza, a smallholder company in Kenya, is to address increasing wood demand in Africa and include small farmers in commercially viable operations. Komaza was built up initially with grant money from social enterprises, enabling it to obtain development and commercial money through convertible loans and equity investments from various entities. Financiers also invested in Komaza, helping it build assets in trees and a range of small to medium-sized processing facilities. After 14 years, the company now has thousands of partners, a value of more than USD 20 million and expertise across the whole value chain. In 2020, Komaza reached an equity finance agreement worth USD 28 million with the Dutch Development Bank. Farmers provide land and labour and the company provides technical assistance and the required inputs for tree-farming. This helps keep costs down (in conventional plantations, labour may comprise more than half the total cost), while farmers can invest in their plantations without getting into debt and convert their labour into assets (trees). When trees have reached an appropriate size, the company harvests, transports and sells them, sharing sales revenues with the farmers. Subsistence farmers sometimes find it difficult to obtain documentation to support their claims of ownership of land and other assets, which they need to obtain commercial loans. To become a partner of Komaza, however, a farmer’s ownership can be recognized by neighbours, chiefs and community leaders. To date, nearly 6 000 farmers have planted 2 million trees in about 4 000 ha under the scheme.368
Green bonds are emerging, but only 3 percent are oriented towards nature-based solutions
Green bonds are debt securities issued on the financial markets with the specificity of financing (or refinancing) projects with environmental benefits; they are an important part of the sustainable finance market, which has grown exponentially in recent years. In particular, the green bonds market has undergone continuous growth since 2014. This market is dominated by the energy, transport and building sectors – as of 2019, the land-use sector, which includes forestry, had attracted only 3 percent of green bonds (Figure 21).369 Nevertheless, forestry companies have also issued green bonds (Box 20).
Figure 21The green bonds market, 2014–2021
Box 20Green bonds – funding forest pathways
Klabin is a Brazilian producer and exporter of packaging paper with industrial units in Brazil and Argentina. All of Klabin’s forest stewardship units are independently certified, including 229 000 ha of forest plantations and 215 000 ha of native forests set aside for conservation. Klabin adopted the mosaic restoration concept for its sustainable forest management: plantations are interspersed with areas of native forests. The company has developed green bonds, which represent financing opportunities for the three pathways. The company issued two green bonds (USD 500 million due in 2027) and a sustainability-linked bond (USD 500 million due in 2031). Between 2015 and 2020, approximately USD 345 million was spent on eight eligibility criteria, including USD 216 million in sustainable forest management and USD 12 million in native forest restoration and biodiversity conservation.
Most issuers of green bonds are countries with developed economies; among developing economies, Chile, China and Indonesia are significant issuers. The Conservation Fund (based in the United States of America) launched a USD 150 million green bond in 2019, which was the first pure conservation green bond of its kind. The European Commission recently adopted a green bond framework, thus moving towards the issuance of up to EUR 250 billion in green bonds; the framework provides investors in these bonds with confidence that the mobilized funds will be allocated to green projects and that the Commission will report on their environmental impacts.370
Private finance pledges send good signals, but more support to public and private institutions is needed to develop pipelines of investment-grade projects
Numerous meetings and fora have highlighted that the “where from” of finance (i.e. where to find additional finance for forestry) is easier to answer than the “where to” (i.e. where to invest in emerging and developing economies so as to generate economic, social and environmental returns).371 In many developing and emerging countries, the where-to question is constraining forest-based progress – the availability of large quantities of finance needs to be met with large opportunities to invest. To attract significant finance to restoration and sustainable use, countries need scalable, credible pipelines of good investment-grade projects. One means for developing such pipelines would be to set up investment facilities or hubs to help small and medium-sized enterprises, communities, smallholders and their organizations that operate in forest value chains to aggregate their production, add value and prepare quality projects; tools to help inform investment decisions could also be developed and deployed.
Several initiatives have been developed in recent years to help create pipelines of bankable projects. The Land Accelerator is supporting entrepreneurs and small and medium-sized enterprises to develop and scale up business models that combat deforestation and restore forests. To date, 191 entrepreneurs from 46 countries have benefited from the programme. The Restoration Factory, launched in 2021, provides mentoring to entrepreneurs engaging in ecosystem restoration. Various models exist for project preparation and technical assistance facilities. Some are open to a wide range of funds and investors: the Nature+ Accelerator Fund, which started operation in 2021, supports project development at various maturity steps. Other project preparation facilities and technical assistance facilities are directly attached to funds, such as those associated with the Land Degradation Neutrality Fund, the &Green Fund and the Agri3Fund.
New investment vehicles supporting the forest pathways have been accelerated through programmes such as the International Climate Finance Accelerator. The aim of the Restoration Seed Capital Facility, launched in 2021, is to speed up the design of investment vehicles contributing to FLR, including through targeted support for the development of a pipeline of bankable projects. Lessons learned from these programmes can be capitalized on and further efforts and resources allocated by governments and investors to continue developing investment-grade projects.