Financing Tropical Forests: Lessons For Scaling From Yale's Annual Conference

In Brief

What challenges and capital opportunities confront nations that house tropical forests?

As billions flow to carbon markets, experts talked in January about the size and sensitivity of decisions ahead. 

This summary of a Yale panel offers warning signs and guidance. 

Recovery across the world came before a panel of experts at Yale in January.

The International Society for Tropical Forestry’s 2022 conference at Yale emphasized scale and the importance of COVID-19 recovery efforts for the “Decade on Ecosystem Restoration.”

The annual Yale International Society of Tropical Foresters (ISTF) Conference took place virtually from January 27 to January 29, 2022. The conference used the United Nations’ recent declaration of the 2020s as the “Decade on Ecosystem Restoration'' to emphasize the importance of scaling up tropical restoration and COVID-19 recovery efforts. The conference spanned topics from indigenous land rights in Southeast Asia to key forest law and policy concerns in Latin America to national landscape management plans in Belize and deforestation issues surrounding cacao farmers in Ghana. A need for fresh approaches to financing forest protections bubbled through many discussions. 

The topic came to a head in a feature panel on financing forest restoration. This panel explored how governments, private enterprises, and local communities can join forces to finance restoration and develop land management plans to ensure that tropical forests continue to serve as vital carbon sinks while maintaining biodiversity and livelihoods in the area. The forest finance panel, moderated by Yale professor Brad Gentry, featured Hege Raghnhildsveit of Norway’s International Climate and Forest Initiative (NICFI), Bryan McCann of Emergent Forest Finance Accelerator, and Juan Carlos Ramos of EcoAgriculture Partners.

Following the 2007 United Nations Framework Convention on Climate Change (UNFCCC) Conference in Bali, Indonesia, the Norwegian government launched NICFI, and has since pledged up to 3 billion NOK (~$350 million) a year to help save the world’s tropical forests while improving the livelihoods of those who live there. This pledge constitutes roughly 10% of Norway’s aid budget. Hege, a senior policy adviser at NICFI, helped the audience understand how Norway seeks to mobilize this capital towards climate change mitigation through key partnerships with foreign embassies and engagements with global markets. Specifically, Hege spoke about applying more granular data to diplomatic discussions and partnership building in tropical forest countries.

NICFI is perhaps most known for its large results-based bilateral partnership with key forest countries such as Brazil, Indonesia, and the Congo. NICFI issues payments based on a “pay-for-success” model, where money only exchanges hands when deforestation reductions are verified by satellite imagery against a baseline level. NICFI contracts with Kongsberg Satellite Services (KSAT) and its partners Airbus and Planet to work towards creating open-source, detailed, high-resolution satellite images of the world's forests. This KSAT data has spatial resolution of 4.77 meter per pixel, allowing us to see changes in forests on the scale of a single tree. Previous efforts to map tropical forests which relied primarily on freely available medium-resolution imagery (10-30 meter pixels) from NASA’s Landsat or the European Space Agency’s Sentinel programs. Furthermore, Planet’s constellation of over 150 microsatellites image the entire Earth daily, whereas Landsat captures a complete picture of the Earth every eight days, although it may take many months or even years to capture a usable image in areas with high cloud cover.

This new form of data, now available for free to the public, not only makes way for the analysis of small-scale and short-lived forest changes, but also makes incremental tracking of forest restoration projects easier. Essentially, such high-quality data adds another means of assuring the “success” part of the “pay-for-success” model. Hege also highlighted how paying for results reduces risk to Norwegian taxpayers, delivers environmental solutions, and strengthens existing diplomatic partnerships. Beyond results-based partnerships, NICFI also supports capacity-building efforts and improved land-use policies through multilateral channels and civil society partners.

Speakers at Yale's tropical forest conference sought new financial force.

NICFI is also working towards ensuring that commodity markets can make sustainability profitable. Eliminating deforestation from commodity supply chains will require determined and consistent market signals. With the right market signals, these markets would produce the same commodities without expanding into forests. Currently, deforestation-free products cost more than conventional products, which can be linked to environmental degradation. Oftentimes, governments can play a crucial role in delivering market signals through imposing taxes, tariffs, or other financial barriers that level the playing field between deforestation-free products and conventional products. For example, the European Commission recently proposed a regulation to limit the import and trade of commodities and products associated with deforestation and forest degradation, and the United Kingdom has proposed its own regulations banning the imports of illegally produced agricultural commodities. This type of regulation helps commodity-producing, tropical forested countries to uphold the laws that protect their forests and creates a market incentive for sustainably produced commodities.

With regard to financial markets, Hege highlighted how it is difficult, even at the individual level, to invest in the global stock market without also financing continued deforestation in the tropics. She noted that companies, investors, and banks have previously lacked the tools to adequately address risks of deforestation in their portfolios. NICFI, to fill this void, supports the collection and distribution of company-level deforestation risk data in a standardized format usable to investors. In fact, there are parallel global efforts to achieve similar goals of financial transparency and high-quality reporting from individual companies.

The recent developments of the Task Force for Climate-related Financial Disclosures (TCFD) and the Task Force for Nature-related Financial Disclosures (TNFD) highlight the commitment from financial institutions and other financial market players to monitoring risks and opportunities related to tropical forests. With the TNFD’s goal of creating the Paris agreement-equivalent for nature in mind, there will be a need for government regulators to create mandates for reporting internally. Currently, only a select number of firms have made commitments to the TNFD, however, as the metrics, tools, and standards around the TNFD mature, the Norwegian government might benefit from legally requiring Norwegian companies to disclose information in alignment with the task force.

In a similar vein, Hege also heralded the Lowering Emissions by Accelerating Forest finance (LEAF) Coalition, the largest-ever public-private efforts to protect tropical forests coordinated by the non-profit organization Emergent Forest Finance Accelerator. Bryan McCann, Vice President of Markets at Emergent, was able to provide deep insight into how LEAF and Emergent function to leverage blended finance for tropical forest restoration. The way LEAF works is as follows.

Participants, including a number of Fortune 100 companies (such as Amazon and Walmart) and government agencies (such as NICFI), agree to purchase credits for $10 per tonne from eligible tropical forest countries after deforestation has been verifiably reduced for use against their sustainability strategies. The resale of these credits is limited and must not generate a profit. Proceeds from these credits must be reinvested to support countries’ nationally determined contributions under the Paris Agreement. LEAF has so far raised just over $1 billion for forest protection in just seven months, which is more than twelve years of voluntary carbon markets.

The LEAF approach to ensuring reductions in deforestation is termed the “jurisdictional” approach, backed by the new Architecture for REDD+ Transactions (ART) standard. The jurisdictional approach centers around working with national and subnational governments (including Indigenous Peoples) to protect entire countries or states from deforestation. This approach differs from historic trends in the REDD+ transactions, which have tended to focus on individual forest projects. The argument highlights that these methodologies allow for scaling of forest protection projects as well as greater oversight and law enforcement, which limits the potential for carbon leakage and reversals.

The ART standard, designed to complement and work within the Paris Agreement global framework, supports this approach to systemic change by mandating governments to have ambitious forest protection targets, and improves upon previous standards through stringent measures on issues such as additionality, permanence, uncertainty, leakage, safeguards, and double counting. It is also approved by Leading carbon credit authorities such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the International Carbon Reduction and Offset Alliance (ICROA).

Bryan offered an example from Ghana of how LEAF enables economic transformation in developing tropical forest countries. In Ghana, forests are being lost at an alarming rate, and the production (and global demand) of cocoa is a  key driver of deforestation. While industrialized agriculture is responsible for land-use changes in developed countries, in developing countries like Ghana, much of the production of crops (90% for cocoa) comes from smallholder farms, with an average size of 2-3 hectares. Deforestation results when these smallholder farmers clear new land due to decreasing yield and growing demand.

These farmers lack reliable access to credit as well as more efficient agricultural technology, which makes them more likely to clear forested land. Ghana currently has programs to try and slow the pace of this agricultural deforestation. However, through LEAF financing, Ghana could expand and accelerate these programs by providing Ghana with tens of millions of dollars of additional funding. ​​By investing in improved farming practices, LEAF can reduce Ghanian deforestation by making existing land more productive, while also increasing household income and reducing seasonal risk through income diversification and crop insurance. Through this example, Bryan helped the audience see that LEAF’s stringent protocols can effectively reduce corporate emissions, exerting lasting impacts on some of the most vulnerable populations in tropical forest countries.

Bryan, as well as other panelists, mentioned that there are indeed valid concerns surrounding the issues of additionality (i.e. ensuring that the forest protection would not have occurred otherwise) and permanence (i.e. ensuring that forest protection lasts the test of time). For Bryan, additionality is solved through the jurisdictional approach, by only issuing credits if deforestation levels decline on average across an entire jurisdiction. In terms of permanence, Bryan believes that working closely with heads of state and creating an overall political climate conducive to legislation that protects forests will ensure that efforts to decrease deforestation continue beyond any one person’s tenure. All panelists agreed that unified local action is needed to protect forests in permanent ways that lead to additional carbon reductions. Juan Carlos Ramos, a manager at EcoAgriculture Partners (EAP), joined the panel to discuss how he is working to implement what EAP terms “integrated landscape finance,” a unique way of thinking about forest finance that seeks to incorporate all levels of stakeholders.

EcoAgriculture Partners is a non-profit focused on enabling local landscape partnerships to connect people in long-term collaboration, access finance, and influence policy to advance integrated landscape management. Juan explained this concept by first demonstrating how landscapes are currently managed in a segregated fashion with many competing interests. For instance, take a hypothetical country that has an important river running through it. This river will be in part managed by the ministry of the environment, the ministry of agriculture, the ministry of transportation, and others. The key for integrated landscape management is that all stakeholders are involved in the creation of management plans. The governance structure, scope, and other management plan characteristics vary from info-sharing and consultation between stakeholders to more formal models with shared decision-making and implementation. Juan argued that since the drivers of deforestation are diffuse in nature (i.e. result from product demand, smallholders farmer decisions, government forestry use, etc.), decision-makers must think at the ​​landscape scale for ways to manage and finance the restoration and protection of forests. The term “integrated landscape finance” describes a system of finance coordination and blending that supports multi-project, multisector investment portfolios to achieve multiple landscape objectives and synergies between investments and impacts at scale.

While EAP leads the charge in bringing integrated landscape finance structures to tropical forest countries, the notion of integrated landscape management has existed for some time. The Global Environment Facility, UNDP, FAO, World Bank, Green Climate Fund, and the Global Adaptation Fund have fast-growing portfolios of integrated landscape, city region and territorial projects. Yale also is a part of this shift in focus from individual forests to landscape approaches with its own Forests Dialogues program.

Juan illustrated integrated landscape finance through an example from the ​​Dutch Fund for Climate and Development (DFCD), whose project origination facility is managed by the Netherlands Development Organization (SNV), a close partner of EAP.  DFCD focuses on several high-impact investment themes, including climate-resilient water systems, water management and freshwater ecosystems, forestry, and climate-smart agriculture. The fund is structured with three separate but operationally linked facilities, each with a specific sub-sector focus and role across the project lifecycle. This investment consortium adopts a landscape strategy for deal origination and execution, which allows consortium parties to actively source and develop private sector investment opportunities for other consortium parties who function in-and-around their own investment activities.

In this way, funds can maximize impact across sectors, leading to better outcomes for the landscape and the human and non-human life that rely on it. So, while NICFI and Emergent function to set the stage for mobilizing immense amounts of public and private capital towards tropical forest restoration, EAP helps ensure that dollars are funneled to landscapes in a way that promotes the holistic health of any given jurisdiction.

Ultimately, in bringing together Hege, Bryan, and Juan, the ISTF panel highlighted the value of better understanding the synergies between entities working toward the same goal of restoring and protecting forests around the world. The panel also helped listeners grapple with some of the more challenging issues related to financing forest restoration, such as shifting incentives for private-sector commodity markets or incorporating the interest of local indigenous communities. Hege, in her concluding remarks, said that just a decade ago, she knew almost everyone involved in forest finance. Now, this community is an expansive global network working in every corner of the world on repairing the failures of years past. And this alone gives her hope. 






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