At the moment, if you want to make money out of forests, the best way to do it is to chop down the trees to sell the timber or wood fibre, or to grow crops on deforested land. However, there is an increasing realisation that forests provide a range of services not yet valued by traditional economics.
If the damage that logging does to forests were to be included in the price of forest products, they would be far more expensive. This is critical as market price dictates behaviour throughout the supply chain, from consumers right down to forest owners and managers.
James Griffiths, managing director of Ecosystems, Water and Sustainable Forestry at the World Business Council for Sustainable Development (WBCSD), says: “If we want the critical ecosystems forests that deliver – such as wildlife habitat, land remediation and water – these need to be valued and become marketable assets. Carbon sequestration and storage is becoming fungible [tradable with other assets] and is the first big ecosystem service that sustainable forestry is taking to the marketplace.”
The attempt to place a value on ecosystem services through the development of the REDD+ mechanism is opening up an entirely new avenue for investors. Investing in forests has traditionally been about selling timber and fibre products. Its main appeal has been that as an asset class it does not correlate with other assets and so it can provide balance to a portfolio, according to Chris Knight, assistant director Sustainability and Climate Change, Forestry and Ecosystems, PwC.
Forestry as an investment is long term and low return – add carbon and it becomes more compelling. Under REDD+ we can match timber and carbon values
There has been a growing trend for sustainably sourced timber and pulp, but 95 percent of this comes from forests in the developed world, leaving much of the world’s most biodiverse tropical forest open to deforestation.
The REDD+ mechanism could allow investors to prevent the destruction of tropical forests by ‘monetising’ carbon and other services. “Forestry as an investment is long-term and low-return – add carbon and it becomes more compelling. Under REDD+ we can match timber and carbon values,” says Jan Fehse, managing director of Value for Nature Consulting.
Pavan Sukhdev, head of the UN’s Economics of Ecosystems and Biodiversity study, says that REDD+ provides a way for governments to pay for the generation of a public good. The protection of forests is about poverty alleviation, adaptation and mitigation of climate change, upstream water and carbon management, he says.
Investors are interested in how the introduction of ecosystem services can contribute to return, says Abyd Karmali, managing director and global head of carbon markets at Bank of American Merrill Lynch. “The challenge in ecosystem services lies in valuation, and integration into a market,” he says. Forestry offsets could become the “gourmet” offering of the carbon markets as long as policymakers learn lessons from the carbon market, including the need for robust monitoring, verification and certification, the importance of national frameworks and governance and a benefits-sharing approach.
“It’s absolutely fundamental to have the right social and environmental safeguards in place,” he says. Templates for such safeguards already exist in the voluntary markets, with the CCB (Climate, Community and Biodiversity) and VCS (Verified Carbon Standard) schemes.
However, to thrive the market needs demand as well as supply. One way to create demand, Mr Karmali says, is to have advanced market commitments that provide pools of finance to backstop the market until demand picks up. The Green Climate Fund, a UN-backed initiative to leverage $100 billion a year from governments and the private sector to cut emissions and help developing countries adapt to climate change, could allocate a few billion dollars to explore innovative projects under REDD+ which, at roughly $50 million, is currently only a tiny sliver of the carbon markets.
Mr Griffiths sees REDD+ as an invaluable experiment, but believes that the future of industrial forestry lies in sustainably managed plantations, producing fibre on a renewable basis for existing wood, paper and bio-energy as well as future bio-pharmaceutical, textile and chemical products markets. Preferably developed on degraded land, they can take the pressure off natural forest while continuing to provide ecological benefits like carbon recycling and land restoration.
“Natural forests are large, slow growing, biodiverse and their conservation and management needs to be incentivised more through payments for ecosystem services.” he says. Forestry will really come into its own when the world gets serious about the climate change adaptation agenda, he adds. If the multiple benefits of forest ecosystem services are recognised and paid for, that’s what forests will be managed for.
In theory, carbon and ecosystem offsets provide a new revenue stream and could help stabilise income. At the moment, “there is a guaranteed market for timber, not yet for forest carbon,” Mr Fehse says. “What’s needed is a policy framework which creates a regulated market with a large demand for offsets. Of course for now you can try to sell into the voluntary market but you cannot be sure of price or even a buyer – supply is coming online but demand may not grow as fast.”
As with so many other areas of sustainable investment, getting investment in restry right is contingent on information. In established forestry markets there is an understanding of property rights, forestry permanence and monitoring (to ensure sustainable management and to avoid problems of asset inflation such as has been alleged with Sino-Forest). The bigger question is how to leverage the carbon markets and ecosystem services, to deliver sustainable development and climate mitigation together.