Closing the Gap: Overcoming Barriers to Investment in Forests

Negative emissions technologies, engineered and natural, have a vital role to play in limiting warming to less than 2°C and 1.5°C. Global annual emission levels currently stand at approximately 40 gigatonnes of CO₂ and they are expected to exceed the global carbon budget of 1.5°C by 2021 and 2°C by 2036 if no mitigation and removal efforts are undertaken.1 While new and existing engineered technologies, such as direct-air-capture, may meet the need for significant carbon capture and storage in the future, there already exists a proven and deployable method of absorbing CO₂: natural climate solutions (NCS), in particular forests, which could absorb over 10 gigatonnes of CO₂ each year.

While forests could have a substantial role in meeting global emissions targets, they are in decline globally, despite commitments from governments and the private sector. Between 1990 and 2016, 130 million hectares of the world’s forests were lost.2 Tropical forests have halved in size since the 1960s.3 In response to this crisis, the 2011 Bonn Challenge4 and the 2014 UN New York Declaration on Forests (NYDF)5 set global targets to restore and reforest 150 million hectares and 350 million hectares of degraded lands and forests by 2020 and 2030 respectively.

Establishing what are the existing levels of funding committed to restoration and reforestation programmes is challenging in part due to a lack of broader agreement to what exactly constitutes NCS. For example, globally there are investments of $150 billion (assets under management) in forest and agribusiness7 – a sector that includes activities such as the planting of commercial forests – increasing overall cover. Yet due to the low levels of biodiversity in both the trees planted and within the ecosystems they create, and the periodical harvesting of commercial forests for timber, these activities are excluded from some estimates of finance committed to NCS.8 Instead, the focus is on projects that restore and preserve natural forest ecosystems. There are also issues surrounding the availability and quality of restoration and reforestation project data which is fragmented and dispersed. There are few, if any, comprehensive sources of information regarding the deployment of, and sources of, funding for restoration and reforestation programmes making it very difficult to establish the flows and impacts of existing finance.

The large-scale carbon mitigation potential of forests is still under investigation but they have already demonstrated considerable potential. Previous NCS research suggests that natural ways could provide up to 30 per cent of the mitigation needed to constrain the climate crisis by 2030.9 More recent and in-depth research identifies priority areas and predicts that tropical regions in Africa and Latin America are the most promising geographies for carbon sequestration through the restoration of forests.10 Research indicates that, in addition to geographic determinants, mitigation potential is heavily influenced by the forestry strategies and approaches chosen.

The type of reforestation activity, as well as where, why and how it is being implemented, determines carbon-storage potential. Restoration and reforestation occur along a scale of potential carbon mitigation: spontaneous or assisted natural regeneration of forests have the greatest potential, followed by intercropping and silvopastoral systems, while monoculture plantations have the lowest potential.11 Changes in farming practices that enhance soil fertility can also achieve significant emissions reductions and increase carbon capture potential. However, positions along this scale are greatly determined by the assessment timeframe of reforestation action. Over a short time, fast-growing timber plantations will absorb a greater quantity of CO₂ than natural forests. However, due to their harvesting cycle, they absorb less carbon than natural forests in the long term. Plantations, alternatively, have further carbon-sequestration potential if the timber they generate is used in long-lived product streams such as in construction and furniture.12 There is therefore a menu of forestry options that can be selected to achieve climate goals with trade-offs along several axes including carbon-sequestration potential, biodiversity benefits, water quality and quantity and economic value.

Poor standards of sustainability and supply chain transparency can discourage engagement from those seeking to make investments in sustainable forestry. The life-cycle impacts of forestry projects have reputational and credibility implications for private and public investors who want to be sure their investments are yielding sustainable and environmentally beneficial results. For this reason, the lack of clarity in definitions of sustainability, and the absence of best practices from governments and regulatory bodies, creates uncertainty and risk for investors, dissuading them from engaging in forest projects. Long-term governmental commitments are needed so that investments are not stifled by the uncertainty of repeated changes in technical definitions and policy stances.

Mainstream investors consider the risk-return profiles of forest projects other than monoculture commercial plantation activities to be too risky. The lack of demonstrable large-scale afforestation and reforestation initiatives beyond monoculture plantations, and their perceived riskiness, discourages investment from major funding sources including public finance, development finance institutions, pension funds, impact capital, philanthropy, retail and consumer finance (crowd funding) and carbon offsetting schemes such as funds set up by large oil companies. New models and products are needed to enable sustainble investment such as China’s Alipay’s 'Ant Forest' programme where users can build up green points that are then redeemed to plant trees.16 However, the $30 trillion of global assets committed to sustainable and responsible investments17 remain focused on the well-established and comparatively lower-risk renewable energy sector.

In addition, forest investments are often overlooked by investors with expectations of rapid and high returns. Investment in forest initiatives can take five to 20 years to achieve positive cash flows and have traditionally provided modest returns. As such, they do not have a reputation as attractive financial opportunities despite the fact that some projects, such as agroforestry, can improve the payback of investments with earlier positive cash flow from food crops compared with pure forest investments. Several projects, such as cocoa-agroforestry and coffee-agroforestry, offer reasonable returns. However, the complexity of agroforestry compared to monoculture plantation forestry and the lack of attractive policies and incentives is a barrier to greater investor engagement.

Existing public funding for research and development (R&D) to scale promising forest initiatives is insufficient. Domestic governmental funding of R&D into new forestry techniques and supply chain infrastructure is essential to unlocking the commercial potential of sustainable forestry yet this can be problematic as often the countries with greatest forestry potential are emerging economies with little financial capacity. Although there are sources of public and philanthropic funding that can go some way to address this finance gap, historically the large volume of private R&D funding in forestry has not been fully aligned with environmental goals. For example, in Brazil, during the 1960s, pre-competitive R&D programmes and industrial policies, such as tax incentives, attracted private companies to invest and build capacity in eucalyptus and pine plantations focusing on boosting productivity rates. Although this paved the way for the country to become a global leader in timber production, it also established non-native monoculture plantations as the incumbent business model within Brazil and suppressed R&D into native and multi-species forestry projects.

There is an opportunity for governments and public bodies to better engage with forestry programmes and provide support in ‘de-risking’ restoration investments to bring in private finance. Through investing in R&D and accelerating the scaling-up of existing projects, public finance can absorb some of the risk that is currently discouraging private investment in forestry. However, it is essential that R&D funding is delivered to those projects that align financial and environmental goals to avoid the type of unintended consequence seen in Brazil. Long-term policy commitments can also provide reassurance to potential investors that they are not at risk from future changes to environmental standards. Government action to provide a long term policy framework is shown by Argentina who recently established their Programa ForestAr 2030 initiative – a multi-sectoral approach to conserve natural forests and create a new forest economy. The strategy lasts until 203018 and current concrete actions include a 'Green Insurance' vehicle which uses money raised through road transport insurance to fund planting of trees.19 An additional policy window of opportunity comes from the Task Force on Climate-related Financial Disclosures20 and its requirement of investors to calculate and disclose their financial climate exposure. Integrating NCS in investor portfolio certification of ‘Paris alignment’ could allow the true industry leaders to be identified, rewarded and integrated into low-carbon investment solutions. In addition to policy clarity, governments need to provide better incentives for forest investments such as ‘results-based finance’ programmes and they should engage more in conversations about carbon financing programmes that will be complex and without ‘one size fits all’ solutions.

Establishing a new ‘forest economy’ or ‘bioeconomy’ can support the economic case for restoration activities. As well as rethinking how forests are created, there is also opportunity to address the current and future demand for timber and forest products. Opportunities include wood incorporated into long-lived materials such as building materials and next-generation materials such as lignin and nanocellulose that use wood derivatives as feedstocks. When building new infrastructure there is a need to rapidly substitute carbon-intensive materials, such as concrete and steel, with climate-positive forest products that store carbon. The substitution benefit of wood (the avoided fossil-fuel emissions from using wood in place of other materials) is around 1.2 kilograms of carbon saved for every kilogram of carbon contained in the wood used.21 Recent studies have shown that, under favourable conditions, the cumulative carbon-mitigation potential of this substitution effect, combined with carbon storage in wood-derived building materials and commercial management to maximize tree growth, can reach up to two to three times that of unmanaged forests.22 Considering such practices is especially important in rapidly developing and urbanizing countries where there will be great demand for new infrastructure. By 2050, it is expected that more than half of the world’s population will live in cities23 and it is essential that the resulting resource demands are met by locally sourced and well-managed certified forest operations.

Working towards a common language around forest restoration and reforestation and building new positive narratives around NCS is a vital tool in combatting climate change. Over the last few years, conversations about conservation and the environment have been appearing more frequently on social media and in public discussion. This may well be a sign that discussions around forestry are leaving an industry and academic echo chamber and are being embraced more widely. This new energy needs to be harnessed to gain further public support and to drive the forest restoration agenda forward. However, a common language must first be established between science, NGOs, government and investors to develop clear and common frameworks for action. The increasing urbanization of the global population has created a disconnect between society and the natural world. Engaging with more people will require expanding conversations about forests and NCS beyond their carbon value. Establishing how forests improve the quality of life in a more immediate sense in terms of physical and emotional wellbeing, and considering increasing forestry in urban settings, can better provide the public with a stake in forest restoration.