Investor note

October 2020
The Inevitable Forest Finance Response: Investor Opportunities

What is the Inevitable Policy Response?

Action to tackle climate change has so far been highly insufficient to achieve the commitments made under
the Paris Agreement, and the market’s default assumption appears to be that no further climate-related
policies are coming in the near-term. Yet as the realities of climate change become increasingly apparent, it
is inevitable that governments will be forced to act more decisively than they have so far, and the market
transition will accelerate.

The question for investors now is not if this structural shift will occur, but when it will occur, what policy and
market developments will drive it, and where the financial impact will be felt.

In anticipation, Principles for Responsible Investing (PRI) commissioned Vivid Economics and Energy
Transition Advisors to assess the nature of the IPR and to build a Forecast Policy Scenario (FPS) which lays
out the policies that are likely to be implemented up to 2050 and quantifies the impact of this response on
the real economy and financial markets.

The Inevitable Policy Response forecasts a response by 2025 that will be forceful, abrupt, and disorderly
because of the delay, and the FPS shows that this response presents critical risks and opportunities for
investors to take into account in their decision making. Detailed modelling results are all available on the PRI
website:

• On the macroeconomy;

• On key sectors, regions, and asset classes;

• On the world’s most valuable companies.

Investors need to act now to protect and enhance value by assessing the implications of the IPR Forecast for
portfolio risk. The greater the delay in responding, the greater the potential cost.

This work explores the IPR Forecast’s implications for risks and opportunities in the forest sector. It
complements and builds upon PRI’s existing investor tools for understanding and managing risks in forestry
and land use.

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The Inevitable Forest Finance Response: Investor Opportunities

Executive Summary
Climate policy will inevitably reverse historic losses in forest cover given the affordability and broader
attractiveness of land-based emissions reductions. Net-zero target announcements will accelerate over the
coming five years. These policies will rely heavily on ending deforestation and shifting to forest restoration as
one of the world’s only massively scalable options for negative emissions. The Inevitable Policy Response
(IPR), which models these expected policy developments in a Forecast Policy Scenario (FPS), results in a
cessation of net forest cover loss by 2030, and a total of 350 Mha of afforestation and reforestation globally
by 2050 (PRI, 2019).

Such policies involve large scale development projects that sequester carbon by expanding and restoring
carbon-dense natural ecosystems including forests, collectively known as Nature Based Solutions (NBS).
Delivering NBS at scale will involve historic mobilization of capital alongside a massive increase in NBS project
development capacity around the world, but especially in tropical ecosystems where forest loss has been
most prevalent.

The total NBS market value potential is estimated to be US$ trillions, when measured as the net present
value of discounted profits generated between now and 2070. This opens up enormous new opportunities
for both project developers and investors. Forest-related Nature-Based Solutions (NBS) could generate
US$800 billion in annual revenues by 2050, worth US$1.2 trillion today in NPV terms,1 surpassing the current
market capitalisation of the oil & gas majors.2 Natural forest restoration, as a low-cost mitigation strategy
with a more direct compensation model, is expected to be taken up first and generates most of the early
benefits. Avoided deforestation could represents an additional large scale investor opportunity, but is further
away from at-scale commercialisation since relevant low-emissions agriculture projects require more
complex compensation mechanisms. Both could form part of green bond offerings of interest to the private
sector as companies and countries seek ways to raise funds for mitigation projects.

Forest finance, historically dominated by public sector support, will increasingly be delivered by the private
sector. Recent innovations in green finance make private sector participation in the forest sector possible,
while the sheer scale of forest recovery required make that participation necessary. Moreover, by the end of
the decade, the fuller and wider incorporation of land-based carbon sequestration in carbon offset markets
will provide a more reliable long-term market structure for private actors.

Investors seeking to position themselves to capitalise on this opportunity must act now. By cultivating and
originating early NBS opportunities that are already becoming mainstream, and by engaging policy makers
on optimal enabling regulations, forward-looking investors can drive this market and its impact. Doing so will
also help investors get exposure to the upside opportunities associated with net-zero transitions.

1Estimates are in 2019 US$ terms. See Box 1 for further detail.
2As of June 2020. Oil & gas majors include BP, Chevron, China National Offshore Oil, ConoccoPhilips, Enterprise Product Partners, EOG Resources,
ExxonMobil, Kinder Morgan, Occidental Petroleum, Petrobas, PetroChina Company, Santos, Schlumberger, Sinopec, Suncor Energy, and Total.

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The Inevitable Forest Finance Response: Investor Opportunities

Climate action will drive large-scale forestry

Unsustainable destruction and degradation of forest land has been a primary contributor to the current
climate crisis. Since humans first began cutting down forests, roughly half of global forest cover has been lost
(Crowther, Glick, and Covey, 2015). Much of that taken place relatively recently, with about one-fifth of the
Amazon rainforest destroyed in the last 50 years. Agriculture accounts for the vast majority of deforestation,
with mining and infrastructure serving as additional drivers and facilitators of deforestation (Curtis et al.,
2018) (Kissinger, 2012). Timber, fuelwood and wildfires account for most of the rest, and for most forest
degradation. This loss translates into massive greenhouse gas (GHG) emissions; if tropical deforestation were
a country, it would represent the third largest emitter of greenhouse gases annually (Gibbs, Harris, and
Seymour, 2018). Beyond emissions, the loss of forest cover jeopardizes the wide variety of other ecosystem
services that forests provide, including being an important part of biodiversity provision, local precipitation
cycles, temperature regulation, air quality, soil erosion control, and water storage (IPCC, 2019).

Forestry policy has been an early testing ground of climate commitments and is expected to scale up rapidly
given its efficacy and high benefit cost ratio. Historic forest loss has made it a focus of climate action.
Government policies supporting nationally determined contributions (NDCs) set by the Paris Climate Accords
have adopted a variety of approaches to reducing net forestry emissions. Tropical developing countries have
long been ramping up their efforts to curb deforestation, and many countries are mobilising for reforestation
and afforestation targets that contribute negative emissions to national GHG accounts. Policy instruments to
achieve these aims are proliferating, including zoning enforcement, stopping illegal deforestation, and
domestic carbon markets that incentivise increased forest cover. International carbon pricing policy,
delivered through international agreements, linked emissions trading schemes and voluntary markets, is
beginning to support this domestic action. These efforts have achieved some success in slowing forest losses
in particular locations, but further action is required to stop and reverse the dramatic loss of forest cover.

An inevitable policy response to climate change will increase the breadth and ambition of forest policy, with
enormous growth potential for Nature-Based Solutions (NBS). The ‘rachet mechanism’ built into the Paris
Agreement, a series of international climate coordination commitments beginning in 2023, is expected to
kick off an acceleration of policy announcements. Lawmakers will have to respond to growing awareness of
climate issues and public demand for further action. The forestry sector, as the predominant delivery
mechanism for NBS, has attracted a dominant share of public attention, and is expected to feature
prominently in near-term announcements. Initial action is likely to increase the ambition of domestic policy,
including through the expansion of protected areas, restoration of degraded lands, tree planting efforts and
increased investment in improving agricultural productivity in order to limit expansion into forested areas.
Improved incentive mechanisms are expected later in the decade to support domestic ambitions. These
national and bilateral payment systems will include payment for ecosystem services schemes, expanded
REDD+-style programmes and increasingly integrated international offset markets and emissions trade.

Emerging policies suggest that land sector carbon policy is already accelerating. Sixty carbon pricing
initiatives are implemented or scheduled around the world, covering 21% of global emissions in 2020 (World
Bank, 2020). These policies increasingly include the forest sector. Early-adopter jurisdictions including New
Zealand, California, Spain, and a number of Canadian provinces all have provisions for crediting NBS, and the
first offset projects are now providing their developers with steady streams of carbon credits (Michaelowa et
al., 2019). With pilot-scale projects starting to pay-off, small private developers are increasingly getting
involved with offset delivery; five of the nine projects issued credits on California’s offset market in 2019
were delivered by private companies, which have historically been undertaken by NGOs and charitable
foundations. Developing countries are also increasingly turning to offset markets to support ambitious
promises of reversed forest loss. The Colombian government included a mechanism for companies to offset
carbon tax obligations under their recent Carbon Tax Law, which diverts a share of revenue to financing
Herencia Colombia, a conservation and restoration program for 20 million hectares of natural ecosystems.

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The Inevitable Forest Finance Response: Investor Opportunities

Calls for net-zero plans will support burgeoning demand for negative emissions from NBS. While offsets are
not a replacement for emissions reductions, they form an important part of emerging net-zero strategies for
many industries. If the most emissions intensive industries, including cement, steel, heavy transport and
plastics are to reach net-zero targets before 2050, offsets will likely be required (Ach et al., 2018). The flurry
of recent company net-zero target announcements, across the oil & gas, utilities, steel, cement, consumer
goods, mining and aviation sectors, will fuel demand for NBS as the regulatory and verification frameworks
come into place. BHP Billiton, for example, is providing a price-support mechanism for a $152m forest bond
issued jointly with IFC, and carbon credits it acquires through the mechanism may help offset future carbon
liabilities (Klopfer & Panajyan, 2016). At a country scale, more international demand for verified carbon
credits are coming through initiatives like REDD Early Movers, which includes donor countries like Norway,
Germany, and the UK, and offers payment for verified emission reductions from deforestation prevention.

These policies will rapidly curb forest loss and support gradual recovery of total forest by 2030. The
Inevitable Policy Response (IPR), modelled in a Forecast Policy Scenario (FPS), a high conviction forecast that
incorporates the policy mechanisms discussed above, results in a cessation of net forest cover loss by 2030,
and a total of 350 Mha of afforestation and reforestation globally by 2050, as illustrated in Figure 1 below
(PRI, 2019).

Figure 1 Climate forestry efforts ramp up after the expected ‘Paris Ratchet’ policies beginning in 2025

Note: Forest land estimates include dense, high-carbon stock forest land only. Note that the IPR projects zero
net deforestation after 2030.
Source: The Inevitable Policy Response Project (PRI, 2019)

A 1.5-degree climate target would require a more ambitious expansion of forest cover and drive even
greater forestry-related NBS. The realistic but forceful IPR FPS fails to reach a 2 degree emissions target, but
IPCC scenarios suggest that the more ambitious climate policy of a 1.5 degree target would require as much
as 1,200 Mha of increased forest cover by 2100 (IPCC, 2018). At nearly 10% of global land area, this would
expand current forested area by a third and restore it to near pre-industrial levels. Robust carbon pricing
policy and offset markets are some of the most important drivers of long-term forest cover expansion
because land-based carbon sequestration is a high-capacity source of inexpensive mitigation, with 50% of
mitigation potential achievable at costs under 20 US$/tCO2e (Bellassen & Luyssaert, 2014; Busch et al.,
2019). As land-based mitigation pathways that rely heavily on bioenergy come under increasing scrutiny,
NBS to expand forest cover make up an increasing share of negative emissions in 1.5 and 2 degree pathways
(Reid et al., 2019).

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The Inevitable Forest Finance Response: Investor Opportunities

Climate forestry is ready for at-scale financing

This large-scale climate forestry effort will involve massive increases in finance, ramped up rapidly across
multiple regions. Afforestation and reforestation projects are characterised by high upfront investments in
land purchasing, planting and remediation costs, with benefits accruing over long time horizons. The
financial sector will play a major role in supporting the development and deployment of NBS, for instance in
mobilising long-term capital seeking secure and stable returns, in providing products to hedge risk from
uncertain future carbon prices, and in developing new financing models for small holders and in developing
countries where NBS are economically attractive but capital is hard to raise. Delivery models may draw on
the large-scale, land-based project expertise that has been developed by publicly traded firms across
agriculture, forestry, oil and gas, and mining sectors. Regardless of how NBS projects are delivered, they will
demand significant sources of finance and investment to scale.

Forest-based carbon stocks can generate US$ trillions in net present value for investors through to 2050.
That is, land sector carbon policy will move towards valuing carbon stored in vegetation and soil, creating an
entirely new industry driving economic growth and investment. This will unlock innovative land restoration,
afforestation and avoided deforestation-based business models and investment opportunities.

Natural forest restoration, as a low-cost mitigation strategy, is expected to be taken up first and generates
most of the early net present value. Forest-related NBS could generate US$800 billion in annual revenues by
2050. From today’s vantage point, emerging NBS investments are worth US$1.2 trillion in NPV terms (see
Box 1), surpassing the current market capitalisation of the oil & gas majors.3 These forest sector
transformation and income-generating opportunities will require a massive scale-up of additional
investment, whether in land acquisition or land management operations and supporting infrastructure.
Natural forest restoration looks likely to emerge as a significant opportunity thanks to simple business
models and pathway to commercialisation, since emissions reductions are more easily calculated, and
accounting mechanisms have already been developed in some carbon markets.

Box 1 The size of the investor opportunity in NBS

To estimate the feasible size of the investor opportunity in NBS we created a very simple cash flow model
to represent the global NBS market. First, we estimated the possible revenue growth of the market over
time by using the IPR Forecast Policy Scenario’s forward assessment of the number of hectares of
reforestation globally, the amount of carbon sequestered, the possible carbon price they would secure,
and small ancillary revenues from sustainable forest management. Revenues associated with NBS are
driven strongly by the expected carbon price (see graph).

3As of June 2020. Oil & gas majors include BP, Chevron, China National Offshore Oil, ConoccoPhilips, Enterprise Product Partners, EOG Resources,
ExxonMobil, Kinder Morgan, Occidental Petroleum, Petrobas, PetroChina Company, Santos, Schlumberger, Sinopec, Suncor Energy, and Total.

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The Inevitable Forest Finance Response: Investor Opportunities

In order to generate estimates of returns (or cashflows), we also need to estimate costs – land, capital,
and operational costs. These cashflows then need to be discounted to generate an estimate of the
possible NPV of these investments (roughly equivalent to market capitalisation). These will vary
significantly by location and need estimating on that basis – global high level averages would be
misleading for any single project but can provide an indicative number for investors.

We used a 9% discount rate, which is consistent with discount rates used in the past for the valuation of
forest projects,4 and estimated an indicative set of costs based on existing sources for reforestation
projects.5 Based on this analysis, we estimate a possible NPV of NBS investments of US$1.2 trillion, with
an internal rate of return of 18%. These NPV calculations are very rough, and subject to a number of
uncertainties, especially around the price of land, the actual price of carbon secured, and the appropriate
discount rate given the possible risk levels associated with these investments in different markets.
Nevertheless, they provide an early indication to investors of the possible scale of asset value represented
by the NBS opportunity.

Avoided deforestation represents an additional opportunity whose value to investors could be enormous if
emissions reductions versus business-as-usual activity are fully compensated. Projects that avoid
deforestation are often further away from commercialisation since they involve more complex
compensation mechanisms. Nevertheless, they represent a large potential value stream for low-emissions
agricultural investments, and the carbon credit flows involved could form part of green bond offerings of
interest to the private sector as countries seek ways to raise funds for mitigation projects.

NBS opportunities are geographically concentrated in regions with both dense carbon sinks and high existing
rates of deforestation. These regions are home to many of the world’s tropical forests, peat bogs, coastal

4See Bullard, S. H. and Straka (2011); and Ferguson (2018).

5For example Summers, D., Bryan, B., Martin, N. and Hobbs (2015); and Zorrilla-Miras, P., Marcos, C., Mulligan, M., Giordano, R., Graveline, N.,
Máñez-Costa, M., Pengal, P., van der Keur, P., Altamirano, M., Matthews, J. and Lopez-Gunn (2018).

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The Inevitable Forest Finance Response: Investor Opportunities

wetlands and mangrove swamps, which in the absence of carbon markets or other creative financing, are
being cleared or developed on a large scale. In the global north, deforestation has largely halted and in many
places, afforestation is already occurring but will be accelerated by the introduction of a carbon price.
Carbon pricing, however, fundamentally changes land use decision-making in the global south, where land
competition today continues to drive large-scale deforestation. In these countries low existing agricultural
productivity means carbon-pricing combined with modest investments enable large gains in productivity,
opening up large areas where forests can be reclaimed

In these countries, there are a number of key enabling policies expected to come into force over the course
of the next 5-10 years. Key policy shifts will include:

• strengthening land tenure laws and resolving land title disputes, based on ongoing and extensive
efforts to create forest and agricultural land registries
• addressing constraints on the bankability of local counterparties, built upon better land titles and an
expanding system of improved access to rural credit
• ensuring effective governance and institutions, especially around the monitoring, reporting and
verification to ensure carbon credits meet a high and tradable standard; and
• overcoming social and political barriers, especially ensuring that the transition creates better
economic opportunities for rural and indigenous communities.

Under current NDCs, other studies have estimated that global carbon markets could mobilise annual trade of
US$185 billion by 2030 across energy and land-use and between US$350 billion and US$1.9 trillion by 2050
under 2 degree-consistent targets (Ecofys and Vivid Economics, 2016; IETA et al., 2019). The impact of the
IPR is likely to be a significant increase in such carbon credit trade volumes for NBS, given a significant
amount of international trading by and beyond 2030.

While some public finance may support this investment, there is a large financing gap that private finance
will fill. Current global annual spending on development assistance is less than US$150 billion annually (Net
ODA, 2019) and concessional finance sums to about US$580 billion per year (Buchner et al., 2015). This
compares to the US$1.6 trillion and US$3.8 trillion per year required from 2016 to 2050 for supply-side
energy system investments alone (Buchner et al., 2015). The net zero financing gap is large, and NBS
opportunities (as with opportunities in energy, transport, etc.) will significant new private investment flows.

As local land-use policies tighten and carbon markets incorporate NBS, private sector actors will be
increasingly able to finance forestry projects. Financing of forestry and land-based mitigation to date has
largely involved public concessional finance (like REDD+) flowing from developed to developing countries.
But forest finance markets have started to deepen and private sector engagement is expected to expand as
market-based approaches proliferate. Carbon markets – such as emissions trading systems (ETS) – will
unlock the revenue streams necessary to shift finance to new mechanisms for sustainable forest
management practices more suitable for private investment, supercharging financing models that to date
have had limited application in forestry (Bauch, 2017). For example:

• Distressed asset, where investors purchase and restore deforested or degraded public and private
land to benefit from the carbon stock it produces, with the potential to sell the land on to other
investors or to the government for conservation purposes. Restoration can be implemented by a
land management company contracted by the investor.
• Stewardship model, where an investor leases deforested or degraded land without an ownership
change, and the leaseholder receives the benefits flowing from the carbon stock associated with
restorative management before returning it to the previous owner. Restoration can be
implemented by a land management company contracted by the investor.
• Carbon farming agreements, where an investor supports the ‘farming’ of carbon through forest
growth by providing the land manager with financing for the initial land purchase and planting
costs. In return, the investor receives payments tied to the carbon stock increases. Such a model

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The Inevitable Forest Finance Response: Investor Opportunities

can be used to finance large land holders or cooperatives of smallholders, reducing the risk to those
cooperatives while simultaneously reducing the administrative burden on investors.
• Sustainable farming agreements, where an investor supports traditional crop farming practices
that reduce emissions or sequester carbon (e.g. in soils) by financing farmers’ land or capital cost.
Investors receive payments when the carbon-reduction certificates are created and sold on the
market. This too can be used to finance large farmers or cooperatives of small farmers.
• Green bonds, where investors can purchase securitised forest sequestration and carbon-reduction
projects. This can allow investors to take stakes in projects already developed by others, and they
can be used to aggregate projects that are of insufficient scale for investors, or that are developed
by a government or NGO.
• Forest insurance provision, a disaster insurance against carbon losses from extreme weather,
disease, or forest fires, which can improve carbon credit ratings and allow for risk sharing. This
financing mechanism is currently provided predominantly through public funds, but presents an
increasingly viable business for private insurers as the market grows.
• Carbon off-taker guarantees, financial instruments guarantee a future price for carbon credits,
reducing carbon price volatility and risk for developers. Like insurance, they allow for risk sharing,
and can be underwritten by public or private financial institutions.

Unlocking the opportunity associated with private sector forest finance will require investor innovation.
Figure 3 below shows an illustrative cash flow diagram for one of the most straightforward of the business
models mentioned above. The cash flow is representative of a relatively mature finance market that does
not currently exist for forestry. This market will only be available to firms that have developed expertise and
an investment track record, experience that will require development over the coming decade in parallel
with emerging climate policies. The value and location of early stage opportunities will depend on the
idiosyncrasies of local policy development, but the early NBS market will offer firms a chance to experiment
and position themselves strategically to deliver NBS to a more mature market.

Figure 2 Indicative cash flow for a hectare of pasture or cropland converted into forest

Note: These estimates are for owned land; Land purchase and resale values are not included. Afforestation
opportunities must also balance biodiversity and local ecosystem services needs in order to be

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The Inevitable Forest Finance Response: Investor Opportunities

sustainable. Afforestation only represents one approach to mobilising NBS while others may require
alternative business models.
Source: (PRI, 2019)

Projects that avoid deforestation are expected to continue to receive public sector financing, but private
investors will increasingly have access to related financing streams through offset markets and green bonds.
The financialisation of avoided deforestation involves incorporating credible REDD+ mitigation actions into
investments by otherwise deforesting sectors (especially agriculture); which are used to generate certified
carbon reduction credits, sold in off-set markets to generate revenue. However, establishing internationally
acceptable rules – as part of Article 6 of the Paris Agreement – for the incorporation of such opportunities
into global carbon markets is likely to take a number of years. Thus, the pace at which REDD+ credits become
fungible in international carbon markets is likely to be slow. In the near term, this means such financing
models will depend heavily on local policies, and that forest restoration opportunities are much closer to
commercialisation than projects that avoid deforestation. For financial institutions, the eventual
development of this market (first locally and then internationally) offers a number of opportunities, most
prominently:

• Sustainable farming agreements could be used to support farming practices that reduce emissions
and sequester carbon (e.g. in soils) where an investor finances land or capital costs for the land
manager. Investors would then receive payments as the carbon reduction certificates are generated
and sold. The investor may or may not also have a stake in the primary commodity being produced.
Carbon market platforms, such as Nori in the US, are making on-farm soil sequestration increasingly
investible.

• Green bonds that securitise sustainable farming projects that are either too small for investors or
that are developed by a government or NGO. These can be issued and backed by governments,
international organisations, development banks or private sector actors (Vivid Economics, 2017).
They can also be issued prior to development or as a way of aggregating and reselling projects
already developed. For example, the Responsible Commodities Facility provides low-interest credit
lines to Brazilian producers who commit to planting on degraded pasture rather than clearing
grassland or forest.

• Carbon off-taker guarantees, as described above, would set future prices for carbon credits, de-
risking carbon price volatility for developers, and creating the opportunity for financial institutions to
market-make and trade.

Investors of all sizes are already starting to explore these opportunities. Innovative investment models across
these three opportunities are being pursued by impact investors, such as Pur Projet or Athelia, which have
increasingly taken the mantle of innovative NBS finance from public Development Finance Institutions, a sign
of increasing market maturity. Green Bonds in particular have developed into a mainstream commercial
offering, rapidly growing from $37 billion in 2014 to $258 billion annually in 2019, but such markets still have
much further to go (Fatin, 2020). Large institutional investors with long track records in emerging market
debt have increasingly started dedicated green bond funds, including those at PIMCO, BNP Paribas, and
HSBC. The Real Economy Green Investment Opportunity Fund, for example, channels investment exclusively
to green bond issuances from non-financial corporates in emerging markets (Pulizzi, 2019). Specialist asset
managers, such as NN Investment Partners, Ostrum Asset Management, Robeco, or Nikko Asset
Management, are also closing large green bond funds. The Amundi Planet Emerging Green One Fund is one
of the world’s largest green bond funds, expected to deploy over 2 billion USD over its lifetime (Amundi
Asset Management, 2018). Although green bonds with proceeds used for land-based emissions reductions
remain small, the required standards and their application are well-established for their extension into this
domain.

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The Inevitable Forest Finance Response: Investor Opportunities

Investors can act now to unlock NBS value

By proactively engaging in policymaking and working with project developers and lenders to identify
opportunities, investors can help create, and benefit from, a favourable investment environment. The
development of robust offset and compliance markets for NBS mitigation provides the basis for investable
opportunities, and as countries move toward net zero emissions targets these markets will become
increasingly prominent. However, investors need to:

• Move early in the market to develop the novel business models, financing mechanisms, and
expertise that positions them in a space expected to grow rapidly. In addition to developing an
investment track record in the space, this helps investors hedge their exposure to markets that are
carbon exposed. As policies unfold and private financing mechanisms mature, investors can gain
exposure to a large green upside.

• Support market and institutional development by working with policy makers to ensure that the
expanding NBS market is designed to work well for private financing. Support to the market as it
develops will ultimately ensure that a greater share of future opportunities are accessible to private
finance.

Investors can explore a number of channels for allocating capital to forest finance opportunities. The main
channels of private sector finance are likely to be large agricultural and forestry companies (upstream or
integrated), specialist funds that support NBS-focused project developers, and local agricultural and forestry
lenders. In addition, large emitting sectors like oil, gas and mining are exploring large-scale project
development, although investors will need to consider whether those vehicles enable them to gain exposure
solely to the forest assets rather than being bundled with emissions intensive activities. Therefore,
institutional investors can encourage well-positioned companies in their portfolios to invest strategically,
they can seed and scale-up funding in specialist funds, they can work with banks to finance and securitise
forest projects and sell these on to capital markets, and they can promote the use of green bonds to credibly
channel large investment commitments into forest finance markets. Investors that seek early opportunities
in the coming decade will find themselves well positioned to take advantage of more mature markets by
2030 and beyond.

Investors can support countries to enact efficient and credible markets conducive to investment. At the
outset, this could include collaborating with governments to support new financing models through
concessional finance, de-risking activities, and the provision of technical assistance while successful business
models emerge. In the longer term, a robust price on carbon is the best way to deliver a sustained stream of
NBS investment. To participate in global markets, and to enable the fullest participation of global investors,
NBS mitigation must be credible, with policies establishing accurate baselines, addressing concerns regarding
leakage and permanence, and avoiding the double-counting or double-claiming of mitigation outcomes. This
requires well-functioning and cost-effective monitoring, reporting and verification systems, supported by
effective governance and institutions. Investors’ aim should be to ensure that countries adopt the right
policy mix within a credible system of international rules.

Table 1 Barriers and policy solutions to the mobilisation of NBS investment

Barriers to participation in NBS Potential areas for policy engagement

• High hurdle rates for investment • Effective MRV governance and institutions
• Missing information and lack of capacity • Safeguards for environmental integrity like buffers
• Missing financial instruments or government guarantees
• High credit risk and low risk-adjusted returns • Agricultural insurance products for smallholders
• High transaction and administrative costs • Support for new NBS financing models

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The Inevitable Forest Finance Response: Investor Opportunities

Barriers to participation in NBS Potential areas for policy engagement

• Leakage and reversal risk • Market stability measures to maintain price
incentives and reduce uncertainty
• Sticks and carrots to encourage global uptake

Source: Vivid Economics

In addition, conscientious investors can help ensure the markets and policies for NBS incorporate
considerations like the Just Transition and protection of biodiversity. Good performance on broad ESG
criteria helps not only strengthen mitigation effort but also long-term sustainability and may accelerate the
scale up of finance by addressing areas of stakeholder concern and possible opposition. Afforestation,
reforestation and reduced deforestation will provide significant biodiversity benefits if implemented in a way
that considers this source of value alongside pure carbon sequestration goals. Such considerations might
affect both the terms of project development as well as the spatial targeting of investments to ensure
restoration of biodiversity hotspots. In addition, land holders stand to gain substantially from the
introduction of carbon markets, but well-structured policies and investments are required to ensure that
small-holders and poor agricultural workers are able to enjoy the benefits of the transition. These markets
will also encourage more productive production techniques and investments in irrigation development, the
benefits of which would propagate throughout the economy. Yet these opportunities are not guaranteed,
and it is only through active support for credible policies and development of NBS markets that investors will
see these benefits come to fruition.

Interested investors can engage with PRI’s working group on sustainable land use. Deforestation, biodiversity
and water, all closely interlinked with sustainable NBS provision, have been the focus of PRI’s Sustainable
Land Use Initiative. PRI works with signatories involved with the group to engage investee companies and
portfolios to fully understand the agriculture, forestry and land use risks posed by climate change. Starting
with PRI’s tools for investors is an easy route to begin thinking about gaining exposure to green NBS
opportunities, which actively seek to mitigate such risks.

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The Inevitable Forest Finance Response: Investor Opportunities

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largest-green-bond-fund

Bauch, S. (2017). Incentives to save the forest. Financial Instruments to Drive Sustainable Land Use, 1–22.

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