A Global Offer to Reduce Deforestation: $5 Billion a Year for 20 Years

Heritage Stewardship

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A Global Offer to Reduce Deforestation: $5 Billion a Year for 20 Years
Center for Global Development
Michele de Nevers
June 27, 2018
When it comes to measuring development impacts, nothing beats forests. With ever-improving satellite monitoring technology, measuring global forest cover is each year easier, cheaper, and more accurate. Which means that—whatever you want to call it (pay for performance, results-based aid)—rewarding tropical forest countries for preserving their forests, and for their climate and development benefits, is becoming easier and more accurate.

But until now a large-scale, simple program to reward tropical forest countries for their performance, based on satellite data like the Forest Conservation Performance Rating, has not been established. Why?

One of the primary reasons: not enough money. Most results-based payments to reward reduced deforestation come from aid money, official development assistance (ODA). But there are dozens of competing high priority uses for ODA. And when ODA funds are used for rewards payments, donors are tempted to treat results programs like donor assistance and attach conditions to how the results are achieved and how the reward payments are utilized, or to “aidify” the results-based payment program.

But what if there was a huge endowment or sovereign wealth fund whose investment returns could be used to pay tropical forest countries for their results in reducing deforestation?

That is the thinking behind a new CGD financing scheme—the Tropical Forest Finance Facility. In 2014 Ken Lay, the former Treasurer and VP of the World Bank, came to CGD with an idea to raise substantial funding for a forest performance payments system. With generous assistance from the Rockefeller Foundation and from Norwegian Norad, a CGD-based team fleshed out the idea and consulted with finance, development, climate and forest experts in more than a dozen forest and donor countries. These ideas are now set out in a series of CGD policy and working papers.

What is the new idea?
The basic idea is simple but novel: the Tropical Forest Finance Facility (TFFF) would create a pay-for-performance financing mechanism that would operate like an endowment or multilateral sovereign wealth fund; the net returns on the investment of the TFFF’s capital would be awarded to tropical forest countries based on measured results in protecting their natural forests. Rather than competing for scarce donor funding, the TFFF would be capitalized by low-cost loans. Once the capital is raised, investments would be managed by a team of professional asset management experts and performance assessment would be overseen by forest experts.

To capitalize the TFFF, contributions would not come from ODA or other government budgets. Rather, investor countries, philanthropies, or private investors would provide loans or draw on endowments or reserve funds to capitalize the TFFF. We propose an initial target size of $100 billion for the TFFF.

The low-cost funds used to capitalize the TFFF would be invested over a long-time horizon in a diversified, endowment-like portfolio of relatively riskier assets with higher expected returns, like the portfolios of major universities, endowments, and foundations. Investors would be paid debt service on their loans annually from the fund’s returns and would redeem their initial capital when the fund is unwound after 20 years

The returns on the fund, after paying costs, would accrue to tropical forest countries that successfully protect their forest resources. Based on historic returns, a fund of $100 billion could generate approximately $5 billion a year in potential performance awards—a significant incentive even for large forest countries.

Success in maintaining tropical forests would be assessed as simply as possible, primarily through breakthrough technology in annual satellite monitoring, and would be transparent, public, and independently verified. Performance would be assessed based on a combination of (1) a country’s performance in maintaining forests or reducing deforestation against a benchmark, and (2) its share of global tropical forests. The TFFF’s governance would be modeled on the governance of sovereign wealth funds and not on international climate funds such as the Green Climate Fund or the Climate Investment funds.

Why forests?
Tropical forests contribute to more than 10 of the Sustainable Development Goals (SDGs.) As a recent CGD book Why Forests? Why Now? explains, forests provide incomes to rural communities, protect watersheds, capture and store carbon from the atmosphere, and increase resilience to extreme weather events.

Deforestation in many developing countries has been increasing, the result of seemingly compelling economic incentives—at least for those controlling land. A significant incentive to take the difficult steps necessary to end deforestation is needed. The idea of results-based payments to protect forests is enshrined in the 2015 UNFCCC Paris Agreement, which lays out the parameters for Reducing Emissions from Deforestation and Forest Degradation, or REDD+.
Forests lend themselves to a pay-for-performance funding approach because recent advances in satellite monitoring technology make the measurement of results—maintaining natural forests or reducing deforestation against a benchmark—relatively straightforward, transparent, and consistent.

We are pleased that the World Bank is exploring the possibility to take the TFFF ideas forward. This is similar to the process that brought the idea of an Advanced Market Commitment, nurtured at CGD in this 2005 report, from endorsement by the G7 summit in L’Aquila, Abruzzo, Italy, to implementation by the World Bank, eventually leading to the production and distribution of the pneumococcal vaccine that saved millions of children’s lives in developing countries.

The idea is bigger than forests
The TFFF funding model could be attractive in other sectors and to a wider group of investors, such as impact investors or philanthropic foundations, many of whom are looking to link their endowment investments to their broader mission. These kinds of organizations could provide extremely low-cost loans from their sizeable endowments.

The TFFF model is an interesting new financing mechanism. If it works, it could make possible a new approach to mobilizing international financing to conserve forests, and perhaps eventually to support the SDGs and other global public goods…

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Roadmap to Financing Deforestation-Free Commodities
World Economic Forum- TFA2020
White paper – Jun 2018 :: 30 pages
PDF: https://www.tfa2020.org/wp-content/uploads/2018/06/The-Roadmap-to-Financing-Deforestation-Free-Commodities.pdf
The World Economic Forum is pleased to acknowledge and thank PwC for the development of this White Paper and convening the Expert Working Group, without whom the work on The Roadmap to Financing Deforestation-Free Commodities would not have been possible.

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Press Release
Financial Institutions Pressed to Support Businesses Tackling Deforestation as Governments Worldwide Tighten Land-Use Policies
28 Jun 2018
· Banks, lenders and investors in a $941 billion industry risk exposure from commodities linked to illegal or unsustainable deforestation – a major cause of climate change
· New report urges financial institutions to support efforts to remove deforestation from value chains as business and governments tighten policies on agriculture and land-use
· The Roadmap to Financing Deforestation-Free Commodities report shows how financial institutions must adapt to a changing regulatory and market landscape post-Paris Agreement

Oslo, Norway, 28 June 2018 – Financial institutions must back companies that are removing unsustainable and illegal deforestation from their value chains or risk saddling themselves with unprofitable clients and stranded assets, a new report launched at the Oslo Tropical Forest Forum warns.

The Tropical Forest Alliance (TFA 2020), a partnership hosted by the World Economic Forum, says that banks, lenders and investors must support efforts by agriculture producers, traders and consumer-facing companies to end deforestation, a major cause of climate change.

Its new report, Roadmap to Financing Deforestation-Free Commodities, says that the economics of this industry is worth over $941 billion a year and could fundamentally change as businesses and governments ramp up their ambitions after the Paris Agreement on climate change.
Governments are deploying more stringent land-use regulations to end deforestation in countries such as Brazil and Indonesia. Businesses – particularly large consumer brands or those facing shareholder pressure – are also tightening policies in the supply chains of beef, soy, paper and pulp and palm oil, the four commodities that are behind half of all agricultural-driven land clearance and deforestation.

“These risks are largely unknown and unmanaged by financial institutions,” said Marco Albani, Director of the TFA 2020. “But they could radically change an unsustainable means of production through practices such as disclosure policies on deforestation in their investment portfolios, improved data gathering and monitoring techniques and improved environmental, social and governance structures.”

The TFA 2020, hosted by the World Economic Forum, is working with more than 60 global businesses – alongside over 80 governments, international organizations, civil society and non-governmental organizations – to support their efforts to stop deforestation in their supply chains…