Scaling Up Private Sector Investment in Forests: The Risks and Rewards

Report back from the Yale/IUFRO Side Event

“No one single entity – public or private, domestic or international – can address the challenges facing forests,” said Professor Ben Cashore at the UNFF10 side event Private Sector & Forest Finance on April 11 which was co-organized by Yale University and the International Union of Forest Research Organizations. Synergistic and collaborative efforts are needed to embrace the complexity of forest management and to scale up technical and financial support.

An effective future framework for the governance of our world’s forests is not possible without substantial involvement from the private sector. Similar statements can increasingly be heard at conferences concerning climate change, sustainable development, and forests. Funding schemes like the Green Climate Fund or Reducing Emissions from Deforestation and Forest Degradation (REDD+) aim to diversify and increase their financial support beyond government donors by leveraging various kinds of public-private-partnerships and corporate investments. Given the limits of existing initiatives, what is the current and future role of the private sector in scaling-up forest finance for sustainable forest management?

UN Undersecretary for Economic and Social Affairs, Wu Hongbo, affirmed that there are “win-win” opportunities in forest management for all stakeholders – the private sector, governments, and the local population. “Forests need the private sector and the private sector needs the forests,” he said, and encouraged the private sector to continue engaging with the UNFF. This direct outreach appears particularly relevant considering the incremental changes and slow pace of decision-making in the UNFF processes, which suggest that alternative pathways toward a better future of our forests need to be explored.

How can forest finance make a difference?
A white paper written by Professor Ben Cashore and Lloyd Irland, introduced at the side event, addresses this question. The often-mentioned linkages between forests and other sectors lead to diversifying effects, such that for each ten jobs created in the forest sector, eight jobs are created elsewhere, according to Cashore. Generally, effects of the forest sector on social aspects are vastly understudied, Cashore emphasized, and research is needed to make good forest governance decisions. Both policy-makers and researchers agree that a key element for forest management and economic development is secure land tenure and official land rights. While for local people this ensures income and encourages sustainable resource use, for the private sector this is a major determining factor for investment decisions. The private sector is, therefore, in an important position, because the prospect of increased forest finance may motivate governments to enact much needed land tenure reforms. “Governments can also ensure that investors contribute to conservation,” Hans Djurberg, Head of Sustainability and Forestry at SCA, said. Private forest finance provides a chance for governments to support serious investors in sharing the risks and costs of conservation investments.

What factors influence forest investment decisions?
Several panelists agreed that before investing, besides tenure security, contractual law, improved transparency, and reduced corruption are crucial. The risk of changing law is also an important factor since a stable and consistent law encourages companies to invest. Information, while mostly present in the country, is often not accessible to international companies, according to Yale F&ES alumna Camille Rebelo, partner and co-founder of EcoPlanet Bamboo. The risk associated with investments in a particular country or project needs to be foreseeable. Forestry investments are traditionally conservative and risk mitigation and risk management are essential to scale-up forestry investments. The latter, Djurberg stated, is particularly relevant to meet the projected rise in global fiber demand, both for traditional and innovative purposes like bio-plastics and bioenenergy.

If increasing fiber demand or climate projects involving forestry will trigger private investments, how will this influence the social and ecological landscape of a country?
Forest financing faces suspicions concerning underlying motivations of the private sector. While non-governmental organizations (NGOs) play a crucial role in monitoring companies, according to Hannes Lechner, Senior Principal, Global BioFutures Practice at Pӧyry, several companies have developed business models based on sustainability with corresponding management plans. Plantation forestry, Camille Rebelo said, can contribute to conservation. The plantations of EcoPlanet Bamboo, for example, must have at least 20% of conservation forest. Djurberg of SCA emphasized that an impediment to conservation is that sustainable forest management doesn’t “pay off in the books.” Adequate framework conditions need to be changed to encourage companies to conduct best practice management.

Different views surround the engagement of private actors in forest finance and conservation projects. In light of a rising demand for fiber and a history of insufficient international financial commitments to the forest sector, particularly in developing countries, engaging the private sector in a synergetic and collaborative effort is likely to be the way forward. Good governance to encourage long-term investments and ecological and social safeguards can help reduce risk and create trust between investors, governments, and local people. Lastly, ways to encourage domestic investments in the forest sector should be explored. Lloyd Irland, co-author of the white paper, said: “Most investments today come from outside actors while domestic capital in developing countries is often invested abroad.”

The rising challenge will be how to engage the private sector to invest in sustainable forest management and in doing so create a paradigm shift in the market to conserve and protect one of the world’s most valuable resources.

For comments, or further information – also about Professor Ben Cashore’s forest finance paper – contact Alisa.Zomer@yale.edu, Urs.Dieterich@yale.edu or follow us on twitter: @azomer, @UrsDieterich.