Seeing the Trees, not the Wood
Can markets for sustainable forest finance be mainstreamed?
Can the finance sector play a role in sustainable forestry? How can sustainable forest lending policies become standardized across financial institutions such as the Equator Principle for project finance? What are the opportunities for banks to integrate sustainable forestry in their product portfolio?
These are some of the challenging questions that have been debated at the Global Business of Forests session in London yesterday.
Banks and financial institutions have long acted as important players in financing forestry, both through equity and debt markets, but sustainability has not always been at the fore in decision-making. Over the past decade, some banks have put in place lending policies that include sustainability risk standards and safeguards – a welcome development. But despite this, responsible investment is still far from becoming today´s market norm.
In terms of global forest conservation, some of the most important companies are also based in the riskiest investment countries. They forge an important link between retail markets and the forests and incur costs to enable them to meet best practices (eg. forest certification costs).
The majority of tropical timber today is extracted from the world´s biologically most interesting natural forests. In many cases these forests are managed by companies that are relatively small in size (SME´s), locally owned and financed. The small size of operations makes them not very attractive to invest in, with the result that they have great difficulty in accessing finance that rewards environmental efforts. Most of the time, they also suffer from basic business deficiencies and lack attractive collateral and as such, are falling outside the appetite of most responsible investors. Moreover, many of the countries where these companies operate are considered “high-risk zones” from an investor´s point of view. The challenge is to find ways to finance these types of operations so that companies can achieve and then keep their certificates.
One way for banks to overcome these barriers and effectively engage with SME´s could be to reduce finance transaction costs and to find suitable ways to safeguard themselves from risk. New value streams (such as forest carbon) or financing a sustainable supply chain - which means that the retailer provides some level of guarantee to the bank which will be inclined to provide capital at more attractive rates - are possible solutions that should also be considered. Another approach would be for the financial institutions to find cost effective ways to consider smaller investments or for domestic banks to begin to adopt the more progressive policies of the larger international institutions.
Certified forests are going to become an increasingly valuable asset as demand for wood and fiber grows whilst many buyers find themselves more and more supply constrained. The potential to combine this added value with new revenue streams, such as carbon, along with the safeguards of certification should make these types of operations attractive to investors. Certification costs should be seen as an investment, just like an investment in new machinery. Today many investors do not regard standing timber in the forest as a form of collateral, a situation that makes access to finance a challenge for smaller operators.
It is crucial to reward operators practicing responsible forest management both in the market place - through better access and fairer prices, and in the financial market - where they should be able to access more favorable terms and a stronger push from reputable investors, so that the market for sustainable forest finance becomes fully mainstreamed.
Responsible finance for forestry is a vital part of the process of mainstreaming responsible forest management and trade. Forests that have no perceived value face a very uncertain future – ensuring they have a value that appeals to traditional and emerging markets of all types is a challenge for us all. George White, Head of GFTN