What would happen if financial markets treated trees like shareholders?
Enter Tropical Forests Forever, a new fund that Brazil, home to about a third of the planet’s tropical forests, is promoting to the world. It involves paying a fee for each hectare of forest maintained in developing countries.
The project, first announced at the World Climate Summit in Dubai last November, is currently in the final stages of design and could ultimately pay $4 billion a year for forest protection.
The foundation’s mission is to reverse the economic conditions that have long encouraged deforestation. Agriculture, logging and other industries that drive deforestation can boost local economies, but Brazil’s fund says it won’t stop tropical forests from doing what tropical forests currently do for free, such as storing global warming carbon and regulating rainfall patterns. You will essentially be paying each country for the service.
With this, TFFF, despite its awkward name, aims to stop what was long thought to be unstoppable. Over the past 20 years, countries have been losing approximately 9 million acres of tropical forest annually. These forests are important for storing global warming carbon and limiting biodiversity loss.
But promising ideas such as carbon credits tied to reducing deforestation and subsidy schemes that reward forest protection have struggled to significantly reverse deforestation trends globally. Payments from TFFF can be large and predictable enough to succeed where other efforts have not.
Brazil’s proposal envisions a $125 billion fund, which in some ways would be the world’s largest pot of money to help fight climate change and biodiversity loss. The Green Climate Fund, the world’s largest climate fund financing project in the developing world, is contributing about half of the proposed capital.
“We’re now at a stage where everyone is saying, ‘Look, this is wrong in principle,'” said the investment banking firm that helped design the proposed fund, which focuses on sustainable development. “But it’s crazy in some interesting ways,” said Christopher Egerton Warburton, head of Lions Head Global Partners.
Unlike the Green Climate Fund, TFFF does not require donations. “What we are looking for is investment,” said Garo Batmanian, head of the Brazilian Forest Service and one of the architects of TFFF.
Here’s how it works: Wealthy countries and large philanthropies will lend $25 billion to the fund, which will be repaid with interest. Fund supporters say raising the money is the most difficult part. That funding will help attract an additional $100 billion from private investors. Those investors would be paid a fixed rate of return as if they had invested in something with a slightly higher expected return than U.S. Treasuries.
TFFF then plans to reinvest $125 billion into a diversified portfolio that can generate enough returns to repay investors. Excess proceeds will be used to make payments to about 70 developing countries based on the amount of tropical forest they still have.
This design essentially allows TFFF to create its own grants for forest protection. Although their designs are unique, the financial mechanism behind them is common: taking deposits and reinvesting them to earn a profit. It’s basically how a bank works.
“The idea is elegant,” said Francis Seymour, a senior forestry adviser at the U.S. State Department. “I’m excited because there seems to be political momentum.”
Brazil aims to complete the design of the fund, including how it will be managed, by the end of the year and begin operations next year. Brazilian officials are seeking to use the country’s role as host of the 2025 UN climate change summit and this year’s G20 presidency to drum up support for the TFFF.
The idea has attracted the attention of leaders in the United States, Norway and France, as well as the World Bank, which is helping develop the project. At a meeting about TFFF in Rio de Janeiro in July, the bank’s president, Ajay Banga, said his team was “encouraged by the efforts to make this idea a reality.”
However, at this early stage in the process, no country or charity has yet announced that it will put money into the fund.
The proposal’s ambition has led to some skepticism about its feasibility. Getting rich countries to pledge $25 billion in loans and investments may be easier than raising that amount through traditional subsidies. Still, it can be a very difficult task. In the United States, for example, it would require approval from the currently divided Congress.
The fund’s goal is to pay countries with low deforestation rates $4 annually for every hectare (2.5 acres) of existing forest visible on satellite images. These forests are not plantations, and can be either old-growth or restored forests.
The fund’s supporters believe the fund’s price will be at the absolute lowest in order to help countries stop mining deforestation in Indonesia, the growth of cocoa crops in Ghana, the expansion of ranching in Colombia, and countless other money-making drivers of environmental destruction. It states that it is set in the amount.
Countries receiving TFFF funds would also be subject to a $400 fine for each hectare of forest they lost in that year. This fine is roughly equivalent to the annual income generated by one hectare of land used on soybean farms in the Amazon, one of the most profitable uses of deforested land in developing countries.
If a country’s deforestation rate gets too high, TFFF payments will stop. There is also the risk that the Forest Conservation Fund will be exposed to fluctuations in financial markets, which could disrupt fund payments to countries.
Still, experts say the impact of a reliable flow of forest protection funds, which would allow countries to plan their annual budgets, could be enormous.
Take Brazil, one of the richest forested developing countries. Had the fund already been operational, the country would have received about $600 million this year, minus losses from existing forests. This is almost twice the annual budget of the country’s Ministry of the Environment.
“We have been talking about the benefits of conservation for a long time, but we have not been able to translate it into something tangible that people can feel,” said Brazil’s Environment Minister Marina Silva.
But by spending real cash on standing trees, the fund allows politicians who fight every environmental policy to “count every hectare of forest preserved and thank each and every indigenous person in the state.” ”, she added.
Governments of major forest countries such as Colombia and Malaysia have expressed support for the proposal and its design.
Malaysian Environment Minister Nik Nazmi said it was “critically important for us” to find resources to match the economic power of destroying forests.
As the design of the fund is finalized, how the money will be used could be a source of tension. However, Seymour said recipients need some freedom to spend their money without red tape or reporting requirements.
On the other hand, we need to ensure that funds actually reach the communities that support and protect forests. “Reasonable people can disagree about what the right balance is,” she added.
The current proposal has its roots in the idea of an investment fund that rewards standing trees, first envisioned by economist Kenneth Ray, then World Bank treasurer, about 15 years ago. Since then, he has been active in the development finance and nature conservation worlds.
The project has changed since Brazil started last year, but it’s still based on a fairly simple idea, Rey said. This fund will give developing countries what they have worked tirelessly to seek: cheap money that only rich countries have access to.
Many developing countries cannot borrow money at low enough interest rates to finance forest conservation on this scale.
When Ray talks about this idea, he often gets the same question. So couldn’t we use this to fund many of the world’s most challenging activities, such as distributing vaccines to developing countries and curbing plastic pollution?
“That’s right,” he always answers. “But let’s start with the trees.”
