Forest Bond Typology

1. What are Forest Bonds?

Forest bonds are an extension of the green bond concept being actively promoted by promoted by the IMF, the World Bank and the UK government. Green bonds are capital market instruments issued by government or corporate entities to fund ‘best in class’ sustainable development; the defining characteristic is how capital raised is employed over the life of the instrument. The market for green bonds is in its infancy; to date the World Bank has issued a [billion] of green bonds (to refinance a proportion of its own low carbon investment portfolio) but market reaction has been excellent.

Independent standards for validating the issue of green bonds to capitalise emission reduction and low carbon infrastructure are already under discussion (see Climate Bonds Initiative for further details).

Slowing deforestation and forest degradation is a crucial component of the global response to climate change, but channeling multi-billion investments to the sector purely to slow carbon emissions could have dire consequences. An independent standard is required for green bonds issued to capitalise sustainable forest and land management in order to ensure vital co-benefits including biodiversity habitat, water management, and rural livelihood, cultural and aesthetic value are protected.

For further information on the development of Forest Bond standards and interim evaluation of green bonds issued in the forest and land use sector please contact EnviroMarket Ltd.

2. Have Forest Bonds been issued?

No, not yet, although potential is growing rapidly as national and regional government further strengthen commitments on sustainable development, and progress towards a globally binding emission reduction targets post 2012 continues.

Opportunities are created by government actions on three fronts – regulation, procurement and the introduction of cap and trade environment markets – each of which has the potential to create demand for sustainable forest product or service, and subsequent forest cash flow.

• Legally verified timber (US Lacy Act)
• Biofuels (EU Biofuels Directive)
• Carbon credits (EU Emission Trading Scheme)
• Biodiversity (US Clean Water Act)

3. Who will issue Forest Bonds in future?

Forest Bonds are ‘thematic’ in nature – i.e. they are defined according to the activity they are issued to capitalise – and hence could be issued by a range of entities, utilisng widely differing structures.

Forest bonds could be issued to finance government activity

To finance government procurement (either explicit or implicit) or policy

• Supra-national (e.g. Interim finance to initiate REDD+)
• Government
• Municipal

Forest bonds could be issued to finance private sector activity

To refinancing local lenders, or capitalising sustainable land management projects

• CDO

To finance large areas of  ‘natural infrastructure’ – forests generating regular income for the ecosystem services they deliver.

• Project finance bonds