Managing Risk
Forest management involves a degree of political, commercial and market risk wherever forests are located, and a variety of structural and third party approaches have evolved to address this.
Political risk includes failure to implement or uphold existing policies, failure to honour contracts, arbitrary changes to forest law, and expropriation all the way down to bribery and corruption. Management of political risk is increasing central to forestry investment, since the majority of global forest resource and development potential is located in tropical countries with medium to high political risk.
Commercial risk can cause sustainable harvesting, ecosystem services or planting activity to materially underperform or fail completely. In addition to physical damage caused by drought, fire, ice, and wind storm and pest infestation managers need to address theft, malicious damage and the credit risk presented by customers, especially in local markets.
Market risk refers to the potential for instability or disruption within those markets that the sustainable forest business is operating. All businesses operating within the young economies of the developing world live with a high degree of economic uncertainty. As a sector forestry presents its own unique challenges, including a relatively higher potential for corruption, competition for land for alternative activities, and complex community and ecosystem interactions.
Developers and fund managers can address these risks by careful selection of location, shrewd asset selection, good structuring and cost effective use of third party risk products and services.
Institutional investors assessing forest bonds and other innovative products need technical insight on underlying risk, quality of risk management, anticipated returns, and emerging standards governing their issue.
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