Forest-Backed Bonds Proof of Concept Study

This project looks at how conventional structured finance methods applied to natural tropical forest might give forest managers greater ability to access long-term finance. Improved finance has been identified as one of the ‘missing’ elements necessary to unlock the wider uptake of tropical Sustainable Forest Management (SFM).

We propose and test ‘EcoSecuritisation’, an innovative approach to the financing of natural forests that enables the development of long term asset value rather than short-term timber yield, through the issue of long duration Forest-backed bonds. The proposed mechanism utilises portfolio diversification; recent developments in forestry insurance and risk mitigation techniques; and the emergence of markets for ecosystem services in order to attract a diverse range of capital market investors.

 The issue of forest-backed bonds in the proposed format will enable the creation of a long-term capital pool accessible to SFM operators and investors. Although governments remain the dominant owners of tropical natural forests, community and indigenous groups are playing an increasingly important role, and an increasingly diverse range of groups now carries out the management and harvesting of tropical natural forests. Significant financing gaps exist throughout the strata of tropical SFM, and viewing the sector as a whole is expected to deliver real benefits in terms of overall uptake. Important questions remain regarding how capital unlocked by EcoSecuritisation should be accessed by the different entities that could benefit from it.

The principles of EcoSecuritisation can be extended ‘up’ to government and ‘down’ to small and medium sized forest enterprises via alternative structures.  Sovereign bonds issued against state income from SFM, and securitisation of small scale loans for SFM are both possibilities.