Jose Maria Ortiz l Palladium - Jan 27 2021
Investing in Green Gold: Tackling Climate Change in 2021

2021 will be the year of renewed focus on climate change. As the United States renews its commitment to the Paris Climate Agreement and the United Kingdom prepares to host the upcoming COP26 climate negotiations, climate policies must be accelerated towards net-zero, and quickly.

Industries will develop and grow in response to the ambitious climate targets set by the global community, but one of the most important shifts to emerge will be the establishment of forests as an asset class.

Forests make up 33 per cent of the solution to decarbonisation and 2021 is the year when early business models around forestry will emerge, creating enormous opportunities and drastic transformations. I predict that we will see a massive change in the level of commitment that countries are going to make against carbon emissions and the sophistication of the solutions we develop to do so.

Preserving Forests

According to Partnerships for Forests, a UK-funded program that supports investments in forests and sustainable land use, about a quarter of global greenhouse gas emissions are the result of deforestation, agriculture, and other land uses. As populations, incomes, and demands for food, fuel, and fibre increase drastically, there will be an increased pressure on forests and their survival.

Reforestation is certainly required, but if policymakers and governments want to truly tackle the climate crisis, we must focus on preserving existing forests. Recent research has shown that mature natural forests store more carbon than plantation forests, but these benefits can take centuries to emerge and act on slowing the accumulation of CO2 in the atmosphere.

Doing so won’t come cheap. Researchers from the research institute RTI International found that by 2055, it would cost as much as USD 393 billion per year to plant and protect enough trees to reduce 10 per cent of the total emissions needed to restrict climate change to 1.5 degrees Celsius.

Investing in Forests

Where forests were once viewed as an investment liability (due to the length of time before investors see returns and because assets are often ‘illiquid’), now is the time for economic incentives and investment in the preservation and recovery of forests globally.

For billions of years, forests have acted as the world’s most effective carbon removal technology, but more often than not, the short-term economic gains from degrading or converting forests have outweighed the long-term gains of leaving them standing.

Simply put, there is monetary value in a standing forest, and it isn’t just because of climate change. These forests are worth far more standing than chopped down for timber, and traditional solutions already exist in many places.

We have the opportunity to scale up and invest in the trade of sustainable, high-value forest commodities, supporting carefully designed business models that combine high-intensity agricultural production with the protection of adjacent forests.

New solutions are emerging too: innovative business models that reflect the true value of nature’s ecosystem services. For these ideas to succeed and scale up, the right enabling environment is crucial.

They will appear in countries whose governments move first to remove the economic incentives that have long driven environmental destruction (such as subsidies for monoculture farming) and design the right frameworks to govern new markets for ecosystem services. These will likely include carbon, biodiversity and habitat creation, and natural solutions to flood risks and tackling water pollution.

The UK Government is currently setting an inspiring example for how this can be done, thanks to its new Environment and Agriculture bills, and new markets for nature restoration will swiftly emerge in the UK when these bills are passed.

When the right conditions align and these new investment opportunities emerge, the challenge will be to identify and develop projects to an investable point. Developing an ecosystem for pipeline is critical. We’re seeing the creation of more and more funds to invest in forests, but they’re struggling to find businesses ready to invest. The priority in the coming years will be to create the projects and environment that allow investors to successfully deploy capital at scale for ecological restoration.

Interesting partnerships will emerge between multinationals in many sectors, governments, development organisations, NGOs, and offtakers to find the best means to invest in nature and forest preservation.

Building an Ecosystem to Channel Investment

2021 will see a huge deployment of capital to forests – a transfer that requires the appropriate business infrastructure to absorb. Building a sustainable investment ecosystem that inspires growth over time will be key to mitigating the risk of an overflow of capital, which tends to create inefficient solutions and could fuel corruption, especially in countries that face governance challenges.

The crucial pieces needed for this ecosystem are pipeline development and the redefinition of economic incentives for natural capital outcomes. If governments, foundations and multinationals focus on solving for these two elements, the result would be a framework for capital to flow into businesses that protects forests and increases livelihoods in their communities.

Supporting this shift will require cooperation and coordination across the private sector, governments, and financial institutions, but it’s never been more imperative than the current moment to focus energies and investments on forest preservation.

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