Rainforest Bonds

Proof of Concept

In 2006 the IFC commissioned EnviroMarket and Forum for the Future to undertake a scoping study into alternative ways that capital markets might be used to finance a perceived funding gap for tropical sustainable forest management and conservation.  The scoping study concluded in August 2007 will be available soon (or contact us).

The study drew input from over one hundred finance, tropical forestry, timber and carbon trade professionals and identified key opportunities and barriers to greater integration of tropical forests with capital markets.

A number of theoretical models were developed for a forest-backed bond, each designed to accommodate the operational situation and funding requirements of different tropical forest management entities.  These applied the principles of securitisation to different tropical forest revenue streams. Assuming sufficient credit enhancement, forest-backed bonds could be issued against a variety of cash flows, including for example:- 

  • A portfolio of cash flows from tropical plantation, natural forest and conservation
  • Government income/licence fees from SFM
  • A portfolio of SFM related loans to small and medium forest enterprises
  • Plantation development linked to forest conservation

© EnviroMarket 2006

The feasibility of a tropical forest-backed bond is based to a large extent on the availability and cost effective application of a series of risk management and mitigation procedures. Central to these are portfolio diversity, country selection and third party credit enhancement (by governments or multilateral organisations).

The ability of the asset originator to secure long-term off-take agreements with credit worthy governments and buyers for both certified timber and carbon is an essential component in boosting the overall credit quality of the pool. Overall economic and political stability, growing demand for certified timber and ecosystem services and effective local forest governance are just some of the key factors in country and asset selection. Tropical forests are typically located in countries with high rates of deforestation and weak governance which increases the overall risk to the project.

About EnviroMarket

EnviroMarket provides support and advice on financing the sustainable management of natural resources.  We work alongside corporate, financial, government and civil society entities to enhance the overall viability of natural resources through the realisation of sustainability value.

The business was founded in 2005 by Simon Petley and Jon Grayson, two alumni of Imperial College ICCET MSc, both with many years of City experience behind them.  Although based in London, EnviroMarket also has a team of dedicated forestry experts in Toronto and a wider network of associates engaged on a project-by-project basis.

Over the past three years we have contributed to numerous conferences and workshops at the request of organisations including the ITTO, World Bank, UNFFF, IQPC and GreenPower Conferences - presenting on subjects ranging from SFM, conservation finance, ecosystem services, risk and capital markets.

People behind the Concept

EnviroMarket has been leading the conceptual development of forest-backed bonds together with a number of key partners and contributors.

The concept of ecosecuritisation was worked up by EnviroMarket.  The initiative quickly attracted the attention of the International Finance Corporation (IFC) and UK Department for International Development (DfID) and in mid-2006 the two parties agreed to a programme of research aimed at exploring the technical feasibility and developmental merit of the concept.

The EnviroMarket team, led by its co-founders Simon Petley and Jon Grayson, has been actively driving forward the commercialisation of forest bonds and approaches to ecosecuritisation.  We have been inputting our ideas and thoughts to seminal programmes such as HRH Prince's Rainforests Project (PRP) and the recently published Eliasch Review Climate Change: Financing Global Forests commissioned by the Prime Minister in late 2007.

There are other groups developing concepts with a more regional focus, such as Canopy Capital supported by the Global Canopy Programme looking at the Iwokrama Forest in Guyana.

Mark Campanale sat on the steering committee for the Proof of Concept study which concluded in August 2007.