Financing Forests

Investing in sustainable forestry contributes to curbing deforestation and climate change

The world’s forest ecosystems are under great threat. According to the World Resources Institute (2019), 30 percent of global forest cover has been cleared, while another 20 percent has been degraded. What is left is mostly fragmented, leaving only about 15 percent intact. And that is a huge problem because forests are vital to combat climate change.

The forests we have left are still  capable of absorbing 2 billion tonnes of carbon dioxide each year, equivalent to about a third of the amount released annually by burning fossil fuels. On the other hand, deforestation contributes to the nearly 24 percent of all greenhouse gas emissions from land use activities — more than that emitted by the world’s entire transport sector. Sustainably managing forests is therefore critical for closing the emissions gap and limiting global temperature rise to 1.5°C from pre-industrial levels.

As a development bank, we see a solution in investing in responsible forestry in developing and emerging economies.

The challenges

Financing forests comes with financial challenges: projects take a long time to develop, and typically hardly generate income in the first 10 years. Especially in emerging countries this is problematic as commercial investors have a shorter horizon. To make sure that investment money does flow to these important sectors, FMO uses a blended finance investment approach where we mobilize commercial capital with concessional funding from Building Prospects, the Dutch Fund for Climate and Development and the Mobilising Finance for Forests Program; public funds we manage on behalf of the governments of the Netherlands and the United Kingdom.

In developing and emerging economies, forestry projects are not only financially challenging, but often also present investors with social and environmental risks: e.g. issues with biodiversity, water management, land rights, decent jobs, human rights, poor infrastructure, and weak market conditions. That is why we have environmental and social specialists as core contributors to our investment process; they carefully weigh and mitigate the risks associated with the projects we invest in.

Our Forestry Program

Currently, our forestry portfolio mainly consists of existing forest plantations, integrated plantation with wood processing facilities and agroforestry projects as these projects are most viable from a financial perspective. Going forward, we also aim to include sustainable forest management, forest conservation and non-timber forestry projects to enhance and diversify the impact that we generate.

Financing Instruments

FMO lends directly to forestry projects as well as participating in both debt- and equity-oriented funds, and co-investing alongside them. We provide different types of funding for forestry projects:

  • Loans (senior and mezzanine)
  • Equity investments (including preference equity)
  • Guarantees

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Our customer Burapha is a sustainable forestry company in Laos. It has turned reforestation into an economic opportunity. Curious to find out how that business model works? Read their story here.