How do we ensure that E&S risks don't hinder the scale up of FSLU investment

MFF Header 3 nl.jpg
Reflections and lessons from leading E&S specialists

How do we ensure that environmental and social risks don’t hinder the scale up of FSLU investment?

What are the challenges to scaling up investment in the FSLU sector?

According to the IUCN, halting the loss and degradation of forest ecosystems in addition to promoting their restoration could contribute more than one-third of the total climate change mitigation needed to meet the targets of the Paris Agreement. However, despite the urgency to scale up investment in nature-based solutions, including the forestry and sustainable land use (FSLU) sector, the mobilization of funds has been slower than required. With every increment of global warming, climate change impacts and risks will become increasingly complex and more difficult to manage, thus the need to rapidly increase investment in climate mitigation, including in FSLU and other Nature-based Solutions (NbS) sectors. Providing investors with the knowledge and confidence to finance innovative nature and climate-positive projects whilst reflecting the needs and realities of communities on the ground is compulsory if we want to effectively protect people and our planet.

Discussions on environmental and social (E&S) risk were prominent at the Mobilising Finance for Forests [MFF] and Partnerships for Forests [P4F] event on the 11th of May. Focusing on lessons and opportunities from public, private, and blended finance on investing in forests, the forum provided participants with a targeted session to learn about effectively managing E&S risk from leaders in the FSLU sector.

At present, directing private capital towards sustainable forestry investments in low to middle-income countries [LMICs] is difficult as it is deemed unattractive from a risk-return perspective. With typical lock-in periods for forestry investments being 10 years or more – coupled with concerns over natural disasters, integrity concerns in the voluntary carbon market, infringing on cultural heritage and local rights, and managing local community and smallholders needs with fund managers and investors– the financial and E&S risks may seem too large of a deterrent. But the right tools, strategies, and competencies for effective risk management can help to unlock investments in FSLU and other NbS opportunities and deliver environmental, social and financial returns for both shareholders and stakeholders.

Preventing E&S risk from becoming a barrier to investors

A common perception in the investment community is that imposing higher E&S standards on projects will decrease returns. This idea was roundly rejected by the panel members, who agreed that the real barrier is not having high standards, but a lack of knowledge of successful tools to mitigate E&S risks. Robust internationally recognized standards exist to help investors and project developers with this challenge. In the FSLU sector for example, obtaining FSC certification can be the first step for effective E&S risk management, followed by consistent due diligence and reporting to ensure that IFC performance standards are being met.

On the other hand, it is important to be realistic about the extent to which all risks can be mitigated: fear of risk management processes cannot be a barrier to investment in impactful and urgently needed FSLU and NbS solutions. From the perspective of a global NGO director, it is naïve to believe that every risk that the investor would have to take can be mitigated. Instead of mitigating all risks, investors need to enter into collaborations with the right people and specialists to evaluate which risks are the most important to the integrity and environmental health of their project, with reference to the investment’s unique contextual factors and investors’ objectives for financing the project.


Keeping E&S risk at the core of the investment process

If risk management is not at the core of investment, then it is likely that [the intended impact of] the investment will fail - Senior Leader, DFI

Keeping E&S risk at the core of investment is crucial to ensuring that the project will generate real returns for investors and positive impact on the ground. The longer timeframes of most forestry projects means that due diligence and financial reporting need to be fundamentally sound, with the investigation and planning being completed prior to investment decisions being made. Conducting land-use analysis and examining the current state of biodiversity and conservation value, or drafting a biodiversity management and action plan prior to deploying investment is a good first step. From an intergovernmental organization perspective within the E&S session at the MFF/P4F investment forum, transparency measures such as posting an investment’s E&S reports online is also a good way to ensure a project’s commitment to upholding E&S accountability, as well as holding quarterly meetings to review any relevant developments.

The surrounding landscape and local communities must be leading voices in the decision to move forward with a forestry project. Risk management conducted only from the perspective of the investor is rarely going to provide a comprehensive report of all potential E&S risks. Project financiers need to invest in on-the-ground presence, with a consistent and effective dialogue maintained between those who are being directly impacted by the project and those who are implementing it. This can be achieved through the onboarding of community liaison officers, gaining free prior and informed consent [FPIC], conducting a social baseline study prior to project intervention to map important local stakeholders, and ensuring that any major project decisions likely to impact the community seek out genuine input from the affected population.

How Blended Finance programs can help

The mainstream commercial investment community’s level of risk tolerance for FSLU projects needs to increase as soon as possible if we want to uphold the Paris Agreement and protect nature and a safe climate for all.  Blended finance approaches are one emerging innovation that can help to catalyze investment into key climate solutions such as the FSLU and NbS sectors. In addition to mitigating financial risk, blended finance can help to maximize the impact of FSLU investments, and leverage a wealth of technical expertise on navigating the E&S risks associated with investing in nature and in LMICs, where some of the highestpotential impact NbS opportunities exist. The Mobilising Finance for Forests Programme, funded by the UK government and managed by FMO, is a leading blended finance program rising to meet this challenge. With their greater appetite for risk and experience developing successful E&S management systems to manage that risk, FMO seeks to stimulate commercial investment to protect and restore tropical forests and help to deliver on climate and nature goals.

Blended finance is a powerful tool which allows people to venture out into fields that you otherwise wouldn’t dare – Senior Leader, DFI

The clock is ticking to meet our climate goals: it is critical that investors learn to balance real and perceived risks in FSLU with the need to take action. Workable risk assessments and credible due diligence and mitigation processes are necessary to knock down the barrier to much-needed investments in nature. Developing and disseminating E&S risk management strategies is a key unlocking factor for scaling up investment to protect and restore forests.