Making financing work for forests

Making financing work for forests

the Netherlands - 20 June, 2013

There is a significant gap between the financing that is available from public and private sources for sustainable forest management and the funding required to meet future demands. Private financing is the most significant source of investment for forestry, and is likely to remain so given government policies on public financing.

According to the World Bank, the private sector invests US$ 15 billion every year in tropical forests; this is nine times greater than the combined investments of governments and development agencies.

The crucial challenge is how to reorient private financing to make it accessible in adequate amounts and terms to support sustainable and competitive forest management practices and responsible and profitable forest entrepreneurship. National and international public financing is increasingly focused on creating the supportive conditions to cope with the challenges ahead.

In 2012 TBI carried out several knowledge development activities to broaden the understanding of the needs and perspectives of private finance and business engagement in sustainable forestry (both small-scale and large-scale), and to determine how public policy can contribute.

ETFRN News 54 - Good Business: Making Private Investments Work for Tropical Forests - brought together 23 articles describing the hands-on experiences of individuals and companies. In the Netherlands a study assessed the involvement and perspectives of Dutch financial institutions in forestry. This complemented a similar international study that TBI carried out with the Food and Agriculture Organisation (FAO) on institutional investors’ willingness to finance forestry in emerging countries. All three studies show a growing interest of the private sector to engage more actively in tropical forestry and note the diversity of opportunities. They also, however, caution that the business is still at a very early stage of development and is hindered by uncertainties and risks. To reach the market scale and credibility needed risk-return profiles need to be improved, capacities must be built, networks of expertise and organisations must be expanded, forestry specific tools and standards must be developed, and supportive relations, policies and institutions need to be nurtured.

Together with FAO, the Global Mechanism, the International Tropical Timber Organisation and the National Forest Programme Facility, TBI synthesized the collective experiences in supporting national strategies and mechanisms for sustainable forest and land management in more than 50 countries. The resulting publication, Unlocking National Opportunities: New Insights on Financing Sustainable Forest and Land Management, highlights several lessons for national policy and international support, including the importance of designing a viable strategic process with national partners. Knowledge sharing; coordinated practical action among stakeholders; analysis of potential legal, policy and institutional barriers; risk mitigation; and guarantee instruments also have to be integral parts of strategies to mobilize financing.

TBI’s work on small-scale forestry also teaches that in order to develop a more inclusive and sustainable forest sector a better understanding of the functioning of small and medium forest enterprises (SMFEs) is needed, including self-financing through formal and informal arrangements. Neglecting small-scale forest producers in policy-making and business development not only misses an opportunity, but also increases the risks of policy and market failures. Most small enterprises lack knowledge of markets and access to them, and do not have negotiation skills; these are critical weaknesses.