The Colors of Forestry Financing

by | Feb 23, 2018 | FPN Blog

It is crucial for policymakers to consider how their forestry strategies are financed, because it increases the chance that the desired activities are actually implemented. The Philippine Forestry Master Plan for Climate-Resilient Forestry Development, for example, outlines potential sources of funding from the government, private sector and donors for all its planned activities.

In 2017, the New York Declaration on Forests (NYDF) – an international voluntary declaration to fight against global deforestation – completed a progress assessment on two of its ten forest goals: Goal 8 on financing strategies to reduce emissions from forests and Goal 9 on financial rewards to positive action. NYDF conducts annual assessments to track the progress of its ten forestry goals, which covers areas including halting deforestation, forests in Sustainable Development Goals (SDGs), land-use finance and governance.

The 2017 progress assessment concluded that the total finance of USD 20 billion allocated to Goals 8 and 9 since 2010 is “insufficient and does not reflect the importance of forests as part of the climate solution”.

The assessment focused on “deforestation [economies]”, specifically those with more than 30,000 hectares of gross forest loss in the period 2010 to 2015.[1] In the Asia-Pacific, this includes e.g. Indonesia and Malaysia.

NYDF categorized and compared green finance – those aligned with conservation and SFM objectives (e.g. REDD+ finance) – with grey finance – which has no specific objective to create positive impact in the forest sector but may nonetheless affect forests (e.g. government subsidies on agricultural activities). The sources of finance assessed were public international finance (e.g. donor funding), public domestic finance (e.g. government subsidies and investments) and private investments (e.g. institutional investments administered by the banking and financial sector).

Finance on NYDF goals 8 and 9 since 2010 have been dominated by grey finance, which has no clear objective of supporting forests (NYDF, 2017)

Of the USD 167 billion of public international finance allocated to climate mitigation for all sectors, only 2.3 billion (a meager 1.4%) was allocated to the forestry sector in deforestation economies. This is dwarfed by the USD 87 billion of grey finance allocated to agriculture in the same countries. The grey finance to agriculture alone is almost 38 times that of green finance to forestry. This is important because conventional agricultural activities often involve land use changes that can lead to deforestation and forest degradation.

Similarly, green private finance in sustainable commodity production is dwarfed by grey capital investments in agriculture, forestry and fisheries. While environmental, social and governance (ESG) policies are used by banks that invest in the Asia-Pacific land-use sector to assess the sustainability and ethical impacts of their investments, it was found that the application of such policies on-the-ground has been inconsistent.

Why is the dominance of grey finance over green finance such a big problem? Because the potential negative side-effects of grey finance on forests can offset or even exceed the positive impacts on forests created by green finance.

The dominance of grey finance over green finance can be illustrated in the case of the Ivory Coast (shown in the figure below), where the majority of grey finance is allocated to agricultural intensification, with green forestry and sustainable land use activities comprising a much smaller amount. Such a situation is not uncommon in other developing economies including the Asia-Pacific region (though unfortunately there are no similar studies on individual Asia-Pacific economies at the moment).

Grey finance (mainly in agricultural intensification) dwarfs over green forestry finance in the Ivory Coast. This trend is not uncommon in developing economies, including those in the Asia-Pacific region.  (NYDF, 2017)

How can policymakers improve on financial planning for the benefit of forests? The NYDF recommends that sources of finance be further shifted towards sustainable land use. For example, government subsidies in agriculture can increase its alignment with the objectives and requirements of SFM and REDD+ strategies in the economy. This allows the establishment of safeguards against deforestation in general land-use activities, such as those in the agricultural sector. Forestry policymakers should enhance their engagement with ministries responsible for finance and agriculture, to encourage the shift of resource allocation towards sustainable land use activities.

Similarly, private investments can reinforce its integration of ESG requirements not only on paper, but also in investment projects on-the-ground. Private sector investments in agriculture has been found to be the largest source of finance in the land-use sector, and the NYDF assessment argues that such investments must be redirected towards sustainable forestry and agriculture as soon as possible. “Blended finance” instruments, such as the CIFOR-sponsored Landscape Fund, provide a financial platform to support smallholders in practicing agriculture and forestry sustainably. Such instruments hold great potential for creating public-private partnerships in sustainable land-use.

The detailed findings of the New York Declaration on Forests Assessment Report can be found in the executive summary and full report.

[1] The rate of loss was calculated based on the average gross tree cover loss between 2010 to 2015 and tree cover in 2000, considering tree cover above 50 percent is defined as forest, a drop below 50% is defined as forest loss. See M. C. Hansen et al., Science 342, 850 (2013); DOI: 10.1126/science.1244693

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The APFNet-led Asia-Pacific Forestry Planning Network (FPN) is an informal knowledge network that aims to strengthen national forestry planning processes in the Asia-Pacific region. The FPN Blog is targeted to network members but policymakers and other forestry practitioners may also find it relevant. For more information, please contact Ms. Anna Finke at annafinke@apfnet.cn.

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