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Forest-Backed Bonds Proof of Concept Study

Forest-Backed Bonds Proof of Concept Study

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Published by IFC Sustainability
This report explores how conventional structured finance methods may improve the access long-term finance for natural tropical forests. A forest-backed bond structured around different forest and forest related assets, portfolio diversification, environmental/ecosystem payment flows and third party insurance for both timber and the environmental/ecosystem payment flows, could deliver the up-front capital needed to secure long term tropical sustainable forest management and reduce the economic bias towards unsustainable extraction resulting from expensive local bank loans or equity financing.
This report explores how conventional structured finance methods may improve the access long-term finance for natural tropical forests. A forest-backed bond structured around different forest and forest related assets, portfolio diversification, environmental/ecosystem payment flows and third party insurance for both timber and the environmental/ecosystem payment flows, could deliver the up-front capital needed to secure long term tropical sustainable forest management and reduce the economic bias towards unsustainable extraction resulting from expensive local bank loans or equity financing.

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Categories:Types, Research
Published by: IFC Sustainability on Mar 24, 2010
Copyright:Attribution Non-commercial

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02/01/2013

Forest -Backed Bonds Proof of Concept Study
FINAL DRAFT - CIRCULATED TO STEERING GROUP
06 August 2007
Prepared by Forum for t he Future and EnviroMarket Lt d
for IFC and DfID
Forest -Backed BondsProof of Concept St udy
Forum for t he Future & EnviroMarket
Acknowledgement s
A large number of individuals were consulted in the process of pulling this report together. We
would like to thank everyone who has contributed in a small or greater part to the process. Much
woul d not have been possi ble wit hout exper t gui dance f r om t he St eer i ng Group and a real desi re on
the part of our project sponsors to see the idea become a reality.
Edit orAlice Chapple, Forum f or t he Fut ure
Aut hor s Si mon Pet l ey, Jon Grayson, Nick Moss Gil lespi e, Susannah Turnbul l, Andrew Gaines, Andreas
Wackernagel \u2013 EnviroMarket Lt d
About the programme

The r esear ch pr ogr amme was est abli shed in mid-2006 by t he Int ernat ional Finance Corpor at ion (IFC) with backing from the UK Department for International Development (DfID) and sets out to test the t echnical f easibilit y and likely development impact of eco-securit isat ion by examining it s pot ential role in t he f inancing and/ or re-f inancing of sust ainable f orest ry in t he developing world.

The Programme is divided into three stages. This first st age, a Proof of Concept Study, examines the t echnical f easibilit y of t he idea. Based on it s conclusions, subsequent phases are expect ed t o explore concept development and identify and promote measures that would act as market catalysts.

Part ner s and Sponsor s
The concept was ori ginal ly promot ed by Mark Campanal e, t hen Head of SRI Busi ness Development at

Hender son Global Invest ors i n London. In ear ly 2005, a pr oposal t o under t ake a pr oof of concept st udy was developed in collaborat ion wit h EnviroMarket and Green & Gold. The init iat ive quickly at t r act ed t he at t ent i on of t he Int ernat i onal Fi nance Corporat i on (IFC) and t he UK Depar t ment f or Int ernat ional Development (DfID) and i n mid-2006 t he t wo part ies agreed t o f und a programme of research aimed at exploring t he t echnical f easibilit y and development al merit of t he concept .

The Proof of Concept st age, whi ch commenced i n August 2006, i s managed by UK-based sust ai nabl e
development charit y Forum f or t he Fut ure and undert aken by EnviroMarket Lt d.
The R&D Programme is guided by an independent St eeri ng Group, made up of Jon Wi lliams (HSBC),
Mat t hias Rhein (Df ID), Juan Jose Dada (IFC) and Mark Campanal e.
Forest -Backed BondsProof of Concept St udy
Forum for t he Future & EnviroMarket
CONTENTS

Execut ive Summary........................................................................................................... 4 Abbreviat ions and Acronyms............................................................................................... 13 Key Definit ions............................................................................................................... 15 1

The Forest ry Sect or.................................................................................................... 17
1. 1
Forest Asset s..................................................................................................17
1. 2
Forest ownership..............................................................................................20
1. 3
Forest business models......................................................................................26
1. 4
Sustainable Forest Management............................................................................39
1. 5
Relevance of SFM t o Key Forest St akeholders............................................................ 43
2
Tropical Forest Finance............................................................................................... 48
2. 1
Financing Requirements of Forest Operators.............................................................49
2. 2
Trends in Forest ry invest ment.............................................................................. 51
2. 3
Forestry Investment Risk....................................................................................58
2. 4
Forestry Risk Mitigation Strategies......................................................................... 61
3
Securitisation of Forestry............................................................................................. 71
3. 1
Backgr ound.................................................................................................... 71
3. 2
Benefits of Securitisation....................................................................................72
3. 3
Relevant Structures..........................................................................................73
3. 4
Securitisation in Tropical Countries....................................................................... 76
3. 5
Fut ure Flow Transact ions....................................................................................77
4
Pot ent ial Models for a Forest Backed Bond........................................................................78
4. 1
Int roduct ion................................................................................................... 78
4. 2
Model (A) \u2013 A bond backed by government income from forest ry concessions...................... 80
4. 3
Model (B) \u2013 A bond backed by a port folio of sust ainable forest ry..................................... 82
4. 4
Model (C) \u2013 A bond backed by sust ainable forest ry loans issued by local banks.................... 86
4. 5
Model (D) \u2013 A \u2018 zero coupon\u2019 bond backed by a sust ainable forest ry port folio...................... 89
4. 6
Test ing t he Market for Forest -Backed Bonds............................................................. 90
5
Conclusions and Next Steps...........................................................................................92
5. 1
Securit isat ion.................................................................................................. 92
5. 2
Market for Forest Backed Bonds............................................................................96
5. 3
Next Steps.....................................................................................................98
6
Appendices............................................................................................................ 103
6. 1
Appendix 1 \u2013 Met hodology................................................................................. 103
6. 2
Appendix 2 - Forestry Securitisations (detail).......................................................... 106
6. 3
Appendix 3 \u2013 Forest ry and t he Carbon Market s........................................................ 110
6. 4
Appendix 4 \u2013 Charact erist ics of Select ed SFM Proj ect s............................................... 113
6. 5
Appendix 5 \u2013 Count ry Select ion Assessment............................................................ 115
6. 6
Appendix 6 \u2013 Supplement to Business Models \u2013 Plantation Costs.................................... 117
6. 7
Appendix 7 - Cert ificat ion St andards and Monit oring................................................. 120
6. 8
Appendix 8 - Invest ors for Ident ified Transact ions.................................................... 130
6. 9
Appendix 9 \u2013 Glossary...................................................................................... 132
6. 10
Appendix 10 \u2013 References................................................................................. 134
6. 11
Appendix 11 \u2013 Cont act s List............................................................................... 137

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