Financing a sustainable forest future

Why should a bank in Europe care about the haze in Singapore or forest fires in Indonesia?

First: credit risk. If a bank finances a plantation involved in open burning, the borrowing company can face fines and other penalties under Singapore’s Transboundary Haze Act. Similarly, banks can see a deterioration in their client’s credit profile if these clients are known to be sourcing commodities from plantations linked to the haze. Products pulled off the shelves result in permanently lost sales, as APP can attest after its paper products were removed from the largest supermarket chain in Singapore because of the haze issue.

Shipping port covered by haze in Singapore. The haze was the result of illegal burning of forests and other land in Sumatra, Indonesia. © Rachel Chew / WWF

Banks also face serious risk of public criticism and potential loss of funds from their depositors. This happened in Australia when depositors closed their accounts to protest financing for fossil fuel companies due to their contribution to climate change. It is only a matter of time before the public realizes the role of deforestation in causing climate change and push for accountability from banks.

A WWF report last year showed that international banks and investors recognize the need to integrate environmental, social and governance issues in their lending and investing practices, and recognize the issues of deforestation and climate change. But the industry – particularly local and regional banks – has a long way to go to “do more good,” rather than simply doing less harm.

Asian banks are just at the start of this journey and have historically faced very little pressure from civil society, their shareholders and the general public on the environmental and social impacts of the activities they finance. Doing more good means providing the financial services that sustainable forest management, particularly by small forest enterprises, requires. This is where conservation and development advocates can help broker deals that work for banks, businesses, communities and nature.

Banks are deep experts in the sectors they choose to finance, but have very little knowledge on those that are not their core business. If we want them to lend more, or on better terms, to the small forest enterprise, there should be pathways to make it easier for them to do so. They need examples of possible deal structures, an understanding of how challenges around collateral, lending time frames and high transaction costs can be overcome. They need data to demonstrate the potential size of the borrower market.

We also need to explore alternative options to get finance to small forest enterprises. This might not always be a direct route from bank to forest-rights holder. For example, several projects in the Greater Mekong region arrange small loans in significant overall volumes by using the trading relationships of large buyers of forest products. These buyers know the producers well, and are willing to commit to long-term purchase contracts in some cases. They are even willing to issue loans to them, but don’t have large balance sheets to do this at scale. Working through intermediaries such as traders, buyers and mill owners in this way could reduce risks, transaction costs and increase the overall availability of financing for small forest enterprises. And all without requiring huge investments in lending infrastructure from banks.

A switch to sustainable rattan, Laos. Communities and companies in Cambodia, Laos, and Vietnam are working with WWF to demonstrate a viable and sustainable forest management model. © Simone Stammbach / WWF-Switzerland

There are opportunities to coordinate efforts on forest and landscape-level finance, given the huge amounts of funding now being pledged to climate and development investment projects. Some of these will be in land-intensive sectors such as forestry and agriculture. This comes amid a growing recognition that tackling deforestation and land degradation requires landscape or jurisdiction-wide approaches involving many sectors. This funding and landscape-level aspiration creates an opportunity to build investment partnerships between plantation owners, small forest enterprises, conservationists, communities and governments. The emergence of the green bond market could also mobilize new sources of capital required for these landscape-wide projects, by providing a structuring alternative via the securitization of smaller loans or by direct funding of sizeable projects.

Making this work will require a better reconciliation between traditional capital market mindsets, which don’t typically invest in public goods or sustainable development goals, and donor mindsets, which don’t typically invest in commercial operations, or over long time frames. All stakeholders need to get better at combining skills and developing hybrid models of land investment that meet both corporate and donor perspectives. Large funds such as the Green Climate Fund want to engage and learn in this area, and if finance can be provided on truly concessional terms, this could finally be a real game changer in attracting significant private sector resources and expertise to sustainable land management programmes.

Chris Knight, Assistant Director, PricewaterhouseCoopers and Jeanne Stampe, Asia Finance and Commodities Specialist, WWF