A brief explainer of how REDD+ finance works

A brief explainer of how REDD+ finance works

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In one of largest ongoing efforts to tackle climate change, projects happening the world under the framework of REDD+ – reducing emissions from deforestation and forest degradation – are shoring up invaluable benefits for the planet’s collective future. But, this doesn’t come cheap. Who’s paying for it? Where does the money go? What are the returns on investment? And, why aren’t answers to these questions already widely known?

In the run-up to the Global Landscapes Forum Investment Case Symposium on 30 May – a high-level summit focused on sustainable investment – we spoke with CIFOR scientist Stibniati Atmadja, who’s worked with a team on groundbreaking, soon-to-be-published research about the current state of REDD+ finance. Here, she gives us a brief run-down on how it works.

Can you define indirect and direct REDD+ finance in your own words?

Direct REDD+ means the activity has the REDD+ brand on it: the title has REDD+ in it, the activity is described as using REDD+, or it involves institutions set up to channel REDD+ money (UN-REDD, for example). Indirect REDD+ activities have the same objectives but don’t use the brand. A lot more financing goes there [to indirect].

Why is that?

When it comes to brands, think of detergent. You have Tide, and you have other brands. They all have the same objective of cleaning your clothes, but just aren’t called Tide. A lot of things we do are trying to reduce deforestation and degradation, but they’re just not branded REDD+ – for example, afforestation, reforestation, conserving some biosphere. This creates uncertainty on how to brand financing as for REDD+ or non-REDD+.

As with detergents, each brand sells something unique. REDD+, for example, incorporates written principles related to rigorous monitoring of emission reductions, care for impacts on livelihoods and biodiversity, and so on – sort of like some detergents that don’t do animal testing or use only natural ingredients.

REDD+ activities have three stages: readiness, implementation and results-based payment. How does finance get spread between the three?

It depends on the year. When REDD+ started to get more global recognition and therefore finance – from about 2009–2013 – a lot of money went to readiness. As countries graduated from readiness to implementation, more finance emerged to support those implementing. Now, as some countries are reaching results-based payments, you have mechanisms trying to address that, like the World Bank’s BioCarbon Fund.

The bulk of REDD+ funding has so far been with readiness, because it started first and is still continuing. Though, it’s tapering off, and donors are trying to support implementation and results-based payments more.

Overall, do you think funding is increasing, decreasing or at a plateau?

I can’t really say. It goes up and down. And I can’t really distinguish between readiness, implementation or results-based payment with the available data.

It’s important to know that financing for REDD+ is increasingly treated like a sub-component for financing for climate, so REDD+ is competing with all kinds of climate finance. And as REDD+ is mainly a mitigation activity, this means it has to compete with more lucrative financial aid activities, such as new forms of energy, fuel efficiency, transport… And that’s pretty tough. When REDD+ is clumped with adaptation funding, it starts being a contender. There, forestry is on more of a level playing field with other adaptation measures that also aren’t as obvious profit-wise. So, if REDD+ can just break free and be in the middle of mitigation and adaptation – because it is — then it would be better.

Do investors generally view REDD+ finance as a cost-effective, attractive way to invest?

Well, first, when you talk about aid, you don’t think of profit as an objective. You think of a sunk cost to invest in something in the future. If there is a very strong investment case for REDD+, then you would see a lot of direct REDD+ activities funded through loans or equity or some sort of mechanism that gives the feeling that it’s not really aid. The data I analyzed was from overseas development aid and loans, up until 2015. In this, almost all direct REDD+ – 99% of it – is funded by overseas development grants. No loans, no equity, no lending.

For me, this seems like we’re still in a phase of looking at REDD+ as a global investment to get something moving in the forestry sector, so that the world has the option in the future to have forests. It’s a social investment, if you know what I mean. The financial profits aren’t catered into the equation right now.

If there wasn’t this international funding, you’d perhaps see countries getting loans to put into forests. But so far, most countries have not, and those that do borrow don’t call it REDD+. They call it afforestation, forestry development planning, or something like that. China has a huge EUR 250 million loan for forestry, but it’s not called REDD+.

And they chose not to call it REDD+ because…

To some countries, REDD+ has very extroverted MRV [measuring, reporting and verification of forest carbon]. Showing that you did a lot of things – safeguard information systems, forest monitoring systems, reporting back to UNFCCC – maybe is just too cumbersome. To avoid all that, countries don’t call it REDD+. Or, maybe [the funding] was just for continuing something that was never called REDD+.

Also, if you’re a country just trying to develop your forestry sector, why would you call it REDD+?

It’s often said that there’s very little private sector support for REDD+ right now. Why?

I wouldn’t want to say there’s no support. The problem is that we don’t know. The data is not available. I think there is a lot of private sector support for reducing deforestation and degradation through investing in plantations and conservation-based business and so forth, but the amount is not known. There’s data from the Organisation for Economic Co-operation and Development (OECD) on bilateral transfers from countries to recipients or from multilateral institutions to recipients, but if the source is from the private sector, data isn’t captured.

There are other studies that talk about private sector contributions to climate finance in general. They talk about energy efficiency, transport, all that stuff. And there, the private sector is huge. But forestry just gets small hits of funding, mostly in the voluntary carbon market (VCM). There are a few VCMs around, and there you can sort of see the contributions of the private sector, but again I don’t have the data.

How do local communities play a role in private sector efforts on the ground?

In many places, if you just want carbon benefits, you don’t have to work so much with communities, because communities aren’t the ones that cause the most emissions. As long as you keep your concession protected, then there’s nothing else you should do. This is if carbon is your only goal. However, ignoring communities is unrealistic, unethical and unsustainable. Most forests are managed de facto by communities. But if you work with communities and maintain biodiversity, then costs get really high, and private finance won’t be enough. You’ll need grants and donors to step in, because as it stands, the financial incentives from just selling carbon can’t cover these added costs and associated risks.

That’s interesting, because there’s so much dialogue now about how to involve local communities in projects from the get-go. Does this actually detract investment?

It shows the limit of the private sector’s role in REDD+. Its role is really about sustainable profit generation and managing risks attached to their investment. It cannot and should not go beyond that. In my opinion, beyond that is the responsibility of the state. There has been so much expectation of what the private sector can do, and it worries me because the expectation is too much.

So for example, if a private sector entity comes, they will evaluate community engagement mostly in terms of social risk management. What’s the cost of managing a risk versus not managing it? Community engagement has to have a budget informed by how much risk you’re taking if you’re not investing in that budget. That’s the kind of mentality the private sector has to maintain their financial health. But in the REDD+ discussion, the role of the private sector is often mixed up social objectives such as indigenous rights, maintaining conservation, biodiversity and so forth. In doing so, the financial logic gets put aside. And if I were in the private sector, I’d want to see the financial logic come first. I think there’s a huge communication gap between what donors, NGOs and governments expect and what the private sector can do. The role of the private sector needs to be further fleshed out and clear. They are neither there to replace the role of the state, nor undermine communities.

Then, how do we still improve local community inclusion in REDD+ finance?

I’ve been thinking a lot about how we think of investors as big institutional things – pension funds, venture capitalists, whatever. But in REDD+, local communities are also investors. Often, it’s local communities who do the labor to conserve land, replant, etc. So, they are investors, investing in areas that they don’t own, in areas that government can even reallocate to others, in some cases. I mean, doesn’t that sound strange? Would you do that? We’re asking poor farmers to give charity to everyone else, and they do, because they really understand the benefits.

If they were treated as investors, the same as the large-scale people coming in, then that would give a new meaning to private sector involvement in REDD+. Then, the private sector includes communities. And they invest, not in money, but in time, effort and labor that otherwise wouldn’t be provided by anyone else. I bet if someone would estimate the amount of investment local communities have made by protecting and replanting forests, it would be humongous.

If you look at the discourse about the private sector, who would bring in a small community leader and talk to them as an investor? You’d talk to them about indigenous rights, or alternative livelihoods. But we have to think about how to make investments better for them. We have to make the idea of the private sector space bigger, by including the small.

How do other forms of forest finance tie into REDD+?

At the big, international level, there are green bonds – offers to put money toward financing something that will generate profit, and that profit will pay back whoever put in the money. A lot goes to green tech, such as fuel-efficient cars.

But for forest-based activities, what generates profit? So far, it’s been timber and other material things, like spices. Profit in the forestry sector has been from selling forest products such as timber or fuel wood. Historically, this has often led to deforestation or forest degradation. So, we need to be extra careful and innovative about having profit generation from forests finance REDD+ because most of our experience in doing that has hurt forests.

If you go down a bit, you have the question of starting a green business in general. Especially in the forestry sector, this depends on loans. And it can be very hard to get a loan from banks. If you’re already harvesting from existing timber areas, banks see you’re producing, and they’ll give you a loan to replant. But if you say, ‘Look, I want to invest in this barren area, reforest it, and harvest it 20 years from now,’ or ‘I’m getting a loan to keep this forest as it is,’ banks don’t want to finance, because they thinks it’s too risky or there’s no money in it. Maybe this is a place for public-private collaboration, such as governments providing loan guarantees to forest investments. With those kinds of loans, the risk of default, however, is really high.

The problem with the business case for REDD+ is that a lot of it before hinged on financing from the carbon market. But now, the carbon market is seen to be just the cherry on the cake, when before, it was the cake. Frankly, I’m not going to a party if I only get the cherry. A lot of possibilities can occur, it’s just that we have to re-think how REDD+ can generate dividends for people that invest in it.

The forthcoming research mentioned in this piece is part of CIFOR’s Global Comparative Study on REDD+. Supporters of this research are listed below.

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Superforest

via Center for International Forestry Research https://www.cifor.org

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