We all know the old saying, “Money doesn’t grow on trees!” Perhaps it is time for us to abandon this saying. Forests are valuable. I don’t think that this has ever been in doubt: they have served as a rich resource of timber, foods and medicines for centuries. But the financial value of the ecological services they provide has only been recognised recently.
Forests protect topsoil, filter waterways, moderate rainfall, provide pollinators and shelter biodiversity. These functions are vital to our own health and wellbeing. At last, we can ascribe a tangible financial price to capture at least some of this value, thanks to the advent of the carbon market. Forests are key carbon sinks. Tropical forests on peat store over 1000t of carbon per hectare. It is not surprising, therefore, that deforestation and land degradation contribute nearly 20% of total annual greenhouse gas emissions.
20%. That’s more than transport, manufacturing or construction.
I started Redd Forests nearly two years ago because we need to stop the deforestation and degradation of the world’s great forests. Our philosophy is simple; these forests, the soils of the land they rest on and the biodiversity and communities they protect, must be of greater value left standing and properly managed than cut down and degraded. No man-made plantation can perform their function of sequestering greenhouse gases as well or as valuably. Redd Forests therefore seeks to realise the commercial value of these forests as environmental assets and remunerate their owners for their safekeeping.
The question is “How best to do this?” The international REDD framework is still being developed and refined. We saw dramatic progress during the Copenhagen and Oslo conferences, with the developed world committing some six billion dollars towards REDD+ projects and policy development. This support is being maintained, with REDD+ arguably the focus of the 16th Conference of Parties at Cancun in November of this year. This is no doubt because REDD is one of the few areas of agreement, as even sceptics of anthropogenic climate change agree on the need to protect and preserve our forests. We therefore have an opportunity, with almost unanimous support among developing and developed countries, to slow tropical deforestation by providing a competitive commercial return for conservation.
The key question in this sector concerns how REDD will develop. Will we see a UN-based approach comparable to the Clean Development Mechanism? Will REDD credits be produced within bilateral agreements at the national level such as the deal we recently saw between Norway and Indonesia? Or will there be a thriving, project-based global market for REDD carbon credits driven by the private sector?
Malaysia has not yet introduced a formal REDD+ policy, despite the immense pressure on its forests. The main driver of deforestation in this region, and we can include Indonesia here as well, is the rapidly expanding oil palm plantations: Malaysia itself is now the second largest supplier of palm oil in the world. We need our forests, but we need palm oil as well. It is a necessity for both food and fuel, and we must recognise global demand for its provision. How can we do this and yet avoid losing more of our tropical forests? There is an answer, and I will get to it shortly.
Back to REDD though. There are four reasons to develop Reduced Emissions from Deforestation and Degradation projects in Malaysia.
- Any mechanism that provides a competitive income to landowners while maintaining the integrity of the asset itself must be the preferred land use. Revenue from REDD can be competitive with revenue from palm oil for landowners, while protecting the forest. Moreover, REDD projects can be integrated with oil palm plantations if developed with the right safeguards. Again, more about this later.
- The carbon market serves to diversify income, reducing national dependence on the volatile timber and palm oil markets. A hedge, if you will.
- Forest ecosystem services are critical for maintaining all other land uses. They maintain watersheds, encourage rainfall, ensure water quality, protect topsoil and provide pollinators. In this way, oil palm plantations can benefit from proximity to REDD projects – hence my previous comment about integrating land uses. It is imperative that we maintain the forests of Malaysia if we want these other land uses to remain viable. REDD offers a means to fund this conservation, which in turn achieves important social and environmental outcomes.
- Finally, REDD hedges against the risks of not protecting the forest. If we follow a business-as-usual trajectory, we are likely to see increased landslides, susceptibility to invasive species, unpredictable weather… In my own country, the steady decline of the Great Barrier Reef epitomises this danger. Forests on the Queensland and northern NSW coastline have been replaced by agriculture, which produces run-off in the form of both fertilisers and pesticides. The result – compounded by climate change – is the likely slow death of the world’s largest living organism and one of Australia’s biggest tourist attractions and fishing resources. The financial cost will be immense – and the social and environmental costs greater still.
It is clear that REDD has the potential to fuel sustainable economic growth and development in Malaysia. However, this demands that we create a suitable policy environment that does not subsidise destructive land practices but, instead, rewards landowners who choose sustainable options. For this reason, I would advocate strongly against the ‘Plus’ in REDD+.
Let me explain.
The term ‘REDD’ describes avoided deforestation, and consequently reduced emissions from land use change. REDD+ extends this concept to the enhancement of carbon stocks by increasing forest cover, and the alleviation of poverty by working with indigenous and local communities. These are worthy goals and I applaud them. However, they also create an added regulatory and financial burden that alternative, much more detrimental land uses do not face. REDD+ is not competing against traditional land uses or forest conservation. It is competing against logging and conversion to plantations. What regulations do these land uses face? Well, not much. The much acclaimed Roundtable on Sustainable Palm Oil – whilst noble in many of its practices and all of its objectives – allows plantation companies to decide what standards they are willing to adopt. Their projects are not assessed according to indigenous opportunity or ecological improvements, but by their financial returns. This is not a level playing field. Conservation is being disadvantaged, often by those agencies who most support its goals, while rampant conversion and deforestation continue apace.
For this reason, I argue that the ‘Plus’ must be a regulatory requirement for all land uses, not a requirement applied solely to REDD projects. In other words, the rigorous guidelines being developed by UN-REDD should be extended to all land use policy. This allows REDD credits to be sold in a free and open commodity market, complying with policy and private sector certification standards. This will create an environment where REDD-plus competes against Oil Palm Plus, Jatropha Plus and Micro-agriculture Plus. Then there need be no doubts about the social, ecological or financial value of alternative land uses. If and when we face that situation, I am sure that landowners will move to protect their forests.
We are making rapid progress with the international frameworks for REDD, thanks to contributions from the supranational organisations such as the World Bank and United Nations, governments, think tanks such as Avoided Deforestation Partners and NGOs such as WWF. However, we face the ongoing challenge of obtaining finance for demonstration projects in an uncertain sector. Many investment banks have tested the waters, from Merryll Lynch to Australia’s Macquarie Bank. Indeed, BNP Paribas in Africa recently invested $50 million in forest carbon initiatives. However, there are more reliable and effective means to attract investment in REDD.
One such mechanism is forest bonds. The World bank issued its inaugural green bonds in 2008, and an equivalent of $1.5bn have since been issued. These have successfully mobilised private funding from the capital markets for climate change mitigation and adaptation projects. However, green bonds have historically demanded an element of business-as-usual: they have consequently been directed more to sustainable forestry management projects than carbon-financed conservation… Of course, the problem with “sustainable forestry” is – as we all know – that it is not always sustainable. I believe that FSC has huge potential, and Malaysia has embraced this potential, with the largest number of FSC projects in the world. However, until every plantation imposes FSC standards and every timber-importing country demands FSC labels, we will face sub- par ‘sustainable forestry’ practices and ongoing deforestation. In addition to promoting ‘sustainable forestry’, one of the World Bank’s objectives is carbon reduction through reforestation and avoided deforestation. Little funding has actually been allocated for this purpose. However, the project has inspired forest bond schemes from other agencies, including the IMF and the UK government. One model involved the issue of forest bonds as asset-backed securities. In 2006, the Malaysian Nature Society and Prime Minister Badawi modelled forest carbon bonds, generated in conjunction with Malaysia’s Belum-Temggor Forest Complex. These did not get issued because, at that time, there was no carbon market mechanism to support them. There is now! And Redd Forests will use this rapidly growing carbon market in our innovative plan to promote forest carbon bonds.
Let me tell you about one of our models. When faced with appalling living conditions in any community, Oxfam International use what they term the ‘positive deviancy’ model. Effectively, you find the individual who is doing the best and encourage the rest of the community to emulate them. This works because it does not impose traumatic sudden change, but rather recognises and highlights what is already possible. Once the entire community are living in those improved conditions, ongoing (albeit gradual) social improvement can be achieved. In the same way, we intend to work with landowners who engage in sustainable practices so that they can utilise the potential of REDD – and this will show others how they might also improve their land management practices to financial benefit.
When working amidst the uncertainty of poverty, inequality and lack of regulation, the standout mechanism for development programs has been microfinance. We believe that the future for forest bonds accordingly lies in emulating microfinance schemes. In short, it may be easier to protect a million hectares of tropical forest by having a thousand individual contracts with landowners – whether traditional indigenous individuals or groups, governments or current concession-holders – than by establishing a single contract over a million hectares. The micro-contracts can be packaged – or securitised – into a financial vehicle that can be traded. The bond would be issued and underwritten by a financial institution. The yield on this forest bond? The income from the sale of carbon credits. In other words, we would finance a landowner annually in advance in return for an expected quantity of REDD carbon credits each year. In this model, we therefore combine an environmental microfinance scheme with an element of the asset-backed security concept and the positive deviancy principal; and in this way we have strengthened the security of the investment and the return to the investor.
This achieves three things:
- Clearly defined provision-of-service contracts and upfront finance for the landowner, with continued annual income for as long as they meet their obligations and the carbon market lasts.
- No need for land ownership changes or transfers. I repeat, no need for land ownership changes or transfers.
- A dramatic reduction in the risk of delivery failure across our million hectares, as the probability of default is minimised to each individual contract.
Just like the Grameen Bank in Bangladesh, the Bandhan in India or Sanasa Development Bank in Sri Lanka, we would expect higher administrative costs from working with more landowners. However, this approach opens up vast new tracts of land to REDD projects. We can obtain cost savings from the economies of scale achieved during technical implementation, particularly using remote sensing to measure carbon stocks. We can expect higher rates of contract fulfilment from small landowners: microfinance institutions have experienced repayment rates of 98% and higher (compared with the 93% of commercial entitites) and we can utilise independent relationships between landowners to supplement the forest protection Above all, we can expect higher social and ecological returns from operating in this scale, which should encourage national governments to support the bonds. Attracting private finance to such a vehicle should not be difficult, as the bonds will deliver a fixed income competitive with any other corporate bond market equivalent. Maintaining standards should also not pose an obstacle, as we have access to both policy instruments and private sector certification processes, such as CCBA and VCS. Forest bonds make it much easier and more financially competitive to put the Plus in REDD-plus. The only real risk is the future of the carbon market itself, and from your presence here today, I presume that you too are confident of that future. The one ingredient we’re missing in this plan is a project developer.
Here’s my card.
Redd Forests is now one of the first and only companies in the world to have completed and validated an avoided deforestation project. Specifically, our pilot project in Tasmania was the first in the world to use the Climate, Community and Biodiversity Alliance’s Second Edition Standards. Since that achievement, we have expanded our projects to a further 12,000 hectares of native forests across Tasmania. We expect validation through both CCBA and the Voluntary Carbon Standard on all of our projects by the end of this year. But that is Australia, I hear you say. Indeed, but we have demonstrated the skills and capacity to successfully deliver project results. We have also worked in Indonesia, in East Kalimantan, not too far from here as it happens.
The reason for our steady expansion and success – as the carbon cowboys are being hauled over the hot coals – is that we demonstrate the highest standards of integrity, transparency, accountability and responsibility. As a matter of principle and until REDD+ is firmly established, we will insist on meeting CCB standards in addition to any carbon credit generating standard such as the VCS. Redd Forests offers a proven working model for carbon-financed forest conservation.
So the final question, and it’s an important one: where might this money come from? It seems to me that Zakat might be the solution. When we look at the principles behind Islamic finance, we start to see some amazing synergies. Without a Muslim heritage, forgive me if I am less than exact. As I understand it, the principle of Zakat is the sharing of wealth to the betterment of Muslim communities and is seen as an integral part of the Islamic faith. Zakat finance or Islamic bonds therefore offer the ideal form of investment to implement REDD projects.
REDD projects can generate a sustainable stream of revenue for local forest communities across Malaysia and Indonesia. This is sustainable development, providing the income for health, education and infrastructure projects from environmental conservation. There’s the real plus in REDD+. We need a kickstart from Islamic financial institutions, and I call on them today. With your initial support, communities of landowners can use forest carbon credits to build up their own capital base to start paying Zakat themselves. This can create a self-sustaining investment model while simultaneously conserving the pristine forests that form their rich natural heritage. If you agree with the potential of this idea, please speak to me afterwards; I would be happy to elucidate on our proposal.
Ladies and gentlemen, we have to start seeing that our native forests provide invaluable services to humanity. They are the lungs of the earth. The idea, therefore, of remunerating those that have managed and preserved the forests for centuries is no different to remunerating the utility companies that provide us with energy or water. And the future of plantations? There are over one billion hectares of already degraded land in the world today. Not all of it in the right place, I grant you, but more than enough. The wood and forest products we need can be obtained from plantations and reforestation of those lands: we do not need to fell the forests that have been thriving for thirty million years to produce Palm Oil, pulp and paper. We do not have to fell the trees to extract their value: at last, the market is placing a competitive price on standing forests.
Forests provide one of the richest resources known to man. They are a source of food, timber, medicine, spiritual and cultural wellbeing, and the very air we breathe. It was long overdue, but at last we are finding a place in our economies, on our balance sheets and in our personal values for such an asset.