Sustainable Finance: How does it link to forests?

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Published February 11, 2022 by Anna Begemann

Key narratives on how to harness finance for forests

While “cash is king” and “money talks”, the importance of the financial sector for forests has often been overlooked in the past despite alarming deforestation rates and a clear need to better protect and manage forests worldwide. With NGOs campaigning against “dirty banks” driving deforestation in key hot spots such as the Amazon, it is no longer possible to ignore the connection of the two sectors. But change – at least in some parts of the financial sector – is on its way. Under the headline of “sustainable finance”, voluntary initiatives have developed in the financial sector and sustainable finance regulation in some parts of the world is emerging. At COP 26, 30 financial institutions such as banks, pension funds, as well as insurance and asset management companies committed to eliminate agriculture-driven deforestation from their investment and lending portfolios by 2025 (read the commitment letter here).

While these are positive signs, sustainable finance is yet a blurry term. Without academic research available, it is unclear how it connects to forests. That’s why we interviewed 51 experts from financial institutions such as banks and investment management companies, timberland and impact investors, international organizations, civil society organizations and academia. Most participants came from Europe as one of the spear heading regions worldwide to develop regulation on sustainable finance.

What we found is, that 2/3 of interviewees agreed that there is no common understanding of what sustainable finance means in relation to forests. For us this indicates that there is potential confusion on the topic itself even within the expert community. That’s why we decided to identify main narratives to see if there are any common threads and differences.

Watch our video to get an overview of how experts perceive the connection of sustainable finance with forests:

As explained in the video, some forest and finance experts are sceptical about the potential to harness private finance for forests. This narrative drawing shows you in detail what the main issues are:

The current mainstream financial sector perspective is captured in this narrative on seeing mainly financial risks related to climate change, but not forests:

Deforestation risks are addressed by some financial institutions and civil society as put forward in this narrative:

While the financial sector is mainly concerned about financial and deforestation risks, forest and environmental experts are considering investment opportunities to enhance private finance for forests. Especially in the tropics, public finance is needed to enable private investments as illustrated in this narrative:

Finally, for some experts’ forests are already an attractive asset class, but more collaboration between sectors is needed to harness its potentials:

Considering these different views, clear objectives and standards are needed to use sustainable finance for forests to come to a better, possibly common understanding of how sustainable finance could be harnessed for forests. In their absence, we will need to put much effort to understand each other’s approaches if we want to make any, hopefully, major improvements on the ground.

So, if you are a forester: let us talk more about money! If you are a finance expert: how can nature be valued by finance? And if you are still skeptical about private investments: what can we do about public finance to be more sustainable? We will follow up on this topic also on the blog, so stay tuned!

View narrative images with higher resolution here.

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