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Global Capital, IMF editions, October 2015

It is said that if all forestry management was conducted like Sweden’s SCA, there would be no climate change problem.

It is said, specifically, by SCA’s vice president for environmental affairs, Patrik Isaksson. “Yes,” he says cheerfully. “Let me explain that provocative statement.”

Isaksson first spells out a miserable equation: that today,  humans and their activities emit about 10 billion tons of carbon ever year, and absorb just over half of it through the oceans and through land-based carbon sinks. Our net emissions are about 4.5 billion tons a year, which is, given the consequent impact on climate, arguably the world’s greatest environmental problem.

Sweden, though, presents reason for faith that things can be turned around. “If we go back 100 years and look at the volume of standing timber in our forests, we can conclude that every year we have had a net increase of 1%,” he says. “Over that period we have doubled the amount of standing timber in our forest, and at the same time doubled the outtake” that is harvested to create products. SCA’s forests, Isaksson says, create a net absorption of 2.6 million tons of carbon dioxide every year, thanks to its sustainable forest management.

Isaksson argues that if half the world’s forests could be handled in the same way and achieve a net increase of standing timber of 1% each year, that would increase the annual absorption of carbon to more than two billion tons. If deforestation was stopped around the world, that would add more than one billion. And if sustainable forest management practices of the kind used in Sweden were used to reduce the damage from insect attacks, fires and storms by 50%, that would be at least another one billion. Put it all together, and roughly all the world’s carbon emissions would be absorbed. “It’s a theoretical example,” says Isaksson. “But it underlines the enormous impact and importance sustainable forest management can play in combating climate change.”

With ambitions and practices like that, it’s little surprise that SCA has been an early mover in green bonds: the first listed Swedish company to issue one, in fact, with a SEK1.5 billion five-year issue in March 2014 through SEB. It was oversubscribed, and placed with 30 investors.


As it happens, none of that money has actually gone to forestry yet; Isaksson says the proceeds were instead for a water project and for energy initiatives. “So far, no actual investment has gone into the forest,” he says. “But we’ve just run for this one year now. SCA’s investments have a very long horizon, sometimes 30 years.” So it is entirely possible that future issues will fund investment in forestry. SCA has its own framework through which it identifies areas that should qualify for inclusion in green bonds, including the forest.


It would be fairly straightforward to do so, because there are recognised bodies for certification to make sure that, for example, forest fibres come from forests with sustainable management in place. It is still, regrettably, a minority way of thinking; only 10% of world forests today are certified, although the figure is around 25-30% for industrial timber. But one has to start somewhere, and the existence of groups like the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC) would make it fairly easy for investors to be sure that the assets they were investing in were suitably green. And that, perhaps, could have a demonstration effect encouraging others to move in the same direction.


It is to be hoped so, because today the situation is bleak. In August the  Washington DC-based World Resources Institute published findings saying that, despite significant efforts to reduce their deforestation, Brazil saw a rate of tree cover loss that increased by more than 16% in 2013-14, and Indonesia’s by 30%. And they are no longer the worst offenders: More than 62% of tropical tree cover loss in 2014 occurred outside those two countries, with new areas of concern including the Mekong Basin, the Gran Chaco of South America, West Africa, and Madagascar. Indonesia and Brazil are, the WRI says, the sixth and seventh highest greenhouse gas emitting countries in the world, thanks largely to land use change. They need their forests. “Both countries have made ambitious commitments to reduce emissions from deforestation, and both experienced promising declines in tree cover loss in 2013 and earlier,” say Mikaela Weisse and Rachael Petersen in the report. “The increase in tree cover loss in 2014 therefore comes as a disappointment.”


So how exactly is SCA looking so different? How has it pulled off this double act of increasing its standing timber while also increasing the amount it harvests? There are several elements to it, from long-term replanting schedules to age distribution in the forest, to leaving certain areas alone because of their biological diversity. “Another tool to create the situation is adopting and using the strictest international standards for forest management.”


Forestry naturally links to the house-building issues discussed in the section on Skanska, and it throws up some curious numbers. In some circumstances, a life-cycle assessment of building a house from wood can throw up a negative number – “which suggests that it is better to build a wooden house than not to build it, from a climate perspective.”


To which one’s instinctive reaction is: hang on a minute.  How can that be? The reason is that if you chop down a tree and burn it then plant a new one in its place, then the carbon the new tree will remove from the atmosphere is roughly equal to the carbon you put into the atmosphere by burning the old one. So if you take a tree and give it a productive use – in housing, for example – and plant another in its place, then there’s a net gain in carbon absorption. If you cut the tree down to make a house and replace it with two, you have a very clear net increase both in standing timber and absorption of carbon dioxide.


“Some environmental organizations argue that you should not harvest the forest, that the trees should still be standing there,” says Isaksson. “But from a climate perspective, that’s not a good idea. Trees will eventually grow up, fall and rot; their impact on carbon emissions over time is plus or minus zero. But if there is demand for wood-based product, and there is an economic incentive for forest managers to do their replanting schedules in a sustainable way to create a net growth in standing timber, it is much better, because it removes more carbon dioxide from the atmosphere each year.”


This is all very interesting but not, at this stage, particularly closely connected to climate finance, but that may just be a matter of time. One of the Climate Bonds Initiative’s ideas is the Forest Bond – using public funds to support private sector investment in forests, leveraging finance from global capital markets to protect and manage forests. Noting that global forestry faces two key challenges – time, because forests are being lost, and scale, for a variety of reasons – the group notes: “The issuance of bonds directly addresses the concerns of time and scale, enabling issuers to raise large-scale finance now that will be repaid by existing and anticipated future income.” It notes that prospective issuers of forest bonds will need to convince investors that cash flows are secure and predictable – which could be through carbon markets, but they’re not yet reliable enough – and instead suggests revenue could be linked to income from other ecosystem service markets like water and biodiversity, sustainable timber and agricultural markets, regulation (through taxes and liability regulation), and forest-friendly lending.


“The bond market will have two questions: is there a cashflow, and is it creditworthy,” says Sean Kidney, who founded and leads the Climate Bonds Initiative. “Where it is not creditworthy, the government has to step in to support and back the cashflow.” When Kidney and his group first started looking at forest bonds, there was a lot of discussion about issuing bonds backed by carbon credits from a UN-led programme called REDD, or Reducing Emissions from Deforestation and Forest Degradation. REDD seeks to create a financial value for the carbon stored in forests, offering a financial incentive for developing countries to reduce deforestation.


The idea was a carbon offset mechanism, but today, Kidney steps back from it somewhat. “REDD carbon credits will be volatile. That means it’s more likely pigs will fly than REDD bonds become a major solution.”


He sees more opportunity in green bonds from forest states that support broader economic development plans that avoid deforestation at their heart. “We need an approach that supports fast-track green economic growth in ways that head off deforestation.”


Another group, the Global Canopy Programme, suggests that the annual needs for tropical forest finance will be in the order of tens of billions of dollars by 2020.


Modern thinking on forestry tends to bracket it with agriculture, since one has a tendency to destroy the other; the World Bank, for example, has so far put 12% of its green bond eligible projects under an ‘agriculture’ category which goes from forest and ecosystem management through to agriculture and livestock projects. “Agriculture is vulnerable to climate change and it is, with associated deforestation, the largest contributor to greenhouse gases,” says the World Bank Impact Report. “Climate smart agriculture has the potential to deliver a ‘triple win’ of increased productivity, enhanced resilience, and carbon sequestration.”


World Bank agriculture projects that have been allocated funds from green bonds cover a wide range of places from Armenian agriculture resource management to the encouragement of sustainable forest management among rural communities in Mexico; China is a particular focus, often in improving agricultural techniques but sometimes simply to increase forest cover and resilience, such as a restoration project in Hunan.  While in many cases they focus on education and attempting to create some harmony between agriculture and forestry, they can take some other angles too, such as improving forest fire prevention and response in Russia. Laura Tlaiye at the World Bank says a focus has been on sectors that have a clear impact on food security; funded projects have included cattle management in farms, for example, or about collecting waste to use for cooking or other biogas purposes.


Agriculture is also something of an opportunity if it could get the right policy backing, says Sean Kidney, founder of the Climate Bond Initiative. “For example, the work in Europe on agriculture is all about mitigation at a modest level,” he says. “The EU’s Common Agricultural Policy should be a Carbon Agricultural Policy focused on sequestration. Soils are a great opportunity for us to suck carbon out of the atmosphere.”



Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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