A recently announced USD 400 million fund could help leverage some of the money needed address deforestation. While urgently needed, such private sector initiatives should not replace other, more established ways of protecting the forest.
Norway has pledged to put USD 100 million into a new fund that aims to raise USD 400 million by 2020, potentially ‘de-risking’ investments in more sustainable agriculture. It ultimately aims to leverage more than USD 1.6 billion in deforestation-free agriculture investments, according to their press release.
In practice, ‘de-risking’ may describe a range of different financial instruments. For example, it can mean guaranteeing a loan from a third party, or making investments that take on a larger piece of the potential risk, such as taking a first loss in the event of a default. These instruments can reduce the risk for subsequent investors, encouraging them to put money into projects.
This is welcome news, as addressing deforestation will need investment from both public and private sources. To make agricultural supply chains deforestation-free would require approximately USD 200 billion per year direct investment and trade finance, according to one recent estimate. This is much too big for governments to pay for alone. Annual government investment in agricultural capital was USD 38 billion in the mid-2000s in low and middle income countries. So private investment will also need to fill this gap.
Without public money providing a ‘derisking’ function, projects to make agriculture more sustainable may struggle to attract this investment. This is because the innovative and untested nature of these investments may scare off regular investors. Through the Unlocking Forest Finance project, we are trying to do something similar, building financial mechanisms to drive investment in sustainable agriculture and forestry in three regions of Peru and Brazil.
A spokesperson from the Norwegian Climate and Forest Initiative (NICFI) said that these funds are new, previously uncommitted funds. This is important. Initiatives to support the private sector should not replace other, more established methods of forest protection such as grants for protected areas.
The UFF experience shows that it is particularly hard to find private funders in these areas, as investment does not return cash profits. And these costs can be significant. For the UFF project in San Martín, Peru, the parts of the project which will not generate revenue (including strengthening protected areas and supporting indigenous peoples’ livelihoods), will likely need more investment overall than sustainable agriculture elements.
Image: Rice fields in San Martin, Peru. Credit: Bruno Locatelli/CIFOR