A two-day Expert Workshop was held on 21-22 April 2016 in Solsona, Spain on Financial and Institutional Innovation for Reducing the Risks of Private Sector Investments in Sustainable Forestry. The event was organized by the Food and Agriculture Organization of the United Nations (FAO) in collaboration with the Forest Sciences Centre of Catalonia (CTFC) and other development partners.

The workshop was organized in the framework of the FAO led initiative on “Financial and institutional risk mitigation and management strategies”. This initiative stems from the lack of significant investments in all key areas such as forest plantations, natural forest management, small and medium forest enterprises, local and community forestry and large-scale projects, including REDD+. 

Underlying efficient business models can bring substantial financial returns to investors in all the above activities, but many traditional investors are still reluctant to invest. 

There are multiple potential financial losses at stake in the forest sector: loss of capital (trees, soil, etc.), loss of revenues from wood and non-wood forest product value chains, default payments, and market and price fluctuations are some examples of risks that require mitigation. In this context, some of the existing risk mitigation approaches worth exploring include: credit guarantees and credit enhancement, due diligence and assurance, portfolio diversification, insurance (political and commercial risks), securitization as well as the development of buy-back agreements. Other important approaches to minimize financial risks include related government policies (backed-up by laws) and investment support services to private stakeholders and partnerships or platforms for standardization of investment proposals. Further, relevant examples from agriculture and other sectors could also serve as good entry points for exploration and adaptation. 

However, current information on existing as well as potential financial and institutional risk mitigation and management strategies in forestry is limited. Lack of opportunities for sharing knowledge related to successful examples within and across nations is further constraining effective expansion and adaptation of suitable strategies elsewhere. The goal of the proposed initiative is to specifically address this policy and knowledge gap. 

The workshop brought together 26 participants from 14 countries with expertise in diverse investment related areas including impact finance, banking, insurance, international development, and forest and landscape restoration. During the workshop, knowledge and experiences on existing and future potential financial and institutional approaches to mitigate and manage risks to promote investments in the forest sector were shared. The gathering of experts also provided an opportunity to establish a community of practice for long-term knowledge and experience sharing on this topic, and to promote synergies for collaboration. 

The workshop was opened by Mr. Denis Boglio, Executive Director of CTFC, and Mrs. Thais Juvenal, the Team Leader of the Forest Economics and Governance Team at FAO. Both welcomed the participants and underlined the importance of the subject for the future of sustainable forestry. The presentation by Mr. Rao Matta, FAO Forest Financing Officer, highlighted the growing importance of investing in forest products and services, in the context of climate change and other green development policies. Mr. Matta also provided examples of a FAO study demonstrating significant regional variation in forestry investments, like Latin America where there is substantial investment, contrasting it with Africa, where there has been less investment so far. Mr. Ludwig Liagre, Forest and Landscape Finance Specialist at FAO, introduced the background document and ideas for a future technical paper. Based on the “contribution forms” filled out by participants before the workshop, Mr. Liagre pointed out the main work lines for the future.

The Second Session focused on sharing good practices and case studies from investors’ perspectives.

Mr. Octavio Carrasquilla of the Development Bank of Latin American Development Bank (CAF) explained the risk mitigation mechanism CAF is developing in support of the Initiative 20x20 Initiative, a country-led effort to bring 20 million hectares of land in Latin America and the Caribbean into restoration by 2020. As part of this, CAF is setting up a partial risk guarantee mechanism offering coverage of risks taken by private equity impact funds engaged in the Regional Initiative 20x20. The financing mechanism ("Tamwil El Fellah"),  created in Morocco in order to give access to finance for farmers who are excluded from traditional bank financing because of collateral insufficiency, was presented by Mariem Dkhil, Credit Agricole du Maroc for small-scale cooperatives and CSR strategy in forest investments in Morocco, was presented by Mariem Dkhil, Credit Agricole du Maroc. Tamwil El Fellah was created in order to give access to finance for farmers who are excluded from traditional bank financing because of collateral insufficiency. Ms. Carla Wadewitz, from the BANIF Investment Bank, covered in her presentation different approaches between Portugal and Australia in terms of forestry risk management practices and key takeaways. She also talked about the key issues that private investors like to know before taking any forestry or agro-forestry investment decisions and also exposed the differences between Portugal and Australia regarding this aspect. Reminding participants of the importance of waiting for market prices to get better increase, and to provide a loan long enough to enable the enterprise to freely negotiate the next harvest prices, Ms. Francesca Nugnes of ,Finance Alliance for Sustainable Trade (FAST), noted several key issues:

• Investing own money, not borrowed down-payment
• Being flexible
• Incorporating all dimensions of risk (social, environmental and financial)
• Diversifying the source of information
• Collecting, storing and analysing the Impact Investment data over time
• Attracting new investors 

Mr. Chris Knight representing PwC’s Sustainability and Climate Change unit, talked about  reducing risks through: 1) regional economic development (RED); 2) better research; 3) focusing on revenues, returns and reduced costs of capital; 4) retrospective processes; and 5) resilient financial systems. Mr. Knight also highlighted the need to educate investors and bring them closer to technicians with knowledge as well as the actual field reality. Drawing on lessons learnt from due diligence and valuation carried out on a number of forestry projects, Mr. Christian Held of UNIQUE – Forestry and Land Use shared generic rules for project level financial risk management.

The Nicaforest Reforestation Pilot Program in Nicaragua (NRPP), was shared by  Øyvind Berg, Across Forest. The objective of this programme is directly related to the idea of creating value for rural communities and helping these poor areas.  Mr. Petri Lehtonen from Indufor explained the African panorama in terms of forestry investments. He began his presentation with the question “why are there so few investments in Africa despite really good opportunities there?” and provided a detailed analysis to discuss the problems and potential solutions. Innovations to credit for long-term investment: the CIDRE (Development Finance Institution) case and its important role as a risk mitigation tool across the forestry value chain in Bolivia was presented by Mr. Niclas Benni (FAO). Mr. Phil Cottle (Pardus Underwriting) made a detailed presentation on insurance. He also explained the different types of risk coverage related to the forestry sector, and the recent changes in forestry insurance products. Among them, Mr. Cottle presented new products developed by Pardus in 2015, Value@Risk.

Session III opened the stage for enhanced investments in forest and landscape restoration in group discussions: (1) Investors/Bankers (stakeholders with large financing capacities), and (2) Project developer/Forest communities (stakeholders who need financing).

Rao Matta, Ludwig Liagre and David Solano