News

Investing in financially sustainable alternatives to deforestation

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NIRAS is managing the Mobilising Finance for Forests technical assistance facility to help agro and forestry companies grow and expand, while reducing deforestation in vulnerable tropical forests around the world

May 4, 2022

Tropical forests are among the most vibrant and biodiverse places on the planet, home to a stunning variety of plant and animal life. Beyond this, forests some of the largest “carbon sinks” on Earth, storing CO2 which would otherwise be released into the atmosphere and contribute to climate change. Preserving the forests we already have – and increasing their size and density – is critically important for offsetting carbon emissions and mitigating climate change.

Despite this imperative, forests are consistently under threat of deforestation: timber is itself a valuable and in-demand commodity, and often the forested land could provide a better financial return to its owners if it were converted to other land uses like agriculture or animal grazing. These financial incentives explain in part why deforestation in places like the Amazon rainforest has skyrocketed over the past decades: without a combination of government regulation and financially sustainable alternatives, behaviour is unlikely to change.

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The Mobilising Finance for Forests programme will establish agricultural systems with strict no-deforestation or reforestation rules

Certain sectors will be targeted by the MFF programme to help reduce deforestation, including:

  • Non-timber forest products (NTFPs) such as nuts, seeds, native rubber, native forest coffee, honey, natural medicines, superfoods;
  • Eco-tourism projects in areas of forest with outstanding natural beauty, high biodiversity or cultural heritage;
  • Sustainable commodity production (intensifying production on existing land and working to reduce deforestation in value chains);
  • Establishing agricultural systems with strict no-deforestation or reforestation rules;
  • Sustainable timber plantations (e.g. hardwood plantations on degraded lands combined with reforestation targets).

Supporting lucrative alternatives to deforestation

Creating financially sustainable alternatives to deforestation is a difficult task. It is possible to manage forests in a sustainable manner which allows for economic activity (harvesting timber, for example) while maintaining the forest’s ability to regenerate, but it typically requires large investments, long timescales – in the decades – and deep technical expertise. Agricultural enterprises can improve the productivity and yield of their existing land, which allows for financial returns without needing to raze forests, but this also demands substantial upfront investment and technical expertise.

In an effort to meet this challenge, the UK Government [through the Department for Business, Energy & Industrial Strategy (BEIS)] and the Dutch development bank FMO established the £150 million Mobilising Finance for Forests (MFF) programme (around €177 million) in 2021, with BEIS providing the funding and FMO manging the facility and making investment decisions.

MFF invests in private companies whose activities have a high degree of impact on at-risk tropical forests. The MFF investment helps these companies reorient their activities or grow their business away from deforestation and towards deforestation-free practices while producing a financial return for the companies. The net result is less deforestation, financially sustainable growth for the company, and a return on the investment for FMO. In this way, MFF can be considered an impact investor – a growing space which looks promising as a way to meet the enormous Sustainable Development Goal financing gap. The programme is global in scope, targeting developing countries with vulnerable tropical forest areas in Latin America, central Africa, and southeast Asia.

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Part of the value-add of the MFF programme is that it will offer Technical Assistance (TA) to its investees, in order to both provide capital and the expertise to deploy it in the best possible manner. For MFF, this is a way to “de-risk” their investments by making them more likely to succeed. For the investees, it is a way to gain access to world-class expertise, specifically tailored to their needs. NIRAS, in consortium with the Sustainable Trade Initiative (IDH) and Form International have been selected to manage the TA Facility for MFF. The consortium will take responsibility for working with MFF and investees to (1) develop and design TA assignments, (2) deliver TA through our network of in-house and associated consultants and experts, and (3) offer ad-hoc support to MFF and FMO during the programme’s operation.

Efficiently mobilised and fit-for-purpose advice

NIRAS has a long background working in both forestry and agriculture, providing TA to enterprises, donors and investors in the forestry, agriculture, and land use space. As the manager of large Framework Contracts for the EU, Sida, KfW, EBRD, EIB, and FMO itself through the NASIRA risk sharing facility, we have a robust set of processes and tools which will be applied to the management of the MFF TA Facility. Along with IDH and Form International, the consortium has gathered a group of associate partners to provide their specialist expertise. The promise: efficiently mobilised and fit-for-purpose advice to MFF investees to help them meet their financial and impact goals.

Impact investing is the practise of making investments which are expected to both generate a financial return while yielding positive social and environmental impacts. In the case of MFF, the goal is to reduce deforestation, but impact investing covers all sectors and countries around the world. It’s a powerful tool for mobilising finance: by connecting impact goals with financial returns, we can harness the profit incentive to help meet the SDGs and make lasting change happen.

15 years

the term of MFF investments

177 million

value of the fund

The Sustainable Trade Initiative (IDH) is a Dutch Foundation that works – among other topics - with businesses, financiers, governments and civil society on mobilising investable opportunities that contribute to forest protection and sustainable agricultural inten­sification.

Form International is a specialised Dutch investing and advisory firm focussed on sustainable (agro)forestry, contributing deep experience both in supporting third-party investors and in directly structuring and managing investments.

Associated partners include Earth Active, Indufor, Proforest, Terranomics, and Wellspring.

In addition to the provision of TA, the MFF programme will look to learn from its experiences by gathering ‘blueprints’ of successful sustainable land-use and forestry investment models to be disseminated. This separate component of the MFF TA Facility will be managed by another organisation, but the team will generate learning and provide data on results to help other impact investors make successful investments in the forestry and land use space.

The MFF investments are expected to have an approximately 15-year term, meaning that MFF will either exit (by selling the equity stake or receiving loan repayment) or move forward with new rounds of investments within this time period. The TA Facility, running from 2022-2026, will come in and support at a crucial point at the beginning of the investment, allowing investees to overcome the obstacles they face in making improvements and changes. By helping to improve internal processes, support businesses in certifications or in meeting standards, or offering technical advice on specific aspects of forestry, agriculture, or commodity production, the investees themselves become more attractive for future investment from MFF or commercial investors. Long-term, the intention is to demonstrate to the world that forestry and agroforestry companies can play a key role in reducing deforestation in a financially sustainable – and even attractive – manner.

The MFF programme kicked off in 2021 with a first investment in the &Green Fund, which has itself invested in companies or provided debt financing to companies in Colombia, Brazil, and Indonesia. For example, &Green provided financing to Marfrig Global Foods S.A. in Brazil, one of the three biggest meat producers in the country. The goal? To implement its transition to deforestation-free cattle production across various levels of the Brazilian beef sector. This is typical of the type of company MFF will be working with and investing in: by changing the company’s practises, real environmental and social benefits will be realised.

Consortium partner IDH is already working closely with the &Green Fund, supporting their mission of delinking deforestation from commodity supply chains. Future investments are in the pipeline, and the TA Facility will be ready after a brief inception period to quickly design and deliver support to these investees. With an overall envelope of EUR 6.2 million available manage the Facility and provide TA, the team is ready to mobilise and start putting their expertise to work.

Lukas James Friga

Lukas James Friga

Project Manager - Fund Management & Finance

København, Denmark

+45 4299 8303