Investing in forests to solve the climate and biodiversity crises

Forests cover about 30 percent of the Earth’s land mass and host about 80 percent of the world’s biodiversity. They provide subsistence, employment opportunities and income to a quarter of the world’s population – not to mention storing vast amounts of carbon.

So, how can we invest in forests to promote sustainable development and solve the climate and biodiversity crises?

During Value Chains Week 2022, the Global Landscapes Forum hosted a Twitter Spaces session with experts from the European Investment Bank (EIB) to discuss how to tackle these challenges by building a sustainable forest-based bioeconomy.

“Forests are being threatened – be it by climate change, natural disturbances or other human-induced disturbances,” said Adrian Enache, Senior Forest Engineer at the EIB’s bioeconomy division. “We need to protect forests to help them continue to grow healthily and provide their multiple functions in the long term.”

Humanity will need to invest an additional USD 600 to 800 billion per year to reverse the biodiversity crisis by 2030. However, one of the main challenges is attracting private investors, as sustainable finance is often perceived as risky. A recent EIB report provides an overview of sustainable forestry, including its benefits and challenges, and examines how public banks can make the sector more palatable to investors.

“One central role of public banks such as the EIB in the forestry sector is to help address what we call market failures, [including] reducing negative externalities or enhancing positive externalities,” said Sylvain Caurla, a Senior Forest Economist with the EIB. “We try to account for the value of biodiversity in the economic analysis of appraisal.”

Externalities refer to indirect costs or benefits to society that are not accounted for. In the context of forestry, carbon emissions from deforestation are a prime example of a negative externality, as logging firms often do not have to pay for the carbon they emit.

Crucially, though, forests offer a multitude of benefits beyond just storing carbon and providing habitat for wildlife: they also support the global water cycle, keep soil healthy, prevent flooding, purify the air, and offer a source of food, raw materials, livelihoods, recreation and spirituality for humans. Public banks can help ensure that these benefits – and the costs to society when forests are destroyed or degraded – are properly accounted for.

“Everybody talks about ecosystem services nowadays, but we believe markets are still yet to be developed and the proper mechanics put in place to ensure that ecosystem services are properly valued and included in the economic assessments of projects,” Enache elaborated.

However, the task of building a forest-based bioeconomy extends far beyond simply putting a price tag on forests. The current economic downturn, weak governance systems and scientific knowledge gaps all pose formidable obstacles, which is where public banks come in.

“All of these challenges and barriers make the valuation of forest assets and natural capital a very complex and expensive process,” said Enache. “This cannot be easily accomplished by non-specialized private investors, and they need support. This support comes from advisory services and public banks in the form of training and capacity building, and it can be ensured through the safeguards that we are putting in place as public banks.”

The EIB is supporting a wide range of sustainable forestry projects within and outside the E.U., including the Land Degradation Neutrality Fund, as well as a EUR 10 million loan to conserve ecosystems and protect soil and water bodies across 1,000 hectares of forest in Romania.

“This project will take place in a less developed region of Romania to support employment and economic growth in remote rural areas,” said Caurla. “The forest will be managed under what we call continuous cover forestry guidance, which means no clear cutting and promoting natural regeneration and tree species diversification.”

Listen back to the full conversation to learn more about the EIB’s work on sustainable forest solutions.