Building Bridges Between Impact Investors and Sustainable Forestry
By Alexander Watson, CEO OpenForests
My name is Alexander Watson, I am a forestry scientist with a background in Social Banking and Social Finance and founder of OpenForests, a consulting company with the mission to finance and develop social and biodiverse forestry projects.
THE CHALLENGE
The annual worldwide deforestation is about 13 million hectares, predominantly in the tropics. We believe that reforestation is one opportunity to counter deforestation. At the same time it can help to satisfy the increasing demand for timber, which is estimated to grow by 50 percent by 2050.
This is why considerable investments in the forestry sector are needed to effectively combat forest exploitation. Responsible investments in the forestry sectors of the emerging countries are still limited due to uncertain market environments and a low level of investment experience.
LESSONS LEARNED
The goal of OpenForests is to understand these barriers and deliver services to overcome them and unleash the existing investment potentials. But how do we do this in practice? In this article I am going to share our experience working with project developers and investors and present tools of which we think are useful to build strong bridges between investors and projects.
In recent years we have been working in Latin America, Europe and Asia and conducted various feasibility studies and developed sustainable forestry and agroforestry investment projects. We found that the major limitation for project developers to scale up their operations was a lack of sufficient funding. As reforestation projects are very capital intensive in the beginning, project developers often need of seed funding. This is especially true in the case of sustainable reforestation with long rotation cycles.
But why do some projects obtain funding and others not? On the project level we found common patterns that kept investors from funding these projects.
THE POWER OF DATA MANAGEMENT AND REPORTING
First, we learned that the data management and reporting was often insufficient. Although in many cases project developers have shown a high level of experience in managing their forest assets, forestry projects often needed to improve the consistency and timeliness of their forestry data.
A plausible, consistent and complete project documentation is required in order to make projects attractive to investors. Such documentation has to include financial data as well as social and environmental performance metrics. Only by understanding project processes it is possible to improve performance while facilitating a transparent project insight for investors. At OpenForests we improve project management and documentation by providing a customized Forest Information System, a centralized geo-database to organize and share project information amongst all participants.
INVESTORS NEED BETTER, MORE TRANSPARENT INFORMATION
Now turning to the investors' side. When working with investment groups from the U.S. and Europe they revealed their great interest in extending their investment activities to emerging forest investment countries in Latin America, Africa and Southeast Asia. This interest is mainly due to the higher returns that can result from the relatively higher forest growth rates and lower land and labor costs, than it would be feasible in developed countries. However, investors hesitate because of the lack of high quality information about the forestry sectors of these countries. Furthermore forest investment markets are often poorly organized and non-transparent which makes it difficult to source investment opportunities.
To help investors get the information they need, we developed services and tools like a set of risk assessment guidelines, a marketplace for sustainable forest investments and drone-based remote sensing system, to help investors to assess risks more accurately. Using modern information technology, the complexity and heterogeneity of forest ecosystems, management and market environment can be captured and understood more easily. Equipped with these tools, investors are able to explore high potential emerging forest forest investment markets more securely. With our work, we wish to reinforce and unleash the potentials of the emerging forest investment markets and make Impact Investing for Sustainable Forestry a strong force countering deforestation.For more about OpenForests and to source forestry deals.
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