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  • May 08, 2019

Engaging the private sector to fill the forest investment gap: the experience of the Forest Investment Program

Ines Angulo 

Forests play an essential role in our environment, economy, and society. Not only do they help mitigate climate change and protect watersheds and natural habitats, they also support livelihoods for more than 1.6 billion people. 

Yet, despite their vital importance, they are under threat. Deforestation and forest degradation continue to be a persistent problem, particularly in the tropics (between 1990 and 2015, we lost 129 million hectares of tropical forest cover, an area the size of South Africa).

In order to meet national commitments to reduce deforestation and forest degradation, the reality is that we need billions of dollars of financing—and we need them now. Public sector budgets, however, are limited. We must engage the private sector to fill this financing gap.

Through its Forest Investment Program (FIP), the Climate Investment Funds (CIF) is supporting efforts that address the underlying causes of deforestation and forest degradation while incentivizing private sector participation in the forest sector. FIP deploys investments through multilateral development banks (MDBs) that foster enabling policy and market environments and novel approaches for sustainable forest management. Since its work began over a decade ago, FIP has seen important lessons emerge.

From Indigenous territories in the forest core, to communities on the natural forest edge, to peri-urban contexts where forest products are often processed, opportunities to engage the private sector abound. The scale of forest-related enterprises is wide and deep, with micro and small-scale household and community businesses at one end and industrial-scale multinational corporations at the other.

A new review of FIP and financing forest-related enterprises finds that the vast majority of FIP investments were either large-scale investments addressing policy issues (41%) or micro-scale investments in alternative-income-generating activities (53%). Most critically, the review identifies an opportunity to scale up investments in forest-related small and medium-scale enterprises (SMEs), where financing remains limited.

Recognizing the importance of replicability and scalability, the review suggests more effort is needed to close this “enterprise support gap” by focusing on the following areas:

Organization: SMEs have beneficial experience and expertise that need to be channeled productively. By consolidating their expertise and experience, SMEs can improve local ownership, streamline production, increase bargaining power with buyers and help develop pricing and quality grading standards, while also representing local interests with decision makers.

Business incubation: We must do more to support professional development up and down the forest value chain, such as trainings in business, financial literacy and management, marketing and impact assessments. Together, these set the groundwork for sustainable businesses to flourish.

De-risking measures: The private sector perceives different types of barriers to investing in forests, including financial risks. We can work to lower these hurdles by blending finance to reduce early entrant costs, strengthening public-private partnerships that crowd in private sector finance and fund non-commercial enabling activities, and providing tailor-made, innovative financial products.

In a challenging sector, FIP has been able to finance innovative projects that engage the private sector, including with concessional finance. One example is the first private sector blended loan for the forest industry, developed through the African Development Bank in Ghana. In addition, FIP’s exemplary experience in Mexico shows what can be achieved when SMEs in local communities like national development and commercial banks are empowered.

Strong partnerships among the public and private sector, MDBs, financial institutions, and local communities are critical to effectively mitigating the many perceived and real risks in forestry-related investments. CIF has the advantage of being able to bring these actors together, and perhaps even more importantly, to think creatively and pursue bold solutions to support sustainable forests.

 

Read more about CIF’s work in sustainable forests:

Independent report on financing forest-related enterprises

Brief summary of the report

Forest Investment Program

DGM