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A Better Way to Fund Permanent Forest in Aotearoa

The Permanent Forest Bond is an innovative financial instrument for impact investment, which provides upfront capital for native forest establishment. It is guaranteed by the New Zealand government as the principal funder for native forest outcomes.

 

 The objective is to provide a scalable financial instrument that enables landowners to create carbon sinks that reduce New Zealand’s net greenhouse gas emissions. It is a pioneering financial product, designed to fund afforestation and landscaping, while also helping the New Zealand Government to meet its Paris Agreement commitments, particularly the collective goal to reach net zero emissions by the second half of this century.

 

The concept has been conceived so that the environmental co-benefits from the creation of native forest carbon sinks will benefit the New Zealand community, as well as providing a relatively safe and profitable investment opportunity for impact-oriented investors.

 

What conservation problem are you trying to solve?

The challenge is to establish permanent native forest on over 1.1 million hectares of marginal land throughout Aotearoa, especially erosion-prone land and waterway margins.

Leaving this land un-forested hinders the nation’s long-term prosperity by degrading national environmental assets and increasing future carbon liabilities, which together, undermine New Zealand’s highly valued green reputation.

 It is estimated that 192 million tonnes of eroded soil enter New Zealand’s rivers every year, which degrades water quality in those waterways, as well as lakes, estuaries, harbours and coastlines. Erosion and landslides, particularly during extreme weather events, causes costly damage to public and private property. These costs can be mitigated through afforestation, which would also create a significant carbon sink to reduce net emissions and produce biodiversity co-benefits.

 

How are you going to solve this conservation problem?

The proposed solution is a world-leading Permanent Forest Bond. It unlocks private capital to fill funding gaps for budget-constrained landowners and community conservation groups, and also by shifting the environmental spending paradigm so that the New Zealand government pays for results rather than services, for outcomes rather than outputs.

 The Permanent Forest Bond reallocates environmental project risk from taxpayers to private investors, who are compensated in return for taking the risk. Successful pilot schemes will produce bond templates that can be reproduced throughout New Zealand, with a particular focus on highly erosion-prone marginal land and riparian margins over 30 metres wide.

 

 Essentially, the bond bridges the social and temporal distance between the various parties contracting with an interest in the bond’s outcomes: the Crown, green investors, community conservation groups and landowners who want native forest established but lack the resources to do so.

 

What makes your idea new and unique?

The Permanent Forest Bond is an example of an Integrated Impact Bond, which takes the structure of an impact bond, but applies the pay-for-performance contracts to environmental impact targets such as tree stems per hectare and volume of carbon, while also measuring the combined social and environmental outcomes of permanent forest establishment.

 The idea of "environmental impact bonds" was first conceived by David Nicola in a 2013 report. There are no such bonds issued in New Zealand yet. However, there are examples in the United States, including a Green Infrastructure Bond issued in Washington D.C. in 2016 and a Forest Resilience Bond currently under development.

 If launched today, the Permanent Forest Bond would be the second Environmental Impact Bond to be issued globally and the first to be focused on afforestation and underwritten by a national government.

 

Who will use your idea, and how will they benefit?

 A simple version of the Permanent Forest Bond:

 Firstly, the Crown acknowledges that establishing permanent forest is a cost-effective way of meeting its international obligations, relative to purchasing of offshore carbon credits at unknown future price. The Crown also recognises the co-benefits of permanent native forest, such as land resilience, reduced soil erosion, improved water quality, mana whenua support, and regional employment.

 Secondly, an intermediary works with Crown and other parties to develop pay-for-performance contracts. Private investors see bonds as effective and relatively low-risk way to invest in integrated social/environmental outcomes. So, investors offer a principal investment for forest establishment, with a government guarantee that this will be returned (plus interest) if outcome targets are met, as assessed by third-party evaluators. The intermediary also works with landowners and service providers (i.e. community groups, iwi or social enterprises).

 

What tasks or activities do you need investment for? How would you spend a $25,000 grant?

The Permanent Forest Bond was recently awarded a $50,000 seed funding grant from Foundation North’s GIFT scheme (Gulf Innovation Fund Together) in order to develop the business case for two pilots in the Auckland region, specifically the Hauraki Gulf catchment.

 

We are already working in consultation with various public and private-sector partners in order to develop the proposal to the stage of being an investable proposition.

 

The $25,000 award from WWF would support David Hall and Sam Lindsay to create the basic informational and analytical materials required to advance the Permanent Forest Bond concept among relevant stakeholders.

 

The remainder would be spent on developing necessary documents, particularly specialised accounting tools to manage the pilots, as well as publicity/educational materials to advance the concept among future stakeholders.

 

Are you a New Zealand citizen or resident?

YES

I have read and agree to the Crowdicity Terms of Use, the Conservation Innovation Awards 2017 Supplemental Terms and Conditions, and the Crowdicity Privacy Policy

YES

List five other ideas posted in the challenge that excite you. Why?

 1/ Māori Carbon Farming Cooperative: this project aims for similar outcomes to our Permanent Forest Bond, but by a different means. The Coop relies on the ETS for revenue, whereas the Bond relies on outcome funders who don't need to be ETS participants. We consider these complementary projects which fill different needs and interests within the afforestation potential.

 2/ Make Every School a Forest School: this project educates the new generation to appreciate and value forests, which is crucial to provide the cultural context for supporting conservation and restoration work.

 3/ Tend Your Planet/War on Weeds: Some of the major costs for forest establishment (and often neglected!) is aftercare for planting sites, to ensure that new trees aren't smothered by weeds. Pest control is crucial for restoration work.

 4/ Eco-zoning: A key consideration for permanent forest is the zoning or regulations or covenants that protect forest over multiple generations. We strongly support new innovations in land management that can boost the resilience of restoration projects through increased connectivity and networks.

 5/ Te Rarawa Noho Taiao: Environmental progress is not possible without strong social and cultural support, so we strongly endorse projects like this that foster environmental leadership and change the social ecosystem within which land use decisions are made.

 

How could you improve your idea?

Our idea will be improved by gathering together the financial and environmental data that will inform the pay-for-performance contracting, as well as building accounting strategies to manage this. Ultimately, investors will need good sound reliable data in order to take the risk of providing their financial capital for forest establishment. Also, the Crown will need defensible estimates of the value of future forest, especially the various environmental and social benefits to changing pasture land uses to forest land use, in order to clarify what it is willing to pay for forest establishment. This will involve ecosystem services analysis of water quality, soil loss and future carbon price.

 

edited on Nov 7, 2017 by Sam Lindsay

Jennifer Mcguire 10 months ago

I can appreciate how the future of funding environmental change could potentially work by unlocking private investment in environmental outcomes could potentially work. It's important to define the outcomes correctly, pricing those outcomes appropriately and to consider whether the development costs are justified by its trans-formative potential.

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Sam Lindsay 10 months ago

Hi Jennifer,

We totally agree. The benefit of this arrangement is that each party is investing on the basis that the outcomes are precisely defined and appropriately priced.

Happy to answer any questions you may have.

Thank you for your interest.

Sam

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Jennifer Mcguire 10 months ago

This is really different - really look forward to seeing how this project progresses.

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Sam Lindsay 10 months ago

Thanks, Jennifer!

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Hannah Smith 10 months ago

I've been down to Picton recently and its great to see what was marginal farmland slowly progressing through to scrub and now coming away in native bush. I dream of a NZ that doesn't look like patchwork quilt from the air with tiny pockets of bush but a lush deep green broken up by the occasional patch of cultivation :) This seems like a tool that could help that happen.

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Sam Lindsay 10 months ago

Hi Hannah,

Leveraging innovative finance mechanisms to help unlock private capital invested in global financial markets is one way we can make it happen!

Happy to answer any questions you might have.

Thank you for your interest.

Sam

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Michael Fielding 10 months ago

Hi Sam,

You obviously know quite a bit about this concept.

I have a bit of a background in investment finance, and I'm afraid I can't follow the business model explained in the text. I reckon the judges and the average reader will also struggle. Can you strip out the jargon and explain what each party does, and why they'd have an incentive to do it?

The diagram at the bottom was the thing that helped my understanding the most. But I still don't understand why the NZ government would do this (if/when we have one!!!), given their cost of capital is going to be lower than any of the other parties in the transaction.

Hope this helps!

Michael

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David Hall 10 months ago

Hi Michael,

Thanks for your feedback. It is always a challenge to describe this concept to different audiences – which is precisely why we developed the diagram. So we're glad that was illuminating! I have refined the description in a way that hopefully should help; see especially the section: "Who will use your idea, and how will they benefit?"

Also, we do address these issues in the lengthier, more comprehensive working paper attached as part of our application.

Best wishes, ngā mihi nui, and thanks again for your thoughts.

David


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Becky Wilson 10 months ago

The idea has been progressed to the next milestone

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