Fund Structuring: Forests, carbon and benefit sharing

Forests play a critical role in mitigating climate change by capturing carbon dioxide from the atmosphere. Forests provide a “carbon sink” that absorbs a net 7.6 billion metric tonnes of CO₂ per year, 1.5 times more carbon than the United States emits annually.

In this regard, forest protection projects are gaining momentum to tackle the climate crisis. These can be done in different ways, including conservation, management, and restoration. Conservation involves the protection of existing forests from deforestation, while management focuses on preserving forests through sustainable forest management practices. Restoration, on the other hand, involves the planting of trees on deforested or degraded land.

Globalfields was hired to model a revolving carbon fund for reforestation projects in the Global South. The aim was to raise, on the back of an initial donation, USD 100 million to invest in forest protection projects with high levels of community benefits. Sharing the benefits of the fund with the local community, who are involved in the project implementation and management, ensures that the reforestation projects contribute positively to local communities' sustainable development objectives. This is critical to support the regime for access and benefit sharing of resources (ABS), as provided for by the United Nations Convention on Biological Diversity, including genetic resources that are found in forests. In this respect, forests are closely linked with biodiversity use and provide a myriad of valuable products for commercial as well as research purposes. Equitable and efficient forest management is closely linked to benefits to forest communities.

Benefit sharing is also key to enabling multiple co-benefits to be realised through specific investments, including social, environmental and climate-related.

A revolving fund approach, taking advantage of the liquidity in the carbon markets, is important because it ensures that the fund can sustain itself in the long term and continue to support reforestation efforts over time, rather than being a one-time investment. This is an effective way to ensure that the fund has a lasting impact on livelihoods and on the environment.

At the same time, an explicit commitment to providing a very high level of community benefits, making the stewards of the forests the key beneficiaries, addresses much of the criticism that is currently being raised against carbon offsets.

The geographical focus of the projects was in developing countries, with the aim of achieving additionality on the supply side. For carbon credits projects, it is however also paramount that the clients to whom the carbon credits are sold are chosen carefully. This is because carbon credits work alongside the reduction of emissions, and it is important to ensure that the credits are only sold to entities that are genuinely engaged in reducing their emissions. This approach ensures that the projects have a real impact on mitigating climate change and prevents greenwashing practices.

The financial model designed by Globalfields projected both carbon and financial flows, based on a range of assumptions derived from the client’s experience in investing in forest carbon projects in the past. The revolving carbon fund worked by investing the initial capital and using the returns to provide community benefits and fund future reforestation projects. In addition to the model, Globalfields provided an operations manual for the planned fund that defined decision-making roles and structures and internal procedures.

Reforestation projects are crucial in mitigating climate change, and a community-based and benefit-driven revolving carbon fund model is an innovative way to fund such projects sustainably, avoiding many of the pitfalls in the traditional carbon markets.