Imperial College London report shows methods of managing risks and returns forest carbon credit projects
Investors wanting to finance forest carbon credit projects should look to diversified investment portfolios in the tropics, says a new report.
The report, Forestry-Backed Assets Design, published today by Imperial College Business School reveals that bundling forest investments across forest ages, geographies, and ecosystems can reduce investment risk by half or more.
The report was authored by The Singapore Green Finance Centre – an initiative of the Centre for Climate Finance & Investment at Imperial College Business School and backed by the Monetary Authority of Singapore and leading global financial institutions. The report was published in partnership with Terraformation, a forest tech startup.
The report provides investors and policymakers new insight into how forest carbon investments can yield financial returns while mitigating the effects of climate change.
The study sheds light on the biodiversity potential of forest projects, and the risks of wildfire and other weather and climate hazards, leveraging support from the Leverhulme Centre for Wildfires, Environment and Society.
While risk pooling is common in a variety of Asset Backed Securities (ABS), including mortgages and credit cards, it has been less explored in the context of forestry projects. As the carbon market takes off, this security design could help make forests a more predictable and investable asset class.
“The findings of this report are important for forestry asset originators, investors, and forestry management companies.”
Enrico Biffis
Associate Professor of Actuarial Finance at Imperial College Business School
The paper also demonstrates the prevalence of geographies in the tropics (regions surrounding the equator) with both high carbon capture potential and high biodiversity restoration potential.
This overlap, the authors note, provides clear evidence of a link between carbon sequestration forestry projects and biodiversity preservation, and suggests a natural alignment between ambitious biodiversity and climate mitigation objectives. The authors believe these geographies of overlap will become the most attractive locations for forest carbon investors in the future.
The report is co-authored by Enrico Biffis, an Associate Professor of Actuarial Finance at Imperial College Business School, alongside Giuseppe Brandi, Research Associate at the Business School as well as authors from Terraformation. It is the first in a forthcoming series of papers that provide new insights on forest carbon investments.
Enrico Biffis, Associate Professor of Actuarial Finance at Imperial College Business School and co-author of the report, said: “The findings of this report are important for forestry asset originators, investors, and forestry management companies. The findings are also important to policymakers and governmental agencies who are interested in understanding which forestry assets may need tailored intervention to make them more appealing to market participants interested in carbon-based assets.”
Andrea Snavely, Finance Manager at Terraformation and paper co-author, said: “This paper provides important insights into the value of diversification for forestry-backed asset design that have been largely unexplored up until this point. It is our hope that this research can be useful to practitioners, regulators and academics alike to promote wider participation in this asset class.”