Investors poised to help fight damaging deforestation

Photo of Michael Ackerman

By Michael Ackerman, CEO of EcoForests Asset Management

While engineers frantically rally to devise efficient carbon capture technologies to assist in our fight against climate change, a simple and effective solution already exists – planting forests.

Studies over the last decade have confirmed reforestation is one of the most efficient ways to capture carbon and halt the rise of global temperatures. One 2019 study found Earth’s ecosystems could support another 2.2 billion acres of forests – about 25% more forest than currently exists. Moreover, results indicated planting half a trillion trees could capture an estimated 205 gigatons of carbon, reducing atmospheric carbon by about 25%.

However, afforestation is fruitless unless we significantly curb deforestation – a practice inherently tied to national economic development.

Deep disparities

Economic growth has gone hand in hand with deforestation for centuries, as industrialisation and globalisation – the two main engines of global growth – heavily relied on resource-intensive activities, such as agriculture and mining. Although most deforestation now occurs in countries like Argentina, Brazil and Indonesia – the developed world is largely responsible for the practice. About 40% of products that necessitate deforestation, such as meat, dairy products and palm oil, end up in high-income countries.

Developed countries have effectively forced the deforestation problem onto a developing world that has lacked the governance, financial systems and the wealth to resist the depletion of its natural capital. In fact, a significant study of 130 different countries found income per capita is the most robust determinant of differences in cross-border forest cover – with a stronger marginal impact at the earliest stages of economic development.

The poorest countries are therefore on the front line of the battle for the planet, faced with the unenviable choice between preserving natural resources and improving financial wealth. At this critical climate juncture, they require urgent help from the most powerful governments and deepest pocketed investors to prosper sustainably.

Regulation required

At the policy level, action must be led by governments. At COP26, we must see a revamped system of financial incentives and penalties, which will need to be both mandatory and voluntary. This should include, for example, tougher ESG screening on sovereign debt issues, as well as a higher cost of capital for nations permitting environmental destruction. If done correctly, this will rebalance financial returns from deforestation to reforestation – as well as direct capital investment into wholesale reforestation of the developing world.

In addition, governments must provide greater law enforcement support to fight deforestation. Combined with inflows of private capital, this will allow land to be acquired and reforested, and provide sustainable employment growth for local populations.

Nevertheless, with government coffers almost empty after fighting the pandemic, responsible financial investors must also step up to the plate and provide much-needed financial support.

Investors ready

The most forward-thinking and climate-conscious investors are already waiting in the wings. According to the UK Sustainable Investment and Finance Association’s 2019 survey of fund mangers, 97% reported their clients had become more interested in carbon reduction strategies over the prior 12 months, and 80% of fund managers reported more interest, or significantly more interest, from clients in fossil fuel-free products.

In addition, according to the UBS 2020 Global Family Office Report, 39% of family offices intend to allocate most of their portfolios to sustainable investments in five years’ time – while many are adopting net-zero mandates. This is significant, as family offices are currently not required to disclose environmental and social risks, unlike some institutional investors – such as EU pension funds.

If we see meaningful changes to financial incentives and regulation at COP26, this will provide greater certainty for investors, making opportunities more attractive for those eager to fund the transition to a more sustainable economy. We cannot lose this opportunity generate meaningful change.

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