Wall Street investors have earned billions financing activities linked to deforestation in the tropics, with forest loss reaching record highs last year. But a major proposal by Brazil’s COP30 presidency wants to turn financial markets into allies of the rainforest.

The Tropical Forest Forever Facility (TFFF), a proposed new fund seeking to raise cash for conservation efforts in tropical countries, is set to be launched at the COP30 climate summit in Belém later this year.

Brazilian President Luiz Inácio Lula da Silva has rallied behind the initiative and secured key endorsements from the eight South American nations home to the entire Amazon Basin. Private banks and countries in the BRICS group of large emerging economies have voiced support.

COP30 president André Corrêa do Lago has said “the TFFF is the right answer for forest conservation”.

The initiative comes as developing countries have complained about being unable to access existing forest funds at the Global Environment Facility (GEF), while foreign aid budgets which have funded forest conservation shrink in the US and Europe.

Yet finance needs in developing countries are large and growing, with estimates ranging between $20 billion and $72 billion every year to protect forests. In contrast, in 2022, the total finance destined for forests was just $2.3 billion.

What is the Tropical Forest Forever Facility (TFFF)? 

The TFFF is being proposed as a blended finance instrument, with funding from both public and private sources. It would seek to directly pay tropical countries that can show effective forest protection.

On paper, the TFFF will get its money similarly to an investment fund. Donor countries and private investors put their money in the fund, which then invests the capital in financial markets. A part of the returns is used to pay back investors and what remains is allocated to forest protection in tropical countries.

“Think of a bank that runs normal market operations but that directs its profits not to shareholders but to forests,” said João Paulo de Resende, undersecretary for economic and fiscal affairs at Brazil’s Ministry of Finance.

In its most recent version, Brazilian officials propose that the fund starts with $125 billion in capital, of which $25 billion would come from donor countries and $100 billion from private investors.

The payments to forest countries would depend on the returns of the fund, but an 8% yield would allow the fund to pay at a rate of about $4 per hectare of protected forest — which in total could raise an estimated $2.8 billion for rainforests every year.

The Brazilian government has said donor countries could include the United Kingdom, Norway and the United Arab Emirates, while private investors endorsing the fund include investment managers PIMCO, Bank of America and Barclays.

Recipients would include tropical countries in major rainforest basins such as Colombia, the Democratic Republic of Congo (DRC) and Indonesia, among others.

How is the TFFF different from other climate funds? 

Other UN funds like the Green Climate Fund (GCF) or the GEF mostly give out one-time grants to countries that reduce emissions through projects and programmes to protect or restore forests (an approach known as REDD+). The TFFF would instead aim to reward countries that have kept their forests standing and can show results.

This “results-based payments” system is not new – the GCF, for example, gave out more than $500 million between 2015 and 2020 in this way. However, a fund solely for countries that can show success in preventing deforestation is a new way to target large intact rainforests, which struggle to receive REDD+ funding, said Torbjørn Gjefsen, international forest finance advisor at the Rainforest Foundation Norway.

“There is complementarity. It’s not competing with REDD+,” said Gjefsen. “If fully operational, it will substantially increase the amount of funding available for this kind of results-based payments.”

Amid a context of tighter foreign aid spending, another key difference is that the TFFF would seek to attract investments rather than depending on donations from public budgets.

The fund’s concept note claims that, if fully operational, the one-time investment from donor countries would allow payments to forest nations for as much as 40 years in the future.

Finally, unlike the other UN environmental funds, the TFFF is being proposed as a mechanism hosted by the World Bank outside of UN environmental conventions.

Sandra Guzman, founder of the Climate Finance Group for Latin America and the Caribbean (GFLAC), said this could potentially help convince large developing countries like China to contribute funds without having to assume donor-country responsibilities at the UN negotiations. Chinese officials have welcomed the TFFF and said they “hope it plays a positive role”.  

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How will the TFFF make money from financial markets? 

In tapping financial markets, the TFFF will have to also deal with risk. If investments don’t generate the expected yields, payments to forest countries would need to be paused and paid out later, de Resende said.

The Brazilian government’s estimates show that if the TFFF had been operating in the last 20 years, it would have been under financial stress on two occasions: during the 2008 financial crisis and during the COVID-19 pandemic. The TFFF’s models project a 60% chance that payments to forest countries would need to be slightly reduced at some point in the fund’s lifespan.

The Brazilian authorities remain optimistic, as most value fluctuations are likely to be small, they say. Resende said that “over the long run, this risk is minimal.”

The TFFF’s main strategy is to get cheap money from investors and lend money to emerging economies at much higher interest rates. Emerging market bonds would account for as much as 80% of its investments.

Critics say this could be a risky strategy, which is precisely why these emerging countries pay higher interest rates. “The risk of Egypt’s state bond is just not the same as the risk of US treasury bonds,” said Max Alexander Matthey, co-founder of Climate Impact Auctions.

Another key point is that, for the fund to achieve the promised payments, it would need to borrow money at a very low cost, so it would need a top-category AAA rating from credit rating agencies. Brazilian authorities have been in discussion with agencies on this and have said they aim to receive a “shadow rating” for the TFFF before COP30.

As part of the strategy, the fund will also exclude any investments in polluting industries such as coal, oil and gas. 

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Who is allowed to receive payments from the TFFF? 

According to the fund’s concept note, the 74 countries that are home to rainforests could be eligible to apply for TFFF payments if they meet the required criteria.

To access funds, tropical countries must demonstrate that they are reducing deforestation in a defined area, have a robust forest measurement system and a set of forest policies, and demonstrate that the payments will not replace national resources.

Countries would also have to commit to reserve at least 20% of payments for Indigenous people. While an important step, Guzman said this could be tricky in practice because of the challenges of directly transferring funds to these communities.

“Indigenous communities do not always have formal legal structures or administrative capacity,” she said. “It’s not easy, but it is desirable that communities start building these legal mechanisms.”

Currently not many forest countries meet the minimum requirements to be eligible for TFFF payments.

Online platform TFFF Watch, built by NGO Plant for the Planet, estimates that major countries like the DRC and Indonesia would not qualify for payments due to high deforestation rates, and would be missing on annual deals worth $400 million and $450 million respectively.

On the other hand, Papua New Guinea would be greatly benefitted if the TFFF went into operation exactly as laid out in its concept note, according to TFFF Watch. The country is already eligible for around $120 million in annual rewards, the platform estimates.

As shown by recent wildfires in the Amazon, some countries could end up losing or seeing some of their forests degraded even with robust protections. In these cases, countries would get their payments cut by the same ratio as they lose forests.

Yet once they do access TFFF funding, forest countries will have full authority over how to use the funds.

Brazilian government authorities have sent a letter of intent to the World Bank, which will have to decide by October whether it will host the TFFF. By COP30, Brazil plans to sign a declaration of intent with donor countries.

The post Explainer: Brazil’s “right answer” to forest finance turns to financial markets to keep rainforests standing appeared first on Climate Home News.

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