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Scaling Climate Finance: Forest Finance Instruments

New Zealand, like other countries around the world, is facing twin crises of climate change and biodiversity loss. Forests address both by sequestering carbon, enhancing land resilience, and creating habitat for endangered flora and fauna. But a lot hangs on whether the right trees are in the right place for the right purpose. If they are not, then the forestry sector risks losing its social licence to operate. Recent examples include erosion and debris events in Tolaga Bay and Tasman District, and rural fears that increasing carbon prices will create “a sea of pines”. Meanwhile, forest fires in Christchurch and Nelson illustrate the growing risks for forests that aren’t climate resilient.

Climate finance is a vital lever for transforming the forestry sector for the better. As the low-emissions transition gathers pace, investors are increasingly searching for climate-aligned assets that deliver positive social and environmental impacts alongside financial returns. Sustainable forestry is an attractive proposition, being a profitable sector that generates revenue by removing carbon dioxide from the atmosphere, to be sold as timber or carbon credits. Consequently, forestry offers a unique opportunity for climate-conscious investors to shift capital from activities that exacerbate the climate problem, such as fossil fuel production, to a genuine climate solution.

The Climate Innovation Lab (the Lab) creates novel structures for financing climate-aligned projects and activities in Aotearoa New Zealand. With support from Principal Partners, ANZ and AUT University, and Advisory Partner, Russell McVeagh, the Lab identifies investment opportunities across a range of sectors to produce positive social and environmental outcomes in addition to financial returns. The Lab is one of only a few such initiatives throughout the world, which situates it at the cutting edge of the rapidly evolving field of sustainable finance and climate-aligned investment.

The Lab’s inaugural concept paper, Scaling Climate Finance: Forest Finance Instruments, proposes six innovative instruments, each ranked in respect to impact strategy and additionality. The paper analyses an environmental impact bond, a leveraged carbon fund, a green covered bond, an equity fund designed to upscale continuous cover forestry, risk-adjusted loans, and an exchange for investing in Nature-Based Solutions. Each concept was developed by reviewing international innovations, adapting promising structures to the unique local context of Aotearoa New Zealand, and conducting workshops and reviews with sector experts and government observers to test, refine and validate the structure. The paper also identifies relevant indicators for impact assessment, such as IRIS metrics, and potential regulatory changes to support the delivery of more sustainable forest outcomes.

The purpose of the Lab’s concept papers is twofold. Firstly, to energise the local conversation on financial innovation and its role in accelerating the low-emissions transition. Secondly, to enable product development by laying the foundations for the co-development of climate finance instruments with key stakeholders. The Lab regards climate finance as an important enabler of change, by helping people to overcome financial hurdles that prevent them from embracing the low-emissions future.

If you would like to be involved in the Lab’s exciting work programme, either to co-develop one of the forest finance instruments, or to partner with the Lab to support subsequent concept papers, then please contact Sam Lindsay at sam@mohio.co.

About Mōhio

The Climate Innovation Lab is a project by Mōhio, a think-and-do tank which focuses on supporting an inclusive, equitable and tika transition for a low-emissions Aotearoa New Zealand. With its climate finance workstream, Mōhio aims to realign investment to the creation of genuine public value by enabling projects and activities that deliver combined social, environmental and economic impacts. Past work includes publishing Climate Finance Landscape for Aotearoa New Zealand: A Preliminary Survey, commissioned by the Ministry for the Environment, which was New Zealand’s first report on this subject; and designing the Native Forest Bond Scheme, an outcomes-based funding mechanism for native afforestation, with support from Foundation North’s GIFT Fund.

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