West and Central Africa Tropical Forest Investment Forum - August 2007 © EnviroMarket Ltd Forest-Backed Securities: alternative finance for tropical natural forest Jon Grayson, EnviroMarket Ltd

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Agenda Introduction:  EnviroMarket Ltd  EcoSecuritisation R&D Key Points:  Why is ‘alternative’ finance needed?  What are forest-backed securities?  How do they work? Conclusion:  What next?

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd EnviroMarket Ltd…  Established in July 2005  Expertise in finance, carbon, forestry, risk  UK-based; also in S. Africa & N. America  Advising on sustainable finance initiatives  Broking ecosystem services e.g. carbon…  Client list

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd EcoSecuritisation R&D… Proposal: Test the feasibility + impact of a financial instrument designed to capture the ‘true’ value of tropical natural forests. Accommodate multiple values, slow growth, geographic location and multiple stakeholders Programme: feasibility study, pilot, market catalyst Participants: International Finance Corporation, DfID, HSBC, Forum for the Future & others

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Why are alternatives needed? Money is attracted to the best return at the lowest risk Risk is directly proportional to duration of investment Forestry delivers returns over long time frames A high proportion of costs are incurred upfront True capacity of asset recognised, but not realised Global thinking (e.g. PES) requires effective local action Time is not on our side: climate change is happening now loss of forests = destruction of value Current models (e.g. TIMO) inappropriate

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Asset-based alternatives  Aim: a mechanism that enhances current value of long term revenue streams associated with sustainable management and conservation, and unlocks this value for immediate investment  Enhanced asset value: timber + carbon, watershed etc  BUT land tenure/ownership rights remain difficult  Can this enhanced asset value unlock enhanced finance?  Bonds: tradable debt obligations using assets as collateral  Asset-Backed Securities: tradable rights to future income generated by assets

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Issuing Bonds  Bonds are a form of borrowing  Debt can be used to ‘leverage’ equity  Known cost/expense to business  Can be tax efficient  BUT interest and principal must be paid, come good times or bad!  Banks recognise few forest assets  Assets used as collateral are at risk

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Selling Asset-Backed Securities  Sale of rights to future income  Enables immediate access to future revenue  Enhances role of product/service buyers  BUT transaction costs require scale  Buyer and seller are fully committed

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd What are forest-backed securities?  Forestry based asset-backed securities  Created through securitisation of future forest income: ‘EcoSecuritisation’  Enhance present value of future forest income  Provide forestry groups ‘upfront’ access to income for product/services delivered in future  Provide investors with access to a range of sustainable forestry ‘value’ streams

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd How forest backed securities work  A fund is created to finance investment by sustainable forestry groups  Forestry buyers commit to long term purchasing contracts for products/services delivered by sustainable forests  Forestry and conservation groups commit to long term product/service supply, sell future payments rights to EcoSecuritisation Fund, and receive payment now  Capital market investors buy forest backed bonds issued in an EcoSecuritisation in order to access various tropical forest value streams

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Key risks to future income Investors see multiple risks:-  Political/country risk  Physical risk (fire, pest, wind etc.)  Credit risk  Market/price risk  Operational risk  Reputation risk Find ways to cost effectively manage and mitigate these risks…

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Natural Forest A Diversity central to reducing risk Processed softwood  Power generation  Construction  Bio-fuels/pellets Processed hardwood Carbon sequestration Avoided deforestation Watershed management Biodiversity payments Fuelwood Other ‘Non Wood’ Products Plantation A Plantation B Conservation Area A Natural Forest B

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Example: one possible structure Approach to risk:- Strong/diverse off-take Third party credit insurance Effective price mechanism Choice of jurisdiction Physical insurance Third party political insurance Performance guarantees Certification Structural enhancement

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Conclusion  Forestry groups monetise their future delivery of long term sustainable forest product/services  Major buyers of sustainable forest products and services leverage the impact of their purchasing strategy  Government/IFI support key elements of long term private commitments and catalyse activity  Next phase: concept development/pilot with support of major commercial and financial groups  Identification of trade/capital investment opportunities

West and Central Africa Tropical Forest Investment Forum 2007 © EnviroMarket Ltd Thank You / Merci! Tel:- +44 (0)