Forest carbon credits: new approaches to risk and return management

Forestry-Backed Assets Design, a report from the Imperial College Business School that came out today, shows that investing in forests across ages, locations, and ecosystems can cut investment risk by half or more.

The report was written by the Singapore Green Finance Centre, which is a project of the Centre for Climate Finance and Investment at Imperial College Business School. The Monetary Authority of Singapore and other major financial institutions around the world supported the project. The report was made with the help of a forest tech startup called Terraformation.

The report gives investors and policymakers new information about how investing in forest carbon can make money and lessen the effects of climate change.

With help from the Leverhulme Centre for Wildfires, Environment, and Society, the study sheds light on the biodiversity potential of forest projects as well as the risks of wildfires and other weather and climate hazards.

Risk pooling is common in asset-backed securities (ABS) like mortgages and credit cards, but it hasn’t been looked into as much in forestry projects. As the carbon market grows, this security design could help make forests a more stable and investable asset class.

The paper also shows that there are many places in the tropics (areas around the equator) that have both a high potential to capture carbon and a high potential to restore biodiversity.

The authors point out that this overlap is clear evidence of a link between forestry projects that sequester carbon and projects that protect biodiversity. It also suggests that ambitious goals to protect biodiversity and reduce climate change should go hand in hand. The authors think that these areas of overlap will be the best places for forest carbon investors to put their money in the future.

The report was written by Enrico Biffis, an associate professor of actuarial finance at Imperial College Business School, Giuseppe Brandi, a research associate at the business school, and authors from Terraformation. It is the first in a series of papers that will come out soon and give new ideas about how to invest in forest carbon.

Enrico Biffis, an associate professor of actuarial finance at Imperial College Business School and co-author of the report, said, “Forestry asset originators, investors, and forestry management companies should pay attention to the report’s findings.” The results are also important for policymakers and government agencies that want to know which forestry assets may need tailored interventions to make them more appealing to market participants who are interested in carbon-based assets.

Andrea Snavely, who helped write the paper and is the Finance Manager at Terraformation, said: “This paper shows important things about the value of diversification for designing forestry-backed assets that haven’t been looked into much before.” “We hope that practitioners, regulators, and academics can all use this research to encourage more people to invest in this asset class.”