Forestry - an effective climate change mitigation strategy

Development and investment rationale for our forestry investments

Investments in forestry projects play an important role in the new IDF strategy for the coming 10 years, as they have a high development impact. Deforestation and forest degradation are significant drivers of climate change, accounting for 12% of global greenhouse gas (GHG) emissions. This makes forestry investments a highly effective climate mitigation strategy. Moreover, forests provide food, fuel, shelter, clean water and air, medicines, livelihoods and employment for people around the world and contain 80% of the world’s terrestrial animals and plants.

Overall, we consider two types of forestry project to be within fund's scope: (1) plantation projects that aim to harvest and sell timber products and (2) conservation projects that aim to protect endangered landscapes and are certified to sell carbon credits. Forestry investments are high-risk and complex transactions that have a long lead and structuring time.

A dedicated team has therefore been assigned to develop a forestry portfolio. Investments already made by IDF in forestry projects include the Althelia Climate Fund, Komaza, Miro and Burapha – the latter two in 2018 and these are described in greater detail below.

Potential impact of Miro and Burapha

Miro, Ghana and Sierra Leone

Type: Plantation
Investment: USD 10 mln, 10-year tenor
Purpose: Expansion from 10,000 ha. to 19,000 ha. and capital expenditure until 2020
Instrument: Mezzanine
Contracted: November 2018

Burapha, Laos

Type: Plantation
Investment: USD 5 mln, 8.5 year tenor (catalyzed USD 5 mln from FMO)
Purpose: Expansion from 4,000 ha to 7,000 ha and construction of plywood mill until end 2019, and then potentially up to 15,000 ha by 2023
Instrument: Mezzanine
Contracted: December 2018

Among other outcomes, IDF’s investment in Miro and Burapha will lead to a reduction in green house gas (GHG) emissions and job creation in rural communities.

In both cases, the jobs generated by the two companies are an important source of income for the rural communities, as both Miro and Burapha are the first formal employers in those areas. It goes without saying that addressing climate change through GHG emission reduction is extremely important.

Miro’s plantations sequester 1 million tons of CO2 equivalent (CO2e) per year, of which 22.5% can be attributed to the FMO’s investment. This represents 22,500 tons per year per million invested. Moreover, the expansion of Miro’s operation will create 1,400 direct jobs (approx. 621 full-time and 779 part-time). A Miro worker’s salary is approx. 35% higher than the minimum wage.

Burapha’s plantations sequester 148,235 tons of CO2e per year over the project duration of 8.5 years, 16% of which can be attributed to FMO’s investment. This represents 14,823.5 tons per year per million invested. Moreover, Burapha’s expansion will create 5,350 direct jobs, of which 1,550 will be full-time and 3,800 will be day job. A Burapha worker’s salary is approx. 20% higher than the minimum wage.

In the case of Miro risk capital for forestry is very scarce and IDF investment is critical to successfully closing this funding round.

For Burapha the IDF investment is additional, as an investment with a tenor this long is not available from commercial financiers.

For forestry companies, there is the risk of natural forests being converted into commercial plantations, negatively affecting climate change. Both Miro and Burapha are, however, committed to not logging natural forests. Another risk factor in plantations stems from extensively cloning seedlings. The higher the share of clones in a tree population, the less resilient it is to diseases. Infected trees need to be logged prematurely and thus cannot reach their full sequestration potential. Extensive cloning could pose a risk to Miro and Burapha’s sequestration goals, but this risk is mitigated by the prudent management of their cloning programmes.