Investors bullish on forestry carbon market

A survey of senior investors has shown significant support for an expanded carbon market mechanism that would address the estimated 20% of global carbon emissions due to deforestation and forest degradation. But the survey found investors looking for initial public financing viable policy frameworks, and more certainty from both international agreements and national legislation, before private funds can be mobilised in connection with Reduced Emissions from Deforestation and Degradation (REDD).

The 2009 Forest Carbon Investor Survey was conducted by the Brunswick Group on behalf of the WWF Forest Carbon Initiative. It is based on in-depth qualitative interviews with 25 senior institutional money managers, sell-side analysts and specialist sustainability investors in Europe, the US and Asia-Pacific.

The key findings from the survey are:

• There is significant potential for a multi-billon dollar expanded carbon market; however, substantial preconditions still need to be met for REDD to succeed
• Agreement at Copenhagen and legislation in key countries, including the US, are crucial prerequisites
• Public sector funding will be vital before a market-based approach can take effect
• Problems of verification and monitoring can be addressed if there is a strong political framework in place
• National governments must put in place robust and durable legal frameworks to create certainty for investors.

The survey found that investors have a high degree of knowledge about REDD and see strong potential in a future carbon market. However, they are also unlikely to invest in the market without clear political commitment, funding and on-the-ground implementation by key developed and developing countries.

More than one-third of respondents expect a forest carbon market will evolve from a voluntary to a compliance market over the next five to fifteen years if certain conditions for a market-based approach can be met. This will require action from governments, including public sector funding, to lay the foundation for the market and support efforts by forest nations to build legal and technical capacity for REDD. A strong legislative framework in forest countries is seen as core to addressing problems of verification and monitoring that have hampered agreement on REDD in the past.

As one analyst involved with green energy and timber funds observes, if a decision is reached at Copenhagen in December to incorporate REDD into the EU ETS, then doing so should be adopted by the EU by 2012 and therefore it is feasible that trading in this market will begin in 2015.

Even then, some investors are likely to approach the market with caution. "We don't know what the landmines are in investing in this and therefore, at least early on, we're going to make small investments until we get our arms around it as an asset class and the kind of risk and volatility associated with it," says a partner in an environmental asset management firm.

Together, the firms surveyed oversee more than US$7trn in assets under management. They include: Allianz Global Investors, APG Asset Management, Barclays Capital, Blackrock, Camco, Citigroup, EKO Asset Management, Evolution Markets, F&C Asset Management, Fortis, Generation Investment Management, Impax Asset Management, Jupiter, Kaufman Bros, KBC Asset Management, Newton, Nikko Asset Management Co, Pictet, RCM Capital Management, Swiss Re and UBS.

MP