Long reads

Fixing finance from the ground up: The fight for afforestation

Hamish Monk

Hamish Monk

Reporter, Finextra

Deforestation in the Amazon rainforest just hit its highest level in over 15 years, despite Brazil – along with 100 other world leaders – promising to end deforestation by 2030, at Glasgow’s Climate Summit, COP26. According to official data from Brazil's space research agency, Inpe, 13,235 sq km has been lost during the 2020-21 period.

This rate of destruction is particularly concerning given the fact that over 3 million species live in the rainforest – including one-third of all tropical trees that exist on earth. Maintaining Brazil’s vast carbon sink is therefore critical to putting the brakes on both climate change and biodiversity loss.

For some years, Global Witness and Global Canopy have been exposing the international demand for commodities – such as soy, beef, palm oil and timber – that is driving the destruction of the Amazon; as well as the human and environmental abuses that come with it. World-famous financial institutions which bankroll Brazil’s beef giants (JBS, Marfrig and Minerva) play a key role in this global trade.

As highlighted by the COP26 session, “Fixing finance from the ground up”, the global call to end the financing behind the abusive environmental and human rights practices in forest-risk commodities is getting louder. To disincentivise deforestation, financial leaders, policy makers and ESGtechs must come together and identify solutions to the epidemic.

So, what exactly can be done to address the accountability gap for finance on deforestation? How can responsible players benefit from tackling the problem?

Beating opportunity costs

According to Harry Grocott, CEO and co-founder of nature-based carbon capture company, Treeconomy – who is speaking at Finextra’s upcoming Sustainable Finance Live event – the solution to the planet’s deforestation crisis pivots on making nature bankable. In other words, what is good for portfolios must become good for the planet.

“There's a really clear financial message being delivered here for carbon pricing in the voluntary market,” he said. “With the price for soy and other commodities rising there is an incentive to monetise, and deforestation rises. The opportunity cost of protecting forests is too steep. We need a higher carbon price to compete with the financial incentive for deforestation.”

To be effective, that carbon tax needs to come in at a tune of $75 per tonne by 2030, argued Mark Carney, UN special envoy for climate action and finance, at COP26. Climate scientists, on the other hand, talk about a carbon price of $150-200 dollars per tonne to meet net-zero goals.   

Grocott gets to the heart of the economics of climate change. The carbon market will have to transition from the ‘Wild West’ that it is today, to a legitimate mechanism of biodiversity preservation, if world leaders are to make good on the promises of COP26. “It is hard to argue that a carbon offset is additional and credible if it is being sold below the opportunity cost of deforestation – it's simply ineffectual.”

The Wild West of carbon markets

The suboptimal integrity of voluntary markets is, in part, symptomatic of their infancy. Given the markets’ fragmented reporting standards, inconsistent quality of available credits and their underlying projects – as well as a lack of consensus around how they align with science-based decarbonisation pathways – a number of improvements are needed.

To truly halt and reverse deforestation, we need a consensus on the definitive role of carbon market credits from standard-setting bodies, as well as stronger guidance on disclosure protocols for credits and how they relate to carbon-neutral claims.

The quality of carbon credits should also be made more transparent, says a recent report from the Global Financial Markets Association (GFMA), with stringent and transparent baselining and Measurement, Reporting and Verification (MRV) standards so that market participants can better identify projects that suit their goals. What’s more, to track global progress toward the Paris Agreement goals – and accelerate the transition to a net-zero economy – fragmentation across regions needs to be reduced through interoperability between carbon markets and the establishment of a unified global registry. This would make credits more liquid, and facilitate the trading process.

The legitimisation of these markets cannot come quick enough. The demand for carbon credits is expected to increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. In order to reach the 1.5-degree warming target, we need a voluntary carbon market that is global, transparent, verifiable, and environmentally sound, today. 

In order to address some of these challenges, Treeconomy deploys satellite and Light Detection and Ranging (LiDAR)-derived data to measure a woodland’s ecosystem services – providing an additional layer of granularity to carbon offset volume and natural capital calculations.

The firm then connects rural landowners to the carbon offset market – compressing the supply chain and providing a new source of income from trees. This approach offers reliability, transparency, and a much-needed incentive for afforestation. Such projects are key to valuing nature, slowing down deforestation and saving our ecosystems.

Valuing our carbon sinks

In 2020, the tropics lost 12.2 million hectares of forest cover – that’s half the size of the UK. So long as these natural environments, the world’s greatest carbon sinks, are not properly valued in our financial systems, they will continue to be destroyed.

Legitimising the carbon markets and securing a sufficient tax on carbon – above the opportunity cost of deforestation – is a big part of the battle. According to the Environmental Defence Fund, if the market system was active across the planet, and if cost savings generated by carbon markets were re-invested in climate mitigation, CO2 emission reductions over the next 15 years would go up “from 77 billion tons in the non-trading base case to 147 billion tons in a scenario with full global emissions trading.”

In short, if the planet has any hope of being saved, trees must become more valuable alive than they are dead.

To hear the likes of Treeconomy discuss how supply chain traceability – yielding dynamic, trustworthy, and secure data from complex supply chains – will change the game, register for Finextra and ResponsibleRisk’s virtual conference, Sustainable Finance Live, here.

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