Brazil is advocating for the Tropical Forest Forever Facility (TFFF) at COP30 to finance forest conservation.
The TFFF aims to raise $125 billion through blended finance, combining public and private funds.
It will pay tropical forest countries for conservation, with a portion allocated to indigenous communities.
The initiative faces challenges, including market volatility and credit rating uncertainties.
Brazil, the host country for the 30th Conference of Parties to the United Nations Framework Convention on Climate Change (COP30), is lobbying for financing the conservation of standing forests.
The country accounts for 12.2 per cent of the world’s forest area and has proposed a global mechanism called the Tropical Forest Forever Facility (TFFF) as a solution that could make forest protection in the developing world more lucrative, as per its stated aim.
The TFFF (hereafter referred to as the fund) is a mechanism that aims to establish a blended finance fund that would achieve the target of mobilising financial resources worth $125 billion through long-term debt and reserves.
Blended finance entails combining public money through sources such as Official Development Assistance (ODA) with private capital. The fund would invest the money into a diversified portfolio that generates a return that is higher than its cost of capital. This would be used to pay the tropical forest countries (TFC) a fixed amount of money per hectare of standing forest, with provision for a deduction based on deforestation and forest degradation.
Additionally, the TFCs would need to allocate greater than or equal to 20 per cent of the payment to indigenous peoples and local communities (IPLC), while the rest of the amount would go towards supporting local policies and programmes for forest conservation.
The monitoring and reporting of the funds directed to a country would be coordinated by the secretariat of TFFF. The country’s forest and rate of deforestation would be subject to satellite monitoring with a certain eligibility criterion for canopy cover and technology used.
The policy is envisaged to complement the REDD+ mechanism rather than replace it. It essentially means that it will not generate carbon credits nor will it finance individual projects. According to the concept note, “Rather than relying solely on traditional grants, which are often subject to political cycles and budgetary volatility in developed countries, the TFFF offers a compelling value proposition to sovereign sponsors and private investors, generating competitive market returns”.
The strategy behind the financing rests primarily on the Tropical Forest Investment Fund (TFIF), which would be a tool to mobilise finances from multiple investors and then invest the capital base back in financial assets such as bonds. The concept note proposes raising capital from two main sources, sponsors and market investors through financial markets by issuing debt instruments such as bonds.
Sponsors would be the ‘high income’ countries as classified by the World Bank, along with philanthropies. The assumption seems to be that the capital flowing from the sponsors will be accrued at a relatively lower rate of interest because of the loans or grants being highly concessional. This will account for 20 per cent of the estimated $125 billion needed to kickstart the initiative.
The market investors would constitute institutional investors (such as pension funds and insurance companies), sovereign wealth funds, which are state-owned investment funds, usually funded by a country’s surplus reserves, and endowments, which are investment funds set up by non-profits and universities. Funds from these sources are expected to account for 80 per cent of the total corpus.
The TFIF is yet to be assigned a credit rating by one of the main agencies (such as Fitch, S&P Global and Moody’s), which will dictate the interest rates of servicing the debt that is owed to the borrowers.
The capital raised would then be housed under a multilateral development bank (MDB) such as the World Bank. Further, it would be invested in liquid public (such as the US Treasury) and corporate market bonds (a big private company such as Apple), especially in the climate and sustainability-related investments (for instance, through green, blue or sustainable bonds) in ODA-eligible countries to create a diverse portfolio for TFIF. In principle, TFFF has mentioned that investments in fossil fuel-based companies would not be allocated.
The difference in the interest rates on servicing the debt (that is taken from the sponsors and market investors) and the returns from the investments being made through bonds in liquid public and private assets would generate the revenue through which result-based payments would be made to the countries under the initiative. These payments would be subject to an additional 2 per cent increase to the countries annually, adjusting for inflation. There could be a reduction in payments as well in response to market volatility, as the returns are subject to market fluctuations.
The payments made to TFCs per hectare of forest conserved are based on the calculations that assume a certain credit rating for the TFIF. This will not only decide the actual revenue generated by the initiative but also be the litmus test for gauging the political will of the developed countries as well as the private sector.
However, underneath this complex financial mechanism that is expected to deliver through a market-based approach, the fundamental question is who is really paying the money? And the answer lies in the fund’s investment into emerging markets and developing economies (which will also encompass TFC) through debt instruments, according to an analysis by Goh Chien Yen for Third World Network.
With the existing bias in the current global financial architecture against developing countries which percolates through unfair credit ratings, they receive capital at a much higher cost of borrowing than their developed counterparts. The TFIF exploits this flaw to receive a higher rate of interest from the countries of the Global South that essentially dictates the amount of profit generated by the fund in order to facilitate payments to the TFCs.
Therefore, the actual flow of finances would come mostly from the developing world (including the TFCs that are meant to benefit from this initiative) under the garb of ‘natural’ return on investments in the international capital markets. Additionally, the sponsor countries and market investors must be fully repaid with interest, and for that too, the money will come from developing countries’ debt repayments.
Furthermore, with the rules of the current multilateral order shaken up by the United States President Donald Trump, the reliance of TFFF on housing the funds in the World Bank, while the US browbeats the global institutions and the developing world to act as per its will is another factor that may shape the administration of the finances.
Additionally, the claim to channel greater than or equal to 20 per cent of the payments directly to IPLCs would always be under question as historically, the IPLCs have received less than 1 per cent of the entire climate-related ODA. Despite the recognition of IPLCs globally vis-à-vis forest governance, the bureaucratic bottlenecks in implementing such policies continue to remain.
Lastly, there is a global push to monitor the status of forests through satellite imagery as forest and agriculture-based certification schemes and mitigation efforts are increasingly hinged on the calculation of carbon stocks. However, the issue of the definition of ‘forests’ that encompasses canopy density and tree height is contested between the countries, with no one size fits all approach, as observed through the example of the European Union Deforestation Regulation.
In the context of TFIF, the TFCs are required to apply a canopy coverage threshold between 20-30 per cent on land spanning a minimum unit of 1 hectare. This would be challenged by countries that adhere to a lower canopy density within a certain land area, as the results-based nature of payments under the initiative would not generate the appropriate volume of funds and those countries would be at a disadvantageous position.
With a market-driven approach towards protecting forests amid a volatile global trade regime that already places the developing countries at odds with their development trajectories, the question of how the TFFF elevates them in their efforts to sustain conservation will unfold at COP30.