Dedicated financial bonds can help capture economic value of cloud forests in 25 countries: Report

Finance should be mobilised for cloud forest protection through payments schemes targeting 25 developing countries, public finance institutions, private sector, says report

By Shuchita Jha
Published: Friday 06 January 2023
Photo: iStock

A Cloud Forest Bond will incentivise governments to protect their cloud forests — forests that are on top tropical mountains, largely shrouded in mist, a new report advocated. 

Such a tool will encourage carbon storage and provide funding to set up sovereign-level carbon finance schemes as well as payments for ecosystem services, the report envisioned.

Cloud forests, which occupy a limited area, are under great threat and their hydrological function is of existential value to millions of people living downstream. Just 25 countries hold 90 per cent of the world’s cloud forests that capture moisture from the air, providing fresh and clean water to people and industries below.

The bond will provide these governments with financial actors like philanthropy, public finance and private investment to capture the economic value of the ecosystem services of the cloud forests, according to the new report Cloud Forest Assets Financing a Valuable Nature-Based Solution released by Earth Security, a global nature-based asset management advisory firm. 

These twenty-five countries are Indonesia, Tanzania, Democratic Republic of Congo, Colombia, Peru, Venezuela, Mexico, Papua New Guinea, Brazil, Ethiopia, Ecuador, Cameroon, Bolivia, China, Laos, Kenya, Malaysia, Angola, Uganda, Madagascar, Philippines, Gabon, Vietnam, Republic of Congo and Myanmar. 

These countries have around 979 hydropower dams and around half of them use water from the cloud forest, said Alejandro Litovsky, founder and chief executive of Earth Security.

These governments are to increase their Hydropower capacity with 1,084 dams that are already at some stage of planning, he added. “Of these 684 – two thirds – will rely on water from cloud forests.”

The total value of hydroelectricity that currently depends on cloud-affected forests across these 25 countries is estimated to be $118 billion over 10 years. This will increase to $246 billion when new hydropower plants that are being developed become operational. 

The report proposes to mobilise financing for cloud forest protection through payments schemes under which hydropower projects and other industrial water users benefiting from cloud forests pay for this service.

“These forests are not currently protected areas, and they should be, just as countries protect any other type of vital infrastructure,” said Litovsky, adding: 

While these investments must conform to rigorous social and environmental impact safeguards, ensuring the protection of these forests upstream should be included as a risk management priority for investors, project developers and policy-makers.

Litovsky has also proposed a Cloud Forest 25 (CF25) Investment Initiative to establish a collective of all 25 countries that have high cloud forest to accelerate the international application of market templates and aggregate the blended finance and data needed to achieve solutions at scale.

Sovereign carbon finance could add an additional $209 billion across these countries over the next decade, the report stated. “Stacking the value of these forests both in terms of carbon and the water provided to existing hydropower plants, amounts to a combined $327 billion for the twenty-five countries over 10 years.”

There is enough evidence to show that forest protection is highest where land ownership rights of indigenous peoples and local communities are fully recognised and exercised, Litovsky said. “These provide a fair share of the benefits from forest carbon and water revenues. This approach should form the basis of financing natural assets.”

The Cloud Forest Bonds will allow the developing countries to improve their debt position and fund the creation of new, long-term income streams from services provided by nature. These bonds can be in the form of new bond issuances, debt-swaps and results-based financing instruments, which are matched to the circumstances of each of the twenty-five countries. 

“We recommend that banks, investors and corporates that operate dams and other water-intensive assets benefiting from cloud forests recognise the value at risk, and the role that cloud forests play in their resilience to droughts and climate change,” stated the report. 

The report is aimed at three stakeholders – national governments, non-profits and communities including indigenous peoples’ organisations and local experts in the cloud forest countries, donors, multilateral development banks, development finance institutions and global non-profits in public finance institutions as well as banks and investors, credit rating agencies and re/insurers, companies operating water-intensive assets that depend on cloud forests in the private sector. 

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