A Path to Greener Future: Leveraging Capital Markets to Preserve Forests and Develop Communities

By Vikram Widge

Mobilizing climate finance by leveraging the power of the capital markets is something the international development community has long stressed. Innovative products and mechanisms are necessary to harness the full potential of what the capital markets can offer.

After much hard work and deliberations over the course of the past two years, and working with several partners, IFC just issued a first-of- a kind financial instrument — a Forests Bond that will help with the global efforts to halt deforestation.

What’s the Forests Bond?

It is an innovative and pioneer instrument designed to demonstrate the ability of private sector investment to support forest protection with the intention to scale up such investment over time. Developed in partnership with BHP Billiton (who was supported technically by Conservation International), the IFC Forests Bond allows investors to choose whether they want the interest paid in cash and/or an equivalent in forestry carbon credits from Phase I and II of the Kasigau Corridor REDD Project being implemented by Wildlife Works in Kenya. If investors choose cash, then BHP takes the credits, thereby ensuring that the project gets an assured minimum revenue every year for the next five years. REDD (Reducing Emissions from Deforestation and Forest Degradation) has emerged in the UN climate negotiations as a way to reduce large-scale forest loss and associated CO2 emissions. Revenues from sale of REDD (forestry carbon) credits can provide a valuable additional income stream to sustain the management of forests and provide communities with alternative livelihoods and other benefits.

Why forests?

Because they are a sink for global greenhouse gas emissions, and protecting them is an essential part to achieving the ambitious goals of the Paris Agreement. About 30% of the Earth’s landmass is covered by forests, but deforestation is taking place at an alarming pace: 5.5 million hectares of tropical forest area — an area approximately the size of Costa Rica — are deforested each year. And an estimated $75–300 billion in investment is required in the next decade to reduce deforestation by 50%.

What’s the Kasigau Corridor REDD Project?

With little economic alternatives, the community surrounding the Kasigau Corridor region in East Kenya, depleted their own forest just to meet their survival needs. Their cattle grazed the fields into dust and they clear-cut much of the dryland forest for firewood and farmland. In 1998 Wildlife Works (WW) established the Rukinga Wildlife Sanctuary on 30,000 hectares of now protected land that led to the return of many species (especially elephant) by creating a key wildlife migration corridor between Tsavo East and Tsavo West National Parks. More recently, WW launched Rukinga as the first REDD project under the appropriate Verified Carbon Standard (VCS). It now provides income to the community and local landowners for protecting their land instead of destroying it. Not only does the program create jobs directly in conservation, it allows WW to develop eco-solutions for harmful practices such as cutting down whole trees for charcoal or unsustainable farming. The protection area has now expanded to 200,000 hectares, which are expected to offset 1.4 million tons of CO2 emissions per year for the next 30 years. With the dryland forest under protection and its original biodiversity restored, the Kasigau Corridor REDD project was also awarded Gold level status by the Climate, Community and Biodiversity Alliance (CCBA) for exceptional biodiversity and climate benefits.

And so what do the primary school children from Kenya in the first photo have to do with the Forests Bond?

So while it protects the forests and the animals, the Kasigau Project also provides alternative livelihoods by training and employing 60 women who manufacture — under fair trade practices — clothing for boutique brands in the USA. Every one of them and the entire support staff gets a mid-morning snack and a mid-day meal, while quality day care and pre-school instruction is provided for their children.

Moreover, revenues from sale of carbon credits have been used to refurbish class rooms at the local Marasi Primary School and build a new kitchen to provide a nutritious mid-day meal to the kindergartners so they don’t have to go home early for one. They have also been used to support local women groups like the one led by Mama Mercy (in the foreground of the picture on next page) that benefit from saplings provided by WW’s nursery, as well as support to grow organic, fertilizer-free produce in and out of greenhouses for sale in local markets. Mama Mercy is an articulate advocate of the value of carbon finance in her community and is well aware of both the current state of the market in terms of prices and demand!

Another example of community support provided by Wildlife Works is the use of a share of carbon revenues to partner with another NGO to harvest and store rainwater. This effort provides water for a village of more than 10,000 people for up to six months a year. Through another program, disabled and handicapped people in the village of Buguta make stuffed toys and woven baskets for sale at the WW office and distribution through a specialized handicrafts retailer. A prime example of a sustainable, closed loop approach, the fabric for stuffing and covering the toys comes from excess material from the clothing factory I mentioned earlier.

The innovative Forests Bond links investors, capital markets and carbon finance to forest preservation, wildlife conservation, employment for women, and benefits for primary school children. We are confident that this innovative instrument will serves as a viable model for the international development community, allowing others to replicate similar investment in other bonds that support resilient landscapes in developing countries, boosting the quality of life rural areas and protecting vital ecosystems. This is only the beginning.

Vikram Widge is the Head of IFC Climate Finance and Policy, Climate Business Department

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