Finance Box 2: Overview of REDD+

Reducing Emissions from Deforestation and Forest Degradation (REDD) is an effort to create financial value for the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low- carbon paths to sustainable development.

REDD+ goes beyond

deforestation and forest degradation, and includes the role of conservation, sustainable management of forests and enhancement of forest carbon stocks.

Much of protecting existing forests (REDD+) or reforesting areas (afforestation and reforestation

– A/R) is achievable at considerably lower costs than other abatement

technologies, and brings

immense potential co-benefits such as biodiversity conservation and watershed protection – “free” services with an estimated value of up to US$ 1 trillion/ year by 2100. Nevertheless, achieving this potential will require considerable investment, estimated at a minimum of US$ 17 to 33 billion per year just to halve the rate of tropical deforestation by 2030 (The Eliasch Review 2008). Investment on this scale is unlikely to come from governments alone, and thus active participation of private sector financial institutions is essential. This in turn depends on making protection and enhancement of forests investable while intensifying efforts to accurately measure and report on carbon stored in forests . The main investment sources in the forestry sector in general (i.e. other than in the context of climate mitigation) are private (93 per cent ) representing about 1.5 per cent of global direct investment (UNEP FI 2011a and UNEP FI 2011b).

The forestry sector, REDD+, and A/R can be of interest to financial institutions if they can not only be profitable, but to also diversify lending, insurance and investment portfolios. This sector can also be of interest to financial institutions because of political and associated reputational imperatives. A range of

mainstreaming institutional investors to deploy larger amounts of investment in the environmental sector. With bond holdings representing 31 per cent of financial assets worth US$ 39 trillion in 2009 (Capgemini 2009), high net worth individuals represent a significant segment of potential demand for green bonds.

Equally, the public sector at the national and international levels should support the growth of these emerging segments by funding research and promotional activities to foster a better understanding of green bond

political, market and general business risks need to be considered. Risk mitigation tools available to financial institutions to make REDD+ and A/R projects more attractive include guarantees, insurance, and bonds.

Although negotiations are still ongoing at UNFCCC level about the exact shape and structure of a REDD+ mechanism, around 40 countries are already engaging in REDD+ strategy development (Phase 1) and pilot activities. It is expected that private sector finance for REDD+ will scale up as initial reforms and institutional strengthening take effect and REDD+ programmes are scaled up (Streck et al. 2010). The five current scenarios that are on the table within international climate negotiations include

Scenario 1: National crediting under a UNFCCC agreement.

Scenario 2: Sub-national or project crediting under a UNFCCC agreement.

Scenario 3: The nested approach as hybrid solution between Scenarios 1 and 2.

Scenario 4: International fund with national- level incentive payments. Scenario 5:

international REDD agreement).

The most promising policy option for private sector involvement in REDD seems to be the nested approach described in Scenario 3. In the absence of a global climate agreement, market players need to be prepared to make use of the opportunities within the voluntary market, or dedicated national cap- and-trade schemes that allow for REDD offsets (e.g. future US scheme and/or EU ETS Phase 3). Source: UNEP FI

markets, green commodity markets, and environmental and social stock exchanges. The Climate Bonds Initiative, a global civil society network launched in 2009, develops policy proposals for governments, finance and industry, and develops advice on large-scale climate mitigation opportunities suitable for long-term debt finance (The Climate Bonds Initiative 2009).

Carbon markets Carbon markets comprise one of the key areas of green finance and provide an important discovery mechanism for

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Voluntary markets only (no