Accelerating Reforestation Project Finance: How Catalytic Capital Can Address Climate, Biodiversity and Equity Goals

Reforestation and land restoration are incredible tools in our fight against climate change, and attracting attention from every organization with a sustainability agenda, from governments to corporations. According to a study carried out by the Nature Conservancy, nature-based solutions (NBS) can provide 37% of cost-effective mitigation strategies required to stay below 2℃ by the end of the century. The obvious lens for analysis is through carbon: 15% of U.S. emissions are sequestered by existing forests. But land restoration and reforestation have massive environmental, social and economic potential beyond carbon, through improving watersheds, increasing biodiversity and bringing jobs, investment and resilience to underserved communities. To meet this potential, we need to develop and catalyze new project financing tools.

A Growing Reforestation Need

We have been running a massive national restoration deficit, such that, today, over 148 million acres have reforestation potential (almost the size of Texas). This deficit is only growing, from drivers such as mining in Appalachia (8.4 million acres of disturbed land from all surface mining), wildfires in the West (on average 7 million acres burned a year), and agricultural land conversion in the Midwest (6 million and 65 million acres of marginal cropland and pasture, respectively).

Source: Reforestation Hub, www.reforestationhub.org

Federal headway on this issue comes in the form of major spending packages, most recently in the Inflation Reduction Act. These efforts will go far on public land, but the bulk of reforestation potential - 88% or 130 million acres - actually exists on private lands. Many of these private landowners want to participate in reforestation projects, but are in lower-income rural communities and lack the financial resources needed to effect change.

Reforestation Funding: The Challenge and Opportunity 

Given the total U.S. private lands reforestation need, we estimate a conservative initial funding shortfall of $65 billion USD [1]. Most forestry investment today is skewed towards the timber industry, as we have yet to build the funding instruments and infrastructure to connect institutional capital with the American landowner. But industrial and sustainable timber investments alone are not large enough to deliver on the funding gap and other land use decisions. 

Among the range of other mechanisms to unlock more activity, carbon-based financing is a promising strategy in this direction. In recent years, we have seen more advances in carbon measurement and accounting methodologies, independent verification and iterations of projects with real-world impact. But carbon finance still faces challenges, and where it has been available to-date, it has:

• Biased heavily towards avoided deforestation over reforestation 

• Prioritized larger projects, typically subsidized by landowning NGOs

• Used evaluation criteria that exclude or undervalue innovative approaches to land use and forest management extending beyond timber/real asset monetization

• Been on financial terms that do not work for developers needing long tenor capital and/or engaging at an early stage in the project cycle

Total Voluntary Carbon Credit Issuance by Type: Reforestation is 3.3% of Total

Source: Voluntary Registry Offsets Database, Berkeley Carbon Trading Project, https://gspp.berkeley.edu/research-and-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database

To move toward landscape-level restoration, we need to unlock significant amounts of private capital and address existing shortcomings of the carbon markets. To catalyze more restoration funding and activity, we will need:

1. More risk sharing and innovation from corporate and impact investors to pre-finance and commit to longer-dated carbon removal and restoration projects,

2. A continued focus on carbon additionality, measurement, verification and benefits of restoration (including the use of dynamic baselines to measure the actual carbon impact of projects),

3. Innovation in insurance products and buffer pools to spread risk of reversal from any carbon project type, and

4. Greater aggregation of and coordination between private landowners to benefit from economies of scale. 

We are excited to begin addressing some of these issues, partnering with institutional investors and corporations to target landowners in overlooked regions and introduce new funding instruments. This work is starting to take shape around post wildfire restoration as well as in abandoned mine reclamation projects. We know land restoration will continue to play a critical role in addressing climate change, biodiversity and equity goals, now is the time to accelerate project finance, especially for private landowners, to reach its potential.

[1]  This is in addition to proactive investments in the “reforestation pipeline”, like seeds and nursery capacity (see our nursery finance work here)