advancing sustainable forest management through...

Advancing Sustainable Forest Management through Responsible Investing and

Financing Mechanisms

October 22, 2009, 18:30 – 20:30XIII World Forestry Congress

Buenos Aires, Argentina

6:30 – 6:40PM Official Welcome & IntroductionRodney Taylor, WWF & Noemi Perez, FAST

6:40 – 7:00PM Needs and Opportunities in Responsible Forest Finance Rodney Taylor, WWF & Noemi Perez, FAST

7:00 – 7:50 PM Lessons in Advancing Sustainable Forestry Through Finance

Roberto Waack, Chairperson, Board of Directors, Forest Stewardship Council (FSC)Mark Constantine, IFC Global Manufacturing and Services DepartmentSavio C. K. Chow, General Manager, Nature (Zhongshan) Wood Industry Co. Ltd.Fernando Calderon G., General Manager, Dekma Bolivia S.A.

7:50 – 8:05 PM Resources for Responsible Forest Investors and Forest OperatorsRodney Taylor, WWF & Noemi Perez, FAST

8:05 – 8:30 PM Further Discussions and Cocktail Reception

GFTN is WWF’s global initiative that aims to transform the global market place into a force for saving the world’s valuable and threatened forests, while providing economic and social benefits for the businesses and people that depend on them.

GOAL: To mainstream responsible forest management and trade so it is the standard practice in the global forest products industry by 2020.

Global Forest & Trade Network(GFTN)

GFTN Works from Forest Floorto Retail Store

MANUFACTURERS

PRIMARY PROCESSORSFOREST MANAGERS

TRADERSRETAILERS

GFTN Participants Across the Globe

GLOBAL TOTALS (July 2009)

More than 335 Companies 28.4 Million Hectares 16% of the Global Forest Products Market35 Countries 20.9 Million Hectares FSC $64 Billion USD Sales in Forest Products

2.9 Million People Employed

FAST ensures the continued growth of sustainable production and trade by increasing the number of producers who successfully

access affordable trade finance.

Photo by flickr.com (Sir Mervrs)

Buyer1. Places order for sustainable

productsSocial Lender

2. Provides finance to producer (financed by social investment)

Producer Organization3. Delivers goods to buyer

produced through recognized sustainable practices

Buyer4. Pays the social lender

Social Lender5. Pays the producer minus

interest

Buyer (Importer, Distributor,

Retailer)

Sustainable Producer

Social Lender(Financial Institution)

1.order

2.credit

3.delivery

4.payment

5. Payment (minus

interest)

ConventionalBanking

SocialInvestors

Policy Makers

Sustainable Producer Organization

FASTFacilitating

communication between buyers

and lenders

Facilitating linkages between buyer

contracts and finance

Facilitating producer and

lender awareness on finance

Buyer (Importer, Distributor,

Retailer)

Social Lender(Financial Institution)

Sustainable Producer

Leve

l of

Dev

elop

men

t

Acce

ss to

Fin

ance

NGOs, MFI, Development Agencies informal financial

channels

Financial Institutions and banks

Banks

Promote Responsible Forest Finance by transforming capital flows so that preferential lending and credit terms are directed to responsible forestry operations to ensure longer term investments in responsible forestry practices, particularly in the world’s most valuable and threatened forests.

Working with financial institutions to promote responsible forest finance

• Identify and promote financial opportunities for responsible forestry operators• Facilitate links between financial institutions and responsible forestry operators•Promote and develop Forest Guarantee Facilities• Adapt FAST tools to the forestry sector•Organize experience exchanges between the FAST members and financial institutions interested in responsible forestry projects

•Identify capital needs and existing barriers faced by the forest sector to finance • Knowledge Sharing: Share GFTN methodologies, tools and technical knowledge with FAST members• Institutional Support: Support FAST in adapting and implementing FAST tools to the forestry sector •Linking GFTN and FAST members:Provide opportunities for FIs to contribute to the GFTN Responsible Forestry Finance program

Working with responsible forestry operators to promote access to responsible forest finance

Needs and Opportunities in Responsible Forest Finance

Study 1 - General financing needs to achieve Responsible Forestry & Supply Chain

Study 2 - Available financing mechanisms

By Global Forest & Trade Network

Financing Needs Assessment:•Determine capacity and capital needs of selected GFTN Participants in order to get and maintain credible certification• 26 participants in 8 countries

Financing Mechanism Assessment: •Review existing investment policy and mechanisms within the forestry sector

•Identify types of institutions and mechanisms investing in the forest products sector in WWF Priority Places

•Large or multinational operators generally have good access to finance; however, they are often supplied by SMEs that need finances• All SMEs found it difficult to secure adequate financing.•Latin American companies find accessing finance difficult•Needs included working capital, expansion, and certification related costs.

•The average investment is about 0.8 % of Average annualturnover.

Type of capital Region GlobalAsia & Africa

South America

USDWorking capital 110, 000 20, 000 65, 000Investment capital 2, 000 17, 000 9, 000New equity/shareholding capital

0 3, 000 2, 000

Others (e.g. credits) 0 2, 000 1 ,000All capital types 112, 000 42, 000 77, 000

Additional annual costs of securing & maintaining certification

All•75% rely only on private sources, 25% both public and private•The company's own income is the second most commonly utilized source.

Certified vs Not certified• Certified companies obtain finance from both public and private with emphasis on banks and private investors. •Non-certified companies only receive private financing

Regional •In South America finance is from private investors and commercial banks•Asia and Africa finance is from commercial banks

Sources of additional capital

Region GlobalAsia Europe Africa South

America%

Internallyraised

50 67 33 43 47

External 33 33 0 0 16

Both1 17 0 67 57 37

Stages Needed Asia & Africa

South America

Global

%Getting certified 33 20 27

Maintaining certification 33 40 37

Both1 17 20 18

Other related costs 17 0 9

No capital needed 0 20 9

• In Asia and Africa, many SMEs reported difficulties accessing finance from banks, private investors, NGOs and SME-Fis.

• In South America, manyh SMEs reported difficulties accessing finance from commercial banks, private investors, NGOs and venture capital funds difficult.

• 66% of South American SMEs found meeting the terms difficult.

•Many reported that it is easier to secure finances from non-banks such as government aid, in-kind technical support

Barriers: •Insufficient quality projects: low quality business proposals are a key barrier to getting finance

•Collateral: commercial banks accept a very limited range of forest assets as collateral. They are highly unlikely to accept standing timber

Locations: •Most favored: Brazil and Indonesia •Least: Africa •Bolivia is particularly underserved by private/commercial lending interests focusing on forestry

Type of forestry:•Plantations trump natural forests •There is interest in natural forests but forest management is deemed higher risk

Scale: •Highest risk: Start-ups and SMEs•Local banks: Are preferred by SME and Communities-but local banks view SME and Communities as very high risk

Risk and Risk Management: •Commercial risk trumps environmental social governance (ESG) risk•Screening ESG adds cost: increasingly material relative to the underlying financing opportunity.•Many investors do not invest unless a prospective asset is “certification ready” and half of those surveyed would use FSC certification to screen.

Key innovations: but both are niche activities•Sustainable trade finance •Forest-based carbon

• Equity investors play a dominant role in financing tropical forestry businesses, particularly in plantation management where delayed income makes it difficult to convince commercial lenders that debt will be serviced in a timely manner throughout a term.

• Development and multilateral finance institutions are the leading lenders to the sector, and also play a catalytic role in enabling private lending and trade finance through various forms of credit enhancement.

• By transaction volume: timber processing and in particular the pulp and paper sector is the most significant recipient of these funds.

• Low willingness to consider lending for forestry management• Forest management is deemed higher risk• Many institutions do not accept standing timber as collateral. • Overall exposure to the forestry sector by international commercial banks has decreased even with its increased role in tropical economies

Key Perceived Risks Associated with Forestry include:

Unclear ownership structure, Lack of progress on certification, Credit risk, Over-reliance on unproven revenue models (such as carbon or eco-system services) and Unrealistic or unsubstantiated assumption about growth and yield/inventory levels of commercial timber species.

• Forestry businesses are seeking a level of finance below a certain threshold while investors are looking for forestry assets of scale to invest in.

• The application of ESG screening tools and investment criteria varies widely.

• ICBS tend to have sophisticated policies to minimize the risk of financing unsustainable activities; yet NCBs have limited or no such tools

• Emergence of forest funds with strong capacity for identifying and managing forestry project risks (e.g. by investing in a portfolio of forests of different ages and in different locations.)

First steps to increase flow of responsible forest finance:

•Extend the coverage and effectiveness of the screening process

•Investors want clear and simple international standards and access to external resources required to analyze initial and on-going projects.

•Increasing the number and quality of funding proposals being presented for screening

•Better targeting/matching of proposals with prospective backers.

Preliminary Survey Results on Access to Finance and Training

By FAST & Rainforest Alliance

With support of

Executive Summary• Objective: Determine the need for financing and training of

certified RA producers and those in process of obtaining RA certification.

• Goal: Cover 155 producers in Honduras, Guatemala, and Nicaragua.

• Target Sectors: Coffee and Forestry.• Sample Study: 15 surveys, 3 in Nicaragua’s coffee sector and 12 in

the Forest sector on the remaining countries.

www.fastinternational.org

Executive Summary

Survey questions aim to identify the financing & training needs of the SME’s.

The questionaire was devided in 5 sections:

1. General Information2. Sales Overview3. Financial Overview 4. Certification Process Overview and5. Training


Honduras


• In the Forest Sector there is UNICAF-BRP’s example.

• This SME represents 12 cooperatives including more than 500 members that are in the certification process.

• The only source of credit that has been accesed has been buyers’ prepayments which have decreased.

• UNICAF-BRP needs US$557,000.00 for next year’s preharvest financing.

Guatemala


• In Guatemala’s forest sector we count with 8 examples of SME’s which represent 1,607 member producers. Seven of the eight businesses have their FSC forest certification.

• Most of them have a seniority between 8 to 15 years and process movable and immovable property to offer as guarantee.

• Their financing sources cover from local investors to development organizations and the state.

Guatemala


•A big percentage of these SME’s have obtained credits in the past but a general reduction predominates with an increase in the average interest rates (from 16% to 19.6%).

•The global financing need of this SME group for next year is 1.87 million (US).

Nicaragua: Forestry


•Among the 15 surveys received, six come from Nicaragua, half from the forest industry & half from the coffee sector.

•Nicaragua’s forest businesses group is charachterized by its recent formation, some even in the consolidation stage.

•Each of them is composed of 30 members, 2 of them are in the certification process.

Nicaragua


•In spite of being recent, these SME’s have obtained credits for 368 thousand dollars from last year to present. Their pre-harvest and commercial financial need comes up to US$220,000.00 for the following year.

Lessons in Advancing Sustainable Forestry Through Finance

Presenters• Robert Waack, Chairperson, Board of Directors, Forest

Stewardship Council (FSC)•Fernando Calderon G., General Manager, Dekma Bolivia

S.A.• Mark Constantine, IFC Global Manufacturing and Services

Department• Savin C. K. Chow, General Manager, Nature (Zhongshan)

Wood Industry Co. Ltd.

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