If a tree doesn’t fall in a forest, should Gabon get paid?

After scaling back France’s military ties with former African colonies last year, President Emmanuel Macron has ventured into another fraught issue on the continent: how to incentivise countries to keep carbon-rich forests and bogs untouched.

Governments of nations with abundant tropical forest but low deforestation rates have long demanded to be paid for the revenue they forgo by choosing not to exploit these natural resources.

One of the loudest voices to have made the case for nature protection payments is Gabon, the small but densely-forested West African country whose capital Libreville was the first stop of Macron’s four-day African tour last week.

“We understood the need to have cash on the table and concrete actions,” Macron said, speaking at a summit on forest protection co-hosted with his Gabonese counterpart Ali Bongo Ondimba. The summit last week concluded with a promise of cash — but few other details.

Read on for more on the questions developed countries face when deciding whether to shell out for forest conservation.

Plus, there was good news out of New York late on Saturday night. After nearly two decades of negotiations, the UN struck a deal to protect oceans that lie outside of international boundaries.

And, we report today that a flurry of “biodiversity funds” have come to market — but asset managers are reluctant to claim they have much real-world impact. (Kenza Bryan)

Macron tiptoes towards a €50mn forest deal

The €50mn ($53mn) France pledged on Thursday to reward developing countries for protecting their forests is small fry when compared with the landmark $8.5bn South Africa negotiated for shifting from coal to lower carbon energy sources after the Glasgow climate summit in 2021.

But it is a tentative step towards establishing a blended finance model for biodiversity, modelled on the decarbonisation plan laid out by South Africa’s Just Energy Transition Partnership, which seeks to use money from national coffers to guarantee loans from private companies.

France plans to put the initial cash towards a nature protection deal with at least one biodiversity-rich country before December’s global climate summit in Dubai, said Philippe Zaouati, chief executive of the French asset manager Mirova, who accompanied Macron’s delegation on the trip. Mirova manages carbon credit investment pools for companies that buy offsets to reach net zero targets, including a €50mn nature protection fund for telecoms group Orange and a fund of the same size for L’Oréal.

Zaouati and I spoke on Friday after he had returned from a walk in the “extraordinary” Gabonese rainforest 15 minutes from the capital. “We can’t just reduce this to a carbon storage issue!” he posted on LinkedIn alongside pictures of the ecosystem the forest supports — towering, gnarly trunks covered in moss, home to great apes and red-nosed mandrills.

The summit had been organised extremely fast, and had thrown up more questions about ecosystem payments than answers, Zaouati told Moral Money. “These are extremely technical and very political issues.”

Macron’s tentative vision is far from being ready to be rolled out across the tropical forests of the Congo Basin, Brazil and south-east Asia, he said.

One notable absentee from the summit was the Democratic Republic of Congo’s president Felix Tshisekedi. The DRC is home to the majority of the region’s tropical forest, but it sent a reduced delegation after failing to secure the cash it had requested for forest protection from developed nations at the COP15 biodiversity conference in Montreal.

The problem facing donor countries is that cash paid out to keep forests standing and peatlands intact comes with moral and financial hazards.

Countries need to choose a “baseline scenario” modelling the deforestation that would have taken place — a hard-to-quantify alternative reality in which palm oil, soy or beef traders would have been unleashed on a patch of land.

Then there is the matter of contractually guaranteeing that the forest will remain standing in future, in the face of political upheaval or natural disaster — issues which already plague the voluntary carbon markets.

Gabon received millions of dollars in 2021 from the Central African Forest Initiative (Cafi), a Norwegian-backed fund, for reducing deforestation. But it has long said it wants to overhaul the philosophy behind this approach, and be paid for simply continuing to preserve the same forests in years to come.

A coalition of rainforest nations including Gabon, Papua New Guinea, Belize, Honduras and Ghana has sought to formalise solutions to these issues by creating their own sovereign carbon credit framework, known as “redd.plus”, in collaboration with S&P Global’s IHS Markit.

But analysts have warned that this idea so far lacks formal safeguards or transparency on how funds would be distributed, and that it has been received with low levels of market interest.

Theresa Bodner, head of nature-based solutions at the climate data consultancy Trove Research, co-authored a scathing blog in October, detailing the “methodological problems and general red flags” with country-level carbon credits issued through redd.plus.

Speaking to Moral Money, she said she was hopeful that alternative sovereign carbon accounting frameworks could bring more integrity to countries’ efforts to monetise their carbon stocks and biodiversity. “We need to find ways to funnel finance to conservation activities because of how important tropical forests are,” she said. “And I think advancements in quality assurance will enable us to steer the market towards high quality credits.” 

“I have 90mn tons of carbon burning a hole in my pockets,” Gabon’s water, forest, sea and environment minister Lee White reportedly said last month, in reference to Gabon’s plan to issue credits via the redd.plus platform. “Nobody wants to buy them,” he added.

France will have to choose how to quantify the ecosystem services it buys. But it will be unlikely to use the type of sovereign credit Gabon has already issued, Zaouati said, because of concerns laid out above. It could instead buy biodiversity offsets — an equivalent to carbon credits discussed at COP15 on biodiversity in Montréal last year, with no established methodology as of yet. (Kenza Bryan)

French asset managers plough forward on biodiversity

Public pressure is growing on financial institutions to show they take the risks to soil, water and air quality just as seriously as climate change — even where these risks are hard to translate into raw data.

In one sign of this, biodiversity-focused funds tripled to nearly $1bn in assets under management last year, rising from $313mn to $984mn, according to data provider Environmental Finance.

A new legal requirement has made the French asset management sector the main driver of this growth. As of last year, French financial institutions have had to disclose their biodiversity strategy and the likely footprint of their investments on the natural world, giving them a particular incentive to funnel client money into this area.

One of the investment products launched last year was the $125mn Axa World Funds ACT Biodiversity fund, by Axa Investment Managers, the London-based arm of the French insurance group.

In September, BNP Paribas launched its first biodiversity exchange traded fund, the Easy ESG Eurozone Biodiversity Leaders PAB ETF. It invests in large-cap companies in consumer goods, tech and manufacturing.

Soil erosion, urbanisation and climate change are shrinking available fertile land globally, creating long-term demand for technological solutions such as precision agriculture and fertilisers, argues Tom Atkinson, who manages the Axa fund. “Biodiversity is now a durable theme, much like the clean energy opportunities that came out five years ago after the Paris [climate] agreement,” he told Moral Money.

The fund invests in large companies that claim to have positive impact in the areas of land use, sustainable packaging, water treatment and recycling. Its biggest holding is Deere & Co, the US machinery group that sells ‘precision agriculture’ tools and software to help farmers maximise yields.

Critics say it is too early to make bold claims about biodiversity strategies, given that even the “cleanest” companies have some impact on their natural environment. The highly localised nature of risks to insects and plant life make them tricky for global financial institutions to understand, argues Daniel Wild, chief sustainability officer at Swiss private bank J Safra Sarasin.

“In my view, biodiversity funds look too similar to soft environmental strategies already in the market,” Wild told me. “We’re still 10 to 15 years behind in our understanding of biodiversity compared to carbon.”

Asset managers are all too aware they must avoid making claims they cannot back up.

Regulators globally are clamping down on the financial sector’s frothy wording on environmental, social and governance issues. The UK’s Financial Conduct Authority, for example, has said it could bring in restrictions on the use of words such as “green”, “sustainable” and “impact” by the end of June.

New funds will continue to cash in on heightened concerns about the natural world. But tougher disclosure requirements just around the corner in some jurisdictions are likely to focus minds on higher-level decisions that affect entire portfolios, like exposure to commodity traders linked to deforestation or countries where biodiversity protection laws are weak. (Kenza Bryan)

Smart read

Investors are significantly more concerned about climate implications for companies than those businesses’ leaders, according to new research from PwC. In recent surveys, it found that 37 per cent of institutional investors thought companies were “extremely” or “highly” exposed to climate risk in the next five years, compared with just 22 per cent of chief executives. And half the investors polled said that the energy transition would have a large effect on corporate profits over the next decade, against 37 per cent of CEOs.