GLOBAL - The financial sector must step its engagement in the emerging green market and make the case for improved regulation to facilitate this, according to a UNEP Finance Initiative study.

The 'REDDy - Set - Grow: Opportunities and roles of financial institutions in forest-carbon markets' study says the commitment of the private sector and financial institutions toward the implementation of REDD+, a mechanism to reduce deforestation and forest degradation, is crucial.

It said that, because the overall investment needed for its implementation appears to exceed public capabilities, it would therefore largely hinge on action from the private sector.

Abyd Karmali, managing director and global head of carbon markets at Bank of America Merrill Lynch said at the report's launch in London: "The market for forestry carbon has significant potential, but will require concerted efforts in the design phase by policymakers to ensure it attracts flows of private capital.

"Because of the ability for sustainable forestry projects to deliver not just carbon but also biodiversity and community benefits, financial institutions stand ready to work with governments to help ensure the full potential is realised."

Richard Burrett, partner at Earth Capital Partners and co-chair of UNEP FI, added: "It is unwise in this day and age for companies that wish to remain competitive to turn a blind eye to emerging green markets such as the forest-carbon market.

"This is a rationale that makes sense from a sustainability perspective, but also from a profitability one."

Previous research has established that a 50% reduction in deforestation is needed by 2030 if the forestry sector is to support global efforts aimed at holding the global temperature increase target of less than 2 degrees Celsius.

Achieving this reduction will require investment previously estimated at $17-33bn (€12bn-23bn) per year, according to UNEP.
According to The Economics of Ecosystem and Biodiversity (TEEB), the forestry-based carbon market's value holds the potential to grow to more than $10bn by 2020, while that of total forest ecosystem goods and services is estimated at $5trn.

This massive potential has, however, largely been left untapped so far, with low confidence levels from investors resulting from an insufficient and ineffective national and international regulatory framework.

Armin Sandhoevel, chief executive at Allianz Climate Solution, said: "In order for the private investors to fully mobilise around REDD+ activities, some issues must be addressed.

"Credits derived from so-called avoided deforestation projects need to be part of compliance schemes, and the projects need a robust domestic legal framework that allows investors to get involved with a long-term perspective.

"Moreover, reliable and rigorous standards for carbon credits derived from avoided deforestation are a pre-condition for long-term price estimates, which are crucial for investors."

Governments successfully agreed in Cancun last December to making REDD+ a core component of the next global regime on climate change.

However, the question of how this global mechanism will be implemented and financed remains unresolved and will be a critical subject of future UN climate convention negotiations - including upcoming talks in Durban, South Africa.

A follow-up report specifically geared for policymakers and containing recommendations on the design of forest-carbon policies will be released in June.

The current study can be found here.