A forest bond is a way of borrowing money from private capital markets at a fixed rate of interest over an agreed time period. It is promoted as a means of achieving predictability and front-loading financing.
Forest bonds may be issued by Multilateral Development Banks (MDBs), financial intermediaries (including commercial banks) or host-country governments, with the issuer liable for repaying the sum of the money borrowed plus the interest payments. In order to attract investors, the bond issuer must therefore generate revenues. These may be related to the bond itself – for example, if the bond issuer is allowed to use the promise of yet to be issued carbon or ecosystem service credits as collateral, or if the bonds are sold in relation to the certification of ‘forest-related products’ such as timber or eco-tourism. Another option is for revenues to come from public financial sources, such as taxes on aviation, shipping or financial transactions.
Although forest bonds are conceived of as potentially more attractive to private sector investors than carbon offset credits, capital market perceptions of political risk (or the costs of political risk insurance) may make them an expensive means of financing as compared to public grant payments.