The Tropical Forest Forever Facility is based on high risk, not easy profits
Two economists explain what’s wrong with the TFFF investment strategy.
The Tropical Forest Forever Facility is supposed to raise US$4 billion annually for countries that protect their tropical forests. The larger the area of forest protected the larger the payment. Deductions will be made for every hectare deforested.
The money will be be raised by investing US$125 billion, of which governments are to provide US$25 billion. The rest will come from institutional and private investors. So far the UK, Norway, and the United Arab Emirates have expressed interest in supporting the TFFF.
The TFFF excludes carbon offsets. One-fifth of the payments will go to Indigenous Peoples and local communities.
The eight countries of the Amazon Basin pledged to support the TFFF at the Amazon Summit held in Bogotá earlier this month. And the BRICS countries have expressed their support for the TFFF.
Several NGOs are supporting the initiative. WWF calls it a “smart and essential initiative”. Greenpeace says it could be a “breakthrough on forest protection” if key issues are addressed. And Ashley Thomson of Global Witness says, “This fund could be a lifeline for forest conservation, but forests aren’t just at risk from neglect.”
Global Witness is arguing for governments to back the fund but also to implement strong laws to stop banks and investors pouring money into forest destruction.
Which is a good point.
The scale of the problem dwarfs anything that the TFFF could generate. In 2024, according to a new report by Global Canopy, 150 financial institutions invested US$8.9 trillion into companies driving deforestation.
Others have firmly critiqued the TFFF. Global Forest Coalition calls it a “false solution for tropical forests”. And Frederic Hache at Green Finance Observatory asks whether TFFF is “The worst conservation fund ever?”
A perpetual motion machine for climate finance?
Two economists recently pointed out the risks involved in the TFFF in an article for Table Briefings.1 Max Alexander Matthey is a PhD student working on incentive mechanisms in global climate policy. Aidan Hollis is Professor and Head of the Department of Economics at the University of Calgary, Canada.
“It sounds like a perpetual motion machine for climate finance,” Matthey and Hollis write. “But it’s not.”
TFFF is based on the idea of wealthy countries borrow money at an interest rate of about 4.9%. The money is to be invested in higher-yielding emerging market bonds at 7.9%.
“The interest rate spread interpreted by the TFFF’s architects as market inefficiency is in fact compensation for real risk — not easy profits,” Matthey and Hollis point out.
Higher yields on emerging market bonds are not a guarantee of profit. Over the past ten years, Argentina, Venezuela, Ecuador, and Sri Lanka have defaulted.
Warren Buffett’s investments
Matthey and Hollis consider Warren Buffett’s investment strategy. Buffett is one of the richest people in the world through his investment firm Berkshire Hathaway. The company hold about US$300 billion in US Treasury bonds. That’s most of its liquid assets.
In 2009 in response to a question from a student, Buffett said,
“In general, emerging markets are not great for me because I need to put a lot of money to work. Risk does not equal beta. Risk comes around because you don’t understand things, not because of beta.”
(Beta is a measure of the volatility of a stock compared to the broader market.)
Matthey and Hollis write that,
The unspoken assumption is that the architects of the TFFF alone have recognized that markets systematically misprice emerging market debt, and that they can extract easy profits that even one of the most successful investment teams in history overlooks.
Norway’s Oil Fund’s investments
On LinkedIn, Matthey gives another example — that of Norway’s Oil Fund, the Government Pension Fund Global, which is the world’s largest sovereign wealth fund with total assets of about US$1.7 trillion.
Norway’s Oil Fund is allowed to hold up to 5% of its fixed-income portfolio in emerging market bonds. Yet it currently holds just 2.7%.
“If even the world’s largest sovereign investor won’t treat EM carry as ‘free money’ then maybe it isn’t,” Matthey writes. “That’s the core problem with the TFFF narrative. It presents risk transfer as if it were value creation.”
TFFF could topple
In their Table Briefings article, Matthey and Hollis note that,
As long as nothing goes wrong, it looks like a win-win. But a single sovereign default could topple the entire structure. If this arbitrage scheme were actually lucrative – why restrict it to rainforest conservation? Why wouldn’t governments use it to pay for education, health care, or public infrastructure?
TFFF gives the impression that private capital is raised with little public capital. Governments in the TFFF would provide 20% of the money. But the governments are taking on all of the risk and guaranteeing the returns of private investors.
The reality is that the TFFF structure “increases taxpayer exposure, boost investor margin — and creates new profit stream for the very financial institutions that helped desing the TFFF”, Matthey and Hollis write.
If early losses hit — from geopolitical shocks or financial turmoil — the fund could collapse even before any meaningful payments for forest protection are made.
The article is also available here.
It pains me to say this (because I really wanted to believe in the TFFF), but you (and Matthey and Hollis) are right about the fanciful financing scheme behind it. I do think the relative simplicity of the TFFF's incentive structure is a serious upgrade from the subjective counterfactuals that REDD+ is built on, but obviously it won't work if the revenue source is wobbly. If the financial goal is generating a $2 billion annual subsidy pool (which likely does not reflect anywhere near the true value, economic and intrinsic, of tropical forests), I would be in favor of an endowment-style fund of $57 billion (assuming a conservative 3.5% annual draw. As to where that $57 billion would come from? It could be capitalized if all 19 countries in the G20 made a one-time contribution of roughly 0.06% of one year’s GDP, which is not a crazy ask. Some of those countries may be willing to sign up for that, and others wouldn't. But that's one angle to get it started without having to rely on the carry-trade illusion.