The $125 billion Tropical Forest Forever Facility (TFFF) is an innovative approach to economic development that is more nimble than the traditional development grant system, writes Carlos Alvarado Quesada
A coalition of Global North and Global South nations is preparing to launch an ambitious, innovative investment fund that offers private investors and governments a novel avenue for long-term investment that will not only yield steady returns but also reduce deforestation.
The initiative’s name, Tropical Forest Forever Facility (TFFF), is clunky but the financial model is elegant.
Interrogated during the 2024 G20 process by finance ministers across the globe, it has piqued the interest of private investors and governments for its promise of predictable and reliable payouts and its efficiency in conserving vital natural resources.
Countries with tropical forests are enthusiastic about the possibility that a new financial mechanism will recognize the monetary value of conservation.
“An investment fund is a fresh approach to economic development aid that pays investor countries back, and is more nimble than the traditional development grant system, which is quickly falling out of favor”
An investment fund is a fresh approach to economic development aid that pays investor countries back, and is more nimble than the traditional development grant system, which is quickly falling out of favor.
Furthermore, a price-competitive, performance-based payment system will enable Global South countries to keep their tropical forests and grow their economies rather than continue to cut down forests to generate revenue, and it does not add to the national debt of emerging market countries.
This is a massive project to mobilize, with many interlocking parts. The vision is an investment fund managed by the World Bank. It will require big, one-time investments enabling it to become self-sustaining within a few decades, and then it will be converted to a trust.
To get it off the ground, sponsor countries need to invest $25 billion in seed capital. Then it needs private investors (pension funds, Sovereign Wealth Funds, fixed income asset managers, insurance companies, etc.) to invest $100 billion. This $125 billion in blended financing will be invested in a AAA-rated portfolio of treasury bonds issued by emerging market economies.
This investment strategy optimizes the fund’s risk-adjusted return, ensuring that investors get their principal investment back with interest by the time the bonds mature. At that point, the fund will become a trust that will pay out annual dividends in perpetuity to countries that successfully prevent deforestation.
“Modeling by a team of economists and development finance experts projects that the Tropical Forest Investment Fund will generate competitive and predictable market returns”
While any investment carries risk, modeling by a team of economists and development finance experts projects that the Tropical Forest Investment Fund will generate competitive and predictable market returns.
To further assure returns for private investors, repayment will be structured according to a waterfall model. Private investors – senior debt holders – get first priority for repayment.
Sponsor governments are second priority for repayment as junior debt holders. In other words, investor countries help to secure the fund’s AAA-rating, by ensuring that private investors will consistently reap year-over-year returns.
While private investors are primarily concerned with returns, governments that invest in this fund have an interest in more than the yields alone; there are broader social and economic pay offs. By supporting tropical rainforest conservation, the fund also helps protect biodiversity, sustain the planet’s water cycle, and protect global food production.
Tropical forest nations can use the payments to invest in other parts of their economies, for example: education, health care, housing, infrastructure.
In addition to the ecological and economic benefits, the Tropical Forest Forever Facility is novel and innovative in ways that give it the financial and political viability necessary for this challenging moment:
- The TFFF is balance-sheet neutral. Sponsor countries make a one-time investment and get their money back and a steady annual return while the fund continues to protect tropical forests in perpetuity without needing replenishment. This appeals to governments that are pulling back on official development aid.
- Protecting tropical forests is the most efficient use of money to protect biodiversity and steward the planet’s fresh water resources.
- The TFFF leverages blended financing and provides performance-based payments to recipient countries. This is a departure from Official Development Assistance grants, which are paid out from taxpayer dollars year after year with no financial return.
- The TFFF model provides flexibility for tropical forest nations to implement their own forest conservation policies. Satellite technology monitors tropical forest canopy cover and annual performance.
- TFFF payouts to tropical forest countries can be used to fund a range of programs, providing a predictable source of revenue that is more flexible than traditional grants.
- At least 20% of the funds will go directly to Indigenous Peoples and Local Communities, who steward much of the planet’s intact forest landscape and biodiversity.
- The TFFF is designed by tropical forest countries and is attracting interest and support from a non-traditional group of Global North countries.
The global economy is in the midst of a massive transition. The Tropical Forest Forever Facility is an out-of-the-box approach that is made for this pivotal and uncertain moment in history.
What we need now is leadership commitments from sponsor countries and institutional investors. Time is short, and we cannot afford to miss the opportunity.
Carlos Alvarado Quesada was the 48th President of the Republic of Costa Rica.
