By Louisa Bartoszek, Head of Communications, 2030 Group and Mozaic Markets
They say money doesn’t grow on trees. But what if it did? What if there was a way to monetise forests using new sustainable financing blockchain technology?
Even more so if monetisation meant protecting a natural resource, not destroying it. No chopping. No drilling. No damage to the surrounding area and its inhabitants. Just a way to generate new and sustainable revenue which can be reinvested in the land and community, not take away from it.
This would be an extremely compelling prospect for forest-rich countries, many of which are the poorest in the world, as their trees could generate a lucrative new source of revenue not possible until now.
Because the good news is that there is a way – Tokenization. A new ‘capitalist’ style financial instrument that meets the needs of both investors and society.
Tokenization could be the biggest opportunity for Capital Markets in decades as it can be used to unlock trillions of dollars of new liquidity from ‘real assets’ – everything from real estate to precious metals, even forests.
I’m particularly curious about the value proposition of tokenizing Africa’s forests and its potential contribution in helping to eradicate extreme poverty across the continent.
Twenty-three of the world’s 28 poorest countries are in Africa. Poverty projections suggest that even under the most optimistic scenario, over 300 million people in sub-Saharan Africa will still be in extreme poverty by the year 2030.
Poverty is a significant indirect cause of deforestation across Africa – and it’s a growing issue.
As Africa’s population continues to rise, Africans need forest land to farm as a means of securing their food security while lifting themselves out of poverty.
Accordingly, the conversion of forest land to agriculture is by far the most common and destructive cause of deforestation in Africa.
Forests need to be preserved to create the microclimate needed for valuable crops, such as cocoa, coffee and tea, to flourish which can then be harnessed sustainably to make money for local farmers.
Kenya’s tea plantations are a good example of the links between forests and the commercial economy.
They are located close to the forests as they require an even temperature and moisture for optimum growth. Without the forests, Kenya could lose this microclimate and endanger the growth of tea crops altogether.
Evidence can already be seen in rural Nyeri, a hilly and green landscape three hours away from bustling Nairobi, where farmers have stripped the hillsides of trees to plant more crops.
Trees lock moisture in the soil and their roots prevent erosion, so as an unintended consequence, rivers dried up and soils washed away with severe flooding.
At the same time, traditional crops are suffering from disease and climate change has changed rainfall patterns, shifting planting cycles. The result is an increasingly precarious situation for farmers in Kenya and throughout Africa.
Notwithstanding Kenya’s (and other African nations) reliance on forests for electricity, generated by hydro-electric dams fed by mountain watersheds.
The financial gap between raw Africa-sourced commodities and the final product sold internationally is wide, and this clearly needs to be addressed.
But in the meantime, improving the productivity of African agriculture is rightly a top priority for African governments and features prominently in the continent’s development agenda (Comprehensive Africa Agriculture Development Programme (CAADP)).
Transforming Africa’s poorly financed agricultural sector will be costly, difficult and take a long time.
Therefore, improving each country’s ability to manage its forest resources (financial, technology and operations), expanding reforestation programmes and changing both public perceptions and economic calculations about the value of existing forests, could be key to the survival of Africa’s ancient forests.
There needs to be a capitalist style financial instrument which incentives forest protection and creates a sustainable new source of revenue which African governments can use to accelerate improvements in agriculture and infrastructure.
That instrument could be tokenization.
Forestry as an asset class been growing in investor appeal in recent years as more and more investors factor in ESG into their investment decisions, and forestry has emerged as a key element of the discussion around reducing global carbon emissions in order to limit global warming to 1.5°C.
The 2015 Paris Climate Agreement and subsequent studies on the role that forests can play in mitigating climate change, as well as the European Union’s Action Plan on sustainable finance, could spur the flow of more institutional capital into forestry.
According to the PRI, global institutional investment in forestry has surged from an estimated US$10-US$15 billion in the early 2000s to over US$100 billion.
Appetite for forest finance products exists. Investors must, however, consider a unique range of ESG issues for both direct and indirect forest investments. For example:
• Environment: pollution, water use and planting techniques
• Social: land rights, labour standards and community impact
• Governance: anti-corruption regulation, systems management and illegal logging
Such issues may present material risks to forestry operations and the success of an investment if managed improperly. Conversely, robust ESG risk management can be a significant source of value creation.
Transparency across all ESG factors is the biggest barrier to large-scale forest investment today and is an important consideration to any new forest-based financial instrument. Along with trusting the underlying data to be accurate to justify a valuation and real-time trading price.
Trust is vital for capital markets to function and through using distributed ledger technology (DLT), such as blockchain and decentralised identity, tokenized transactions would have immutable proof of ownership.
This is because a verified digital ledger cannot be altered. Both of the real asset, in this case forest land, and that of its digital twin. Securing transactions, verifying that a token is a twin and not leveraged and facilitating trust between buyers and sellers.
DLT would also provide an immutable record of the land ownership and the supply chain custody of any logging. This is increasingly important in our growing ESG focused world where there are many improperly sourced natural resources.
Proven strong environmental stewardship could enhance the underlying value of forest land, as well as help to secure a price premium for timber or forest-related products through certification programmes and support sustainable long-term forest growth.
Tokenization uses DLT to turn a real-world asset, such as a forest or say real estate, into a verifiably digital asset (Digital Twin) called a Security Token.
A Forest Token is structured as a security or is deemed to be an investment contract that sits on a distributed ledger and is run by a smart contract.
It represents the tangible assets that can be traded in a security token exchange anytime and anywhere in the world, in a fully regulated environment.
Security Tokens can represent an underlying real asset and pay dividends, share profits, pay interest, or invest in other Tokens or Assets to generate profits for the Security Token holders.
A Forest Token would be a digital twin of the real asset and would allow for an investor to request ownership, for example in the case of a debt forest token, in the event of a default. With the forest land acting as a form of collateral.
Because a digital ‘twin’ is exactly that — one to one. One physical and one digital. They are effectively the same in a sense. A smart contract, imbedded into the token, can specify that it cannot be leveraged or that senior debt is limited to 65%, for example.
And the flexibility of DLT in the potential structuring of instruments means that each individual forest could have its own tailor-made solution meeting the needs of the forest, from available reporting through to commerciality.
Tokenizing Africa’s forests and unlocking a potentially compelling new revenue stream, could help state governments to gradually transition to a more sustainable “green growth” financing model which could be used to:
The new forestry capital could be reinvested into “green growth” initiatives to improve water, energy and food security, promote the sustainable use of natural resources, and spur education/innovation, job creation and economic development across African nations, helping to eradicate extreme poverty.
It could also be used to fund the “missing middle” of the many entrepreneurial restoration businesses in Africa, through both direct investing or perhaps a new state-owned (or private land owned) Green Restoration Fund style investment vehicle, dedicated to funding innovative SMEs.
Helping African SMEs to find the funding many struggle to source today to scale up, accelerate agricultural reform and support government productivity priorities, whilst simultaneously creating better paying higher quality jobs for Africa’s growing population, helping to reduce poverty and increase wealth across the continent.
Africa’s forests, particularly the Congo Basin, are home to some of the world’s oldest indigenous peoples.
While estimates of the numbers of forest-dwelling indigenous people in Central Africa vary from between 130,000 to 920,000, it is widely accepted that approximately 150 distinct ethnic groups call it home.
And together, the forests of Africa boast a rich biodiversity of more than 20,000 plant species, 2,000 birds, 600 amphibians and 400 mammal species.
Agriculture, along with other deforestation actions such as logging in the Congo Basin and oil extraction in the Niger Delta, are all threatening the traditional use of indigenous lands and natural resources.
Forest Tokens could provide a financial incentive to not use the land for commercial use. Protecting the livelihoods of the indigenous peoples who live in these forests and depend on forest resources to survive.
Not to mention conserving the diverse biodiversity of rare flora and fauna; as well as encourage logging and mining companies to promote good forest management practices through transparent blockchain-based reporting. Proven good forest governance being a prerequisite for continued investment.
Covering more than 251 million hectares and stretching across six countries, the Congo Basin forest area has been called the world’s "second lung" representing at least a quarter of the total carbon stored in tropical forests globally.
The additional investment could be invested into replacing lost forests and supporting green initiatives, like that of Ethiopian Prime Minister Abiy Ahmed. His Green Legacy Initiative reportedly aims to plant a total of four billion indigenous trees with more than 350 million planted in just one day in July 2019.
Preserving Africa’s tropical forests and planting new trees to replace those lost to deforestation could help reduce the severity of climate change in Africa (and the rest of the world) by absorbing more carbon from the air and ease the local impact of climate change on crops by regulating local weather conditions.
Reforestation can go a long way in offsetting the carbon and greenhouse gas emissions that human activity has pumped into the atmosphere with a recent study indicating that planting 500 billion trees could remove one-fourth of the carbon in the atmosphere.
Africa’s deep pockets of green forests have the potential to provide a lucrative new long-term revenue stream which could be invested into local communities and help Government’s tackle the continent’s extreme poverty.
But it’s not going to be easy. One set of actors alone cannot achieve success. To transition to a sustainable green growth financing model, African governments, private sector, banks, tech entrepreneurs, investors and society must work together.
Africa’s long-term economic prospects are also largely dependent on each country’s ability to establish political stability and democratic rule.
For forest tokenization to work, all companies across the forest supply chain must commit to greater transparency and accountability.
Transparent, consistent and timely reporting needs to become a standard practice for companies across soft commodities sectors so that investors can clearly understand the returns on their forest investments.
It all starts with one forest. A digital forest. Growing a new digital future for Africa.
If you are a forest landowner and would like to discuss how tokenization could work for you, please get in touch.
This article is marketing material and is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. All investment decisions must be based only on the most up to date legal offering documents.