Natural Resources & Conservation

Investing in Forest Restoration and Wildfire Prevention

Wildfires have left a substantial mark on America’s landscape, especially in California, where increases in wildfire frequency, scale, and intensity have had major impacts on residents. Forest restoration—the process of maintaining healthy forests, including selectively removing brush and trees—may hold the key to minimizing these fires and the threat they pose to ordinary Americans’ well-being.

Assessing the Current Situation

Over the past few years, the annual number of large wildfires has increased in every single state in the western United States. For instance, the Camp Fire of November 2018 in Butte County, California, ranks among the worst in the state’s history, both in terms of the number of lives lost and the monetary cost—it killed 88 people and destroyed roughly 18,000 properties. Insurers have already seen about $7 billion worth of claims for this fire alone.

Earlier this year, the California Forest Association (CFA) warned in its 2018 Forest Health Initiative report that increased forest density was a major exacerbating factor in the phenomenon. Describing its forests as “overgrown,” the CFA claims many forested areas contain more than 100 trees per acre, well over the historical average of about 40 trees. According to CFA, the fuel from overgrown forests and their dead trees are now key factors leading to a catastrophic fire.

“We need a new approach to forest management—one that thins our forests with mechanical techniques and prescribed fire,” the CFA wrote.

The cost of putting out these deadly fires has strained the US Forest Service’s (USFS) budget, leaving less money for fire prevention and forest management initiatives. In May 2018, the USFS warned that it faced a potential $300 million budget shortfall owing to the rising costs of fire suppression. But it’s not just the public sector that has felt the effects. Beyond posing a challenge for some high-exposure insurers, California utility Pacific Gas and Electric Company (PG&E) saw its value drop by about half between November 8, when the Camp Fire started, and November 14, according to Bloomberg. Looking ahead, PG&E is planning a series of investments aimed at increasing safety measures.

Fighting Fire with Finance

With wildfires likely to take a further toll in future years, public-private partnership, which offers investors the opportunity to invest in forest bonds, could provide a way forward. The Forest Resilience Bond (FRB) partnership, for instance, believes there are mutually beneficial opportunities for investors and conservationists in clearing up excessive vegetation from overgrown California forests.

Working in collaboration with investment firm Encourage Capital and not-for-profit sustainable natural resources researcher World Resources Institute, project developer Blue Forest Conservation describes itself as “fighting fire with finance.” Along with reducing fire risk, Blue Forest points to other benefits of forest restoration. These benefits include better water quality, since more natural vegetation density can lead between 10% and 40% more water into streams, according to FRB’s 2017 report.

The FRB works by assigning a monetary value to forest restoration work and converting contracted payment streams from beneficiaries into structured cash flows for investors. Among the beneficiaries of forest restoration work are the USFS, water and electricity utility companies, and state and local governments.

In November 2018, Blue Forest announced it had raised $4.6 million for a forest restoration project using the first ever FRB. This pilot project is focused on the Tahoe National Forest area in Yuba County, California. Financial institutions and philanthropic foundations are among the early investors, including the Rockefeller Foundation, the Gordon and Betty Moore Foundation, Calvert Impact Capital, and CSAA Insurance Group. Contracted cash flows of $2.6 million and $1.5 million will come from the state of California and the Yuba Water Agency, respectively.

Seeing New Potential

Blue Forest said it sees potential for FRBs to grow, claiming $6 billion needs to be spent in forest restoration in the state of California alone.

The group also pointed to the growth in green bond issuance over recent years. These bonds are issued for the purpose of funding projects that can help fight climate change, whether they’re in renewable energy, energy efficiency, sustainable housing, or other eco-friendly industries. This market has grown from virtually nothing a decade ago into one with global issuance of around $155 billion in 2017, according to the International Finance Corporation.

Given the significant financial pressure that wildfires exert on both the public and private sector, Blue Forest hopes there could be high demand from beneficiaries. Ultimately, though, the success and scalability of forest resilience bonds are likely to hinge on the results—environmental and financial—these vehicles bring investors.

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