Financing Cloud Forest Assets

Cloud Forest Assets: Financing a Valuable Nature-based Solution

New report reveals USD246 billion of hydroelectricity depends on water provided by threatened tropical cloud forests.

Earth Security, a global specialist in climate and nature-based asset solutions, has revealed the value of little known and largely unprotected tropical cloud forests in a new report released.

Cloud forests are mountain tropical forests, constantly shrouded in clouds, which sit at the headwater of river basins. They capture moisture from the air providing fresh, clean water to communities and industries, including vital water flows to hydropower plants. Over 90 per cent of cloud forests are found in just 25 tropical developing countries (“cloud forest countries”)

The report, Cloud Forest Assets: Financing a Valuable Nature-based Solution recommends;

• The creation of payment schemes under which hydropower projects and other industrial water users benefiting from cloud forests pay for this service, turning the protection of their forests into an income-generating initiative by creating new sustainable income streams that can bundle carbon sequestration with the water services that cloud forests provide.
• Setting up of Cloud Forest Bonds to help these countries improve their debt position and to fund the creation of new, long-term income streams from services provided by nature.
• Proposes the creation of a Cloud Forest 25 (CF25) Investment Initiative as a way of bringing these countries into a collective group that can accelerate the speed and scale of this transformation.
• That banks, investors, and corporates that operate dams and other water-intensive assets benefiting from cloud forests should recognise the value at risk, and the role that cloud forests play in their resilience to droughts and climate change.

The report puts the total value of hydroelectricity currently dependent on cloud forests across the 25 countries estimated at close to USD118 billion when calculated over 10 years (or almost USD12 billion per year), rising to an estimated USD246 billion when the additional dams currently at planning stage are rolled out. This suggest that cloud forests are crucial assets in the net zero transition and should be protected, yet many cloud forest countries are amongst the world’s poorest economies, facing the prospects of debt distress after the Covid-19 pandemic and the spiralling costs of food and energy imports. Without adequate finance, they will find it increasingly difficult to prioritise climate and biodiversity in the face of growing economic challenges.

The report’s proposals draw on small pilot initiatives that have intended to mobilise downstream users of water from cloud forests to pay for this service before, yet argues that to drive the necessary systems change, these mechanisms need to be developed as national payment schemes, that are applied as a fee to all current hydropower plants as well as those that are being planned and invested in that depend on these ecosystems, providing governments struggling with their debt levels an opportunity to rethink fiscal incomes from nature.

The report’s proposals are intended for three sets of stakeholders: In cloud forest countries, they include national governments, NGOs, and communities including indigenous peoples’ organisations and local experts. Among public finance institutions, they encompass donors, multilateral development banks (MDBs), development finance institutions (DFIs) and global NGOs. In the private sector, they include banks and investors, credit rating agencies and re/insurers, and companies operating water-intensive assets that depend on cloud forests.

The Cloud Forest Assets: Financing a Valuable Nature-based Solution report completes phase one of a three-year project led by Earth Security and funded by the Swiss Agency for Development and Cooperation, UBS Optimus Foundation and HSBC to catalyse a new financing mechanism and global collaboration to harness the value of cloud forests.

For this report, Earth Security collaborated with King’s College London and the scientific work developed by Dr Mark Mulligan. A pilot programme based on the report’s recommendations and findings will begin in 2023.