Implementing Finance and

Insurance Standards for the

U.S. Forestry Carbon Market


       June 29, 2010
Conservation Finance –
Forestry is 21st Century Mega-Trend

            Sustainability is a mega-trend of the 21st Century...
Conservation Finance –
Forest Carbon Portfolio Management Framework

           Portfolio management framework.
          ...
Conservation Finance –
Risk Management Key Points

           All financial investable assets have risk and return profile...
Conservation Finance – Standards and Due
Diligence Procedures for Registries Currently
           The current registry pro...
Conservation Finance –
Recommended Safeguards

          All standards must be transparent, eliminating potential for clai...
Conservation Finance –
The Need for Structure

           Many sources of funding - federal, state and private funding.

 ...
Conservation Finance –
Increasing Investor Confidence

            Management of exposure.

            Measureable return...
Conservation Finance –
Permanence
         Permanence is long term contract defined by protocol.

         Does the buffer...
Conservation Finance –
Integral Registries’ Buffer Pool Requirements
          Complete transparency.

          Ensure pu...
Conservation Finance –
Risk Management Key Points

           All financial investable assets have risk and return profile...
Conservation Finance –
Q&A

           Colm Fay, University of Michigan
             colmfay@umich.edu

           Gabriel...
Conservation Finance –
Further Literature

           The Sustainability Imperative by David A. Lubin and Daniel C. Esty

...
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Implementing Finance Insurance Standards Us Forest Market

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Gabriel Thoumi (Forest Carbon Offsets LLC), Augustus Kent (CO2RS), and Colm Fay (Erb Institute, University of Michigan) sat down on June 29, 2010, to discuss how forest carbon in the US is maturing in terms of finance and insurance standards and how the adoption of these standards can change the face of risk management for forest carbon projects and assets.

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Implementing Finance Insurance Standards Us Forest Market

  1. 1. Implementing Finance and Insurance Standards for the U.S. Forestry Carbon Market June 29, 2010
  2. 2. Conservation Finance – Forestry is 21st Century Mega-Trend Sustainability is a mega-trend of the 21st Century. SEC ruling that climate risk is material to investors. EPA’s mandate that greenhouse gases be regulated as a pollutant. Sustainability imperative. Systematize methods and models. Align strategy and deployment. Systematize reporting and communication. Integrate management. Trees in forests through photosynthesis consume atmospheric CO2 resulting in mitigating climate change easily and inexpensively. Current US climate legislation suggests a need for up to 515 million mtCO2e in biogenic sequestration offsets by 2020, implying 100x market growth for forest carbon offsets based on 2009 levels.
  3. 3. Conservation Finance – Forest Carbon Portfolio Management Framework Portfolio management framework. Risks include financial risks, expropriation, political risk, climate change risk, local community risk, and model risk. Investment return vehicles include VC, equity, sovereign debt, commercial lending, and derivatives on mtCO2e. Legal and regulatory issues include fee simple property ownership, carbon as first lien, independent title search on water, timber, oil and gas, mineral, and development rights, and subnational / national project rights. Taxes include ordinary, capital gains, wealth transfer, and property. Time horizon for investments are long-term. Liquidity is low. Unique characteristics are financial risk mitigation, masquerading, and financial accounting.
  4. 4. Conservation Finance – Risk Management Key Points All financial investable assets have risk and return profiles. Forest carbon is a financial investable asset. Therefore, industry needs financial risk management best practices to meet 2020 forest carbon offset demand as forecasted by US Department of Energy. Real, measurable, verifiable, additional and insured, secured, and preferred. Potential exposures and recommended solutions. Concerns pertaining to registry administered buffer pools. How would a revised permanence strategy differ from current buffer pool designs? Separate administration structures.
  5. 5. Conservation Finance – Standards and Due Diligence Procedures for Registries Currently The current registry protocols have put the emphasis on scientific and social measurements with minimal focus on financial and legal responsibilities. What guaranties are in place to ensure viability of the credits? Do the current procedures meet corporate due-diligence guidelines? What is required to adhere to corporate accounting principles? Registries rely on project developers, managers and verifiers to follow protocols. Who is currently responsible, if an error or omission occurs, whether unintentional or not? The current submission process’s are dictated by the registries. What steps have been taken to ensure all parties are legally required to meet their contractual obligations?
  6. 6. Conservation Finance – Recommended Safeguards All standards must be transparent, eliminating potential for claims of misinterpretation. Reduce potential for errors and/or omissions, by requiring proof of insurance by all project participants. Specifically define all steps taken to financially and legally secure the validity of originators. Make all parties agree, in writing, to all terms and conditions. Retain counsel proficient in contractual, insurance and corporate laws. Registries must have liability insurance coverages for the directors and officers, as well as errors and omissions and general liability.
  7. 7. Conservation Finance – The Need for Structure Many sources of funding - federal, state and private funding. Increasing complexity of financial vehicles. Nexus of portfolio managers and stewardship advocacy organizations. In the language of Conservation Finance we have the vocabulary but not the grammar. Need for a framework to help organizations navigate the sources of funding that are out there.
  8. 8. Conservation Finance – Increasing Investor Confidence Management of exposure. Measureable return on investment – financial and ecological. Balanced portfolio of financing – debt / grant financing / donations. Realizing revenue opportunity through sale of credits, easements, non-timber forest products, payments for ecosystem services, and others. Predictability of future cash flow generation. Remove opportunity for arbitrage. Lower transaction costs.
  9. 9. Conservation Finance – Permanence Permanence is long term contract defined by protocol. Does the buffer structure pass the your counsel’s legal litmus test? What steps are taken to guaranty permanence time commitment? What percentage of credit value is placed on the mechanism to ensure permanence? How will registries respond to intentional reversals? Will there be adequate reserve available for first certified contributors? What recourse does a project have, if, during verification process, the protocols are amended? Would the registry be liable for a negative effects caused to the project? Is there a legal separation between the buffer pool and the registry? If not, are there definitive measures in place to remove potential conflict of interest exposures?
  10. 10. Conservation Finance – Integral Registries’ Buffer Pool Requirements Complete transparency. Ensure purchaser confidence in ability to administer reversals. Require strict adherence to standards agreed by forest carbon credit originator and all parties involved. Legally separate buffer pool administration from registry. Any changes that will effect currently registered projects must be done via mutual acceptance all parties. Adequate financial reserves available for any potential expenses – defense, enforcement, investigation, and other, not covered by registry’s insurance policies. Immediately access to carbon credits, if reversals exceed pools credit reserves.
  11. 11. Conservation Finance – Risk Management Key Points All financial investable assets have risk and return profiles. Forest carbon is a financial investable asset. Therefore, industry needs financial risk management best practices to meet 2020 forest carbon offset demand as forecasted by US Department of Energy. Real, measurable, verifiable, additional and insured, secured, and preferred. Potential exposures and recommended solutions. Concerns pertaining to registry administered buffer pools. How would a revised permanence strategy differ from current buffer pool designs? Separate administration structures.
  12. 12. Conservation Finance – Q&A Colm Fay, University of Michigan colmfay@umich.edu Gabriel Thoumi, Forest Carbon Offsets, LLC gabrielthoumi@forestcarbonoffsets.net Gus Kent, CO2RS gus.kent@co2rs.com Cameron Prell, McGuire Woods cprell@mcguirewoods.com Thank you
  13. 13. Conservation Finance – Further Literature The Sustainability Imperative by David A. Lubin and Daniel C. Esty Forest Carbon is in the Climate Bill, but How do we Insure it? With Trees! By Gus Kent and Gabriel Thoumi, EcosystemMarketplace.com Review of Carbon Markets, PricewaterhouseCoopers LLP, UK Will Forest Carbon Markets Thrive, or Get Lost in the Woods? By Gabriel Thoumi, Greenbiz.com What Kind of Assets Are Forestry Credits? By Talitha Haller and Gabriel Thoumi, EcosystemMarketplace.com Strategic Innovation: New Game Strategies for Competitive Advantage by Allan Afuah
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