[SPN-Discussion] The Journal of Environmental Investing Vol. 10, no 1 (2020)

[Chris Verrill]

The latest issue of *The Journal of Environmental Investing *focuses on
green bonds. One article focuses on a liquidity-level investigation around
a specific type of forest sustainability bond:

Estimating Forest Sustainability Bond Prices for Natural Resource and
Ecosystem Services Markets
*Richard L. Bernknopf, *Research Professor of Economics, The University of
New Mexico; *Craig D. Broadbent, *Professor of Economics, Brigham Young
University-Idaho

Existing markets for natural resources commonly trade precious metals,
energy, and minerals. More recently, ecosystem service markets are being
developed, including the resources of land carbon, species habitats,
streams, watersheds, and wetlands. We introduce a sustainable forestry bond
that is composed of wood products and ecosystem services. The security
represents a specific forested land quality and quantity for the production
of natural resources and ecosystem services. An investment decision is
based on the Net Resource Value (*NRV*) of a series of cash flows produced
from trees and benefits provisioned by the ecosystem services in a forest.
This combination of inputs and outputs represents the value created over
the lifetime of a forest project and is equal to the monetized difference
between the forest natural resources and ecosystem service outputs and the
capital invested to produce them. For investment decision making, an
Average Internal Rate of Return or AIRR is calculated, which is Net Present
Value-consistent (NPV-consistent).

A significant finding of adding all these ecosystem services is that they
produce an increase in the cash flow to a traditional forest bond, which,
in turn affects the security’s Par value, and consequently the Return on
Investment. Our results demonstrate that reforestation with a multiple
harvest species maximizes direct-use benefits and provisions significant
carbon sequestration benefits. However, land conversion to such a species
can have long-term environmental effects that fundamentally change the
structure of an ecosystem. To account for these environmental changes, we
include two other ecosystem endpoints in the portfolio (i.e., waterfowl
habitat and nitrate reduction). While forest and “green” bonds are traded
today, our findings demonstrate that the return from an integrated
portfolio that contains forest wood products (direct use) and ecosystem
services (indirect uses) provides an investor with more investment choices.
You can read the full analysis, and many more, at
http://www.thejei.com/estimating-forest-sustainability-bond-prices-for-natural-resource-and-ecosystem-services-markets/
.

--

Chris Verrill

Social Media Intern at the Journal of Environmental Investing

cverrill at thejei.com

Connect with the JEI:

www.thejei.com

http://www.facebook.com/JournalofEnvironmentalInvesting

https://twitter.com/The_JEI

[image: JEI.jpg]
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