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© Z/Yen Group2012

PEFC/01-00-01

Promoting Sustainable

Forest Management

www.pefc.org

Finance, Forestry & PEFC:

How Is Forest CertificationRelevant?

London, 25 October 2012

Long Finance & PEFC

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© Z/Yen Group2012

PEFC/01-00-01


Forest Management

www.pefc.org

♦ Welcome♦ PEFC Forest Certification And The Finance

Sector– Ben Gunneberg, PEFC

♦ What Does Certification Mean For Investors,Guarantors, Lenders and Traders? – MichaelMainelli, Z/Yen Group

♦ Q&A / Open Discussion on finance, forestry

and certification

Agenda

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PEFC Forest Certification and

the Finance Sector Ben Gunneberg, Secretary General, PEFC International

London, 25th October 2012

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What is PEFC?

§ Global, not-for-profit, non-governmental organisation based inGeneva, Switzerland

§ Voluntary mechanism promoting sustainable forest managementproviding independent, third party certification of good practices

§ Alliance of national forest certification systems with globalrepresentation and an international chain of custody

§ World's largest forest certification system and provider of two thirds of the world’s certified sustainably managed wood

§ Certification system of choice for small family forest-owners

Programme for the Endorsement of Forest Certification 4

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Finance, Forestry & Certification

Financial Significance

§ Global investment universe of managed forests: ~300-500 bnUSD (+100 bn USD by 2030)

§ Physical assets

§ Financial assets

§ Lending, investing, banking,commodity trading, credit ratings

Sustainability Significance

§ 17% of global CO2 emissions

§ 1 in 5 people depend on forests

§ 80% of terrestrial biodiversity§ 10-15 bn USD assets andrevenues lost annually from illegallogging

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Sustainable Forest Management

Forest Certification

Enhances the underlying asset value Reduces risk

Standards, assurance, transparency and traceability

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What is Forest Certification?

Elements of Certification

Sustainable wood raw material is:

• legal: the wood is harvested followinglocal legislation and internationalagreements and the forest owner hasbeen compensated accordingly

• from well managed forests: forestryoperations have been conductedmaintaining forests ecological, social

and economic values

• traceable: the raw material supply chainis controlled and verified from theharvesting site up until finished products

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Forest Management Certification

Chain of Custody Certification

Certification Delivers

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PEFC Sustainable Forest

Management Requirements§ Requires compliance with all fundamental ILO conventions

§ Tailored to specific needs ranging from company to family andcommunity owned forestry

§ Sets highest standards for forest certification aligned with themajority of world’s governments, including

– Maintaining & enhancing biodiversity

– Prohibition of forest conversions

– Prohibition of most hazardous chemicals, GMOs

– Protecting workers rights & welfare

– Encouraging local employment

– Recognizes principles of FPIC (free, prior, informed consent), UNDeclaration on the Rights of Indigenous Peoples, ILO 169

§ Provisions for consultation with local people and stakeholders

§ Exclusion of certification of plantations established byconversions7

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Relevance of Forest Certification

to Finance Sector § Globally recognized mechanism to codify sustainable forest

management standards & verify practices

§ Screening indicator for financial and ESG-related decision-

making§ Provides assurance throughout the entire supply chain;

strengthening of traceability

§ Ensures long-term management of forest assets

§ Elimination of illegal activities; deforestation of primary forests

§ Improved access to markets

§ Better environmental risk management

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Increasing the recognition of

Forest Certification§ ESG issues have potential to create or diminish shareholder

value so need to be managed

§ Over 70 leading banks signed up to the Equator Principles for project finance. Principle 3 recommends compliance with IFC’sPerformance Standards, including Standard 6 - Biodiversitywhich requires independent certification of sustainable practices.

§ Following Rio+20 Earth Summit – 40 institutions have signedNatural Capital Declaration supporting development of methodologies to integrate natural capital considerations intodecision making process for all financial products and services

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PEFC’s Global Presence

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- Endorsed system- Non-endorsed system

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Certification Globally

§ Only 9% of the world’s forests are certified§ Only 26% of the world’s industrial roundwood supply is certified

§ 66% of the total area certified is to PEFC

9% 26% 66%

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§ PEFC is recognised by the Belgian, British, Danish, Dutch, Finnish,French, German, Japanese, and Swiss Timber Procurement Policies

§ Recommended by the European Commission Guidelines on GreenPublic Procurement

§ EU Ecolabel

§ European Retail Environmental Sustainability Code

Acceptance by Government

Procurement Policies

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§ Green Building Councils in Australia, Italy, and Singapore, the Codefor Sustainable Homes, BREEAM in the Netherlands and the UK,and SKA rating in the UK

§ Green Building Assessment Protocol for Commercial Buildings andthe National Green Building Standard (US), and Built Green(Canada)

§ Comprehensive Assessment System for Built EnvironmentalEfficiency (CASBEE) Japan

§ Singapore Environment Council

Acceptance by Other

Procurement Policies

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CPET

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UK Public Procurement CPET

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* for for chip and fibre products with less than 70%. certified materialSource: CPET 2010 Review of forest certification schemes

** own assessment

According to the assessment reports, the certification systems comply with theCPET criteria as follows:

§ FSC: 92%*

§ PEFC: 89% (97% for revised standard**)

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Conclusions

§ Forest certification provides benchmark and assurance tool of SFM practices and is one of several ESG indicators

§ Helps to verify compliance and mitigate risk

§ When investing in or lending to forest related projects:

– Screens for quality re selection/inclusion in funds and for projects /companies – Risk mitigation tool when dealing with smaller enterprises

§ When insuring forest – related activities: – Increases assurances when providing insurance to forest enterprises – esp

smaller actors

§ When trading forest products including timber: – Traceability and risk mitigation

§ Should also be incorporated into financial institutions’ ownprocurement policies

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Why PEFC?

PEFC is the world’s largest forest certification system

1. Based on intergovernmental agreements & internationallyrecognized processes

2. Upholds highest SFM standards without exceptions

3. Intentioned to maintain focus on promoting Sustainable ForestManagement

4. Level of stakeholder engagement equally high for all standards

5. Demands independence between the different aspects of theforest certification

BUILDing on local action, PEFC cares for our forests globally 17

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THANK YOU!

Further information about PEFC: www.pefc.org

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© Z/Yen Group2012

Finance, Forestry & PEFC

What Does Certification MeanFor Investors, Guarantors,

Lenders and Traders?

Professor Michael Mainelli, Chairman, Z/Yen Group

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© Z/Yen Group2012

♦ Investors – individuals, companies, institutions,family offices, governments

Ø Including investment managers or intermediariesacting on behalf of investors e.g. asset managers,

private equity firms, banks♦ Lenders – banks, capital markets, project

financiers, trade financiers

♦ Guarantors – insurers, banks, rating agencies

♦ Traders – commodity traders, bankingservices, trade financiers

♦ In-house procurement

Finance & forestry - who

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© Z/Yen Group2012

♦ Long-term investment for ‘patient capital’ butinvolving immediate returns (e.g. timber)

What - forest physical assets (1)

'

'

'

'

'

'

'

' ' '

$ $ $ $ $

!"#$%&$'()*+,)-$!./*0$ $ $ $ $ $$$$$$$

:$-)+ ;$-)+$ <=-)+ <>-)+

3..?@7A+*/$)@,*+$B

<$-)

6)*"#&*,'

&)&-%'*"&$*7

.5/89 :598; .:8< 4/89 458: /.8= ;8;

>?23"*'@*?1"'

1+-7A"B

=/8C =C8: :8. /C8/ //8. 985 D584

EF$?&?"# ://85 .=98< D.8C /48= /84 :8< ;8C

G?%&# .;=8. :.<89 /C89 ;8= =85 ;85 <8/

H)22"*1?-%'

@*)@"*&,

:<=8; C4<8/ ;8< <8; D58; 98= =84

C,D*)$@++*,+$E,(,@7$)*,?).F$ $ $ $ $$$$$$$

' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' '

' '

!./*0#*4GH=<=

#*4$<>>H$I$<==

!./*0#*4GH=<<

#*4$<>>H$I$<==

B'^7'-',"-*'&)'N-*1+'3-#?#'Z45//'_'N-*1+'45/4[

' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' '

' '

Source - IPD UK Forestry Index (2012)

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© Z/Yen Group2012

What - forest physical assets (2)

Attractive…

♦ Portfolio diversification

♦ Low-volatility of returns

♦ Counter-cyclical

♦ Long-term inflationhedge

…

but risky too♦ Political (country) risk

♦ Property rights

♦ Operational risks

♦ Reputational risk

♦ Investment risk

Risk management and mitigation options:

♦ Diversification

♦ Insurance, e.g. property, investment

♦ Credit derivatives

♦ Securitization

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© Z/Yen Group2012

♦ Forest-related financial product/asset derivingits value from a contractual claim

Ø Timberland Investment Management Organisations(TIMOs), Forest Real Estate Investment Trusts

(REITs)Ø corporate bonds in the forest, packaging & paper

industry

Ø thematic funds – SFM, timber

Ø multilateral and government bonds issued to fundforestry-related activities

Ø forest bonds

Ø emissions credits – REDD+

What – forest financial assets

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© Z/Yen Group2012

♦ UN-backed

♦ Aiming to reduce emissions from deforestationand forest degradation

♦ Focus on developing countries

♦ REDD+ projects include conservation,sustainable forest management and carbonsinks enhancement

♦ Recent developmentsØ REDD + - World Bank administered Forest Carbon

Partnership Facility

Ø REDD – BNP Carbon Finance US$ 50 m deal with

Wildlife Works

REDD and REDD+

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© Z/Yen Group2012

♦ Significant interest (IFC, WB) but no issuanceyet

♦ To attract low-cost, long-term capital to project/companies in sustainable forestry

Ø Bonds issuance against various cashflowsØ Portfolio diversity, country selection and credit

enhancement are key to risk mitigation andfeasibility

Ø Best (?) if issued by supranational entity

Forest bonds

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© Z/Yen Group2012

♦ Lending to or investing in:Ø Companies in the forest, paper & packaging (FPP)

industry

Ø Industries impacting on forests e.g. mining

Ø Infrastructure development projectsØ Companies in sectors buying forest products (e.g.

construction, retail)

♦ Banking services, e.g. to agribusinesses

♦ Commodity trading and trade finance, e.g.timber

♦ Countries’ credit ratings & sustainability

Finance & forestry: other connections

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© Z/Yen Group2012

♦ UNEP FI – “REDDy - Set - Grow” (2011)

♦ Inrate – “The UN Year of Forests and ItsSignificance for Investors” (2011)

♦ Responsible Research – “Forestry in

Asia” (2011)

♦ *Bank Sarasin – “Sustainable Fulfillment of Sovereign Obligations” (2011)

♦ Z/Yen Group – “Finance & Forestry: Where’sthe Data?” (2010)

♦ Forum for the Future – “Forest InvestmentReview” (2009)

Reports from the London Accord

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© Z/Yen Group2012

PEFC/01-00-01


Forest Management

www.pefc.org

Any Questions?

Finance, Forestry & PEFC

Tropical forest Source - PEFC

lflapefc_25oct2012

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