Estimating Forest Sustainability Bond Prices for Natural Resource and Ecosystem Services Markets
A journal article that introduces a sustainable forestry bond that is composed of wood products and ecosystem services, geared toward increasing the cash flow to a traditional forest bond.
Abstract
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.
