Forestry evaluation

To better understand the risks and opportunities of investing in forestry, FMO commissioned an independent evaluation by Wellspring Development in 2024. The evaluation focused on the financial sustainability of FMO's early forestry investments made under the  Dutch government's Building Prospects program, which FMO manages.

Forestry plays an important role in FMO’s climate ambition. By 2030, FMO aims to invest up to USD 1 billion  in the forestry sector.

FMO's role in forestry investing

As one of the first development finance insitutions (DFIs) to invest directly in the forestry sector, FMO has long believed in the sector's potential to contribute to SDG 13: Climate Action. Forestry investments are made both from FMO’s own balance sheet and the public programs it manages, including the Building Prospects (BP) program and the more recently established Dutch Fund for Climate and Development (DFCD)and Mobilising Finance for Forests (MFF) programs.

Why evaluate financial sustainability in forestry?

Financial sustainability is critical in forestry. If companies are not financially viable, their broader impact is at risk: trees can be cut down if businesses fail.

A previous evaluation of the Building Prospects programme already showed that while forestry investments deliver strong environmental and social impact, financial performance is often the weakest link.

In addition, FMO’s aims to attract more commercial investment to forestry. This requires demonstrating that it is possible to build financially sustainable forestry portfolios, something that DFIs and impact investors, have found challenging so far, particularly in Sub-Saharan Africa.

Why is forestry investing so challenging?

The evaluation confirms that forestry is an inherently risky sector due to its long timelines, exposure to commodity and currency markets, and vulnerability to climate and weather-related phenomena.

Some of these risks can be managed, and given FMO’s experience, effectively mitigated. Over time, FMO has adapted the financial instruments it uses to better match the needs of forestry companies. Early investments relied heaviliy on senior debt, which often proved too inflexible. Today, FMO increasingly uses private equity and mezzanine finance alongside debt.

The evaluation identified that while there is no “silver bullet” in terms of instrument, it highlights the importance of:

• remaining flexible over time
• assessing each company and its cash flows
• choosing instruments case by case

The evaluation also identifies other success factors, such as:

• experienced management teams
• strong local and sector knowledge
• diversified revenue streams

The role of concessional finance

Concessional finance and grants are particularly needed to drive transformation. They help derisk private capital that would otherwise not be attracted to forestry. Public programs therefore continue to play a critical role in de-risking investments, attracting private capital, and unlocking long-term sustainable outcomes, which is in line with FMO’s progression model. 

What can other investors learn?

FMO’s experience confirms a core conundrum: forestry is both high impact and high risk. Successfully investing in forestry requires recognizing this and managing risk throughout the investment lifecycle to ensure we do not miss out on the opportunity for impact this sector offers.

Key questions investors should consider include: 

• What funding sources are being used to fund forestry? For instance, since its initial experience in the Building Prospects public program, FMO has set up additional public programs, such as DFCD and MFF, to enable it to use a range of blended finance solutions in financing forestry along with its own balance sheet.
• What instruments best support investing in forestry? As discussed above, FMO has learned that you need to have a broad toolbox, including senior debt, mezzanine financing and private equity to match each forestry opportunity appropriately.
• How are forestry investments selected? Factors such as management team experience and revenue stream diversification should be considered up front.
• How are forestry investments managed? When risk arises, and it will, you need to have monitoring systems to pick up early warning signals and capacity to act on these signals.
• How do you support your forestry learning journey? Knowledge needs to be managed effectively, so you can institutionalize what an organization learns from its ongoing experience. Ideally, it helps to be able to exchange lessons with other organizations on this journey. For instance, in FMO’s MFF program, a core pillar is its learning and convening platform.

Moving forward

This evaluation offers valuable lessons for scaling FMO’s forestry portfolio while managing risk more effectively. FMO’s involved departments have largely endorsed the recommendations and are working to operationalize them.

As FMO continues its forestry journey, these lessons will help ensure that financial performance supports forestry’s impact potential. By sharing this evaluation, FMO hopes to support other investors seeking to contribute to a more sustainable forestry sector.