| By Natasha White For the fight against climate change, the 1 billion hectares of tropical forests breathing in carbon dioxide across the planet are too big to fail. Now, Brazil is betting Wall Street will help keep them alive. When it hosts the United Nations COP30 climate summit in November, Brazil aims to launch a $125 billion fund that seeks to harness the capital markets to pay countries to keep their forests standing. A nine-strong Brazilian delegation was recently in London to discuss the fund’s design with its sponsors and to meet with the banks, asset managers and insurers that might eventually participate. The fund, known as the Tropical Forest Forever Facility, or TFFF, would support tree preservation through investment returns in high-yielding fixed-income assets. The idea has drawn criticism for tying forest protection to the performance of unpredictable financial markets, and the risk that it’ll end up financing the very industries responsible for deforestation. Yet its backers argue that traditional forest finance mechanisms, which have relied on carbon markets and public funds, have largely failed to deliver. Government budgets are also now under more strain than ever as US President Donald Trump slashes overseas climate finance and Europe diverts billions of euros of development funds to bankroll defense.  The construction site of COP30 in Belem, Brazil. Photographer: Pablo Porciuncula/AFP/Getty Images The facility is therefore aimed at being self-sustaining and — if it works — will rank among the largest financial mechanisms ever proposed to help plug the multi-trillion-dollar gap in funding needed to halt climate change and reverse dramatic global losses in biodiversity. It would also help rewrite an equation that has spurred deforestation: Land yields more money when it’s cleared for agriculture, mining or infrastructure than it does as dense, tropical forest. The plan is “audacious,” said Razan Al Mubarak, president of the International Union for Conservation of Nature. “This will be ‘go big, or go home.’” To kick-start the fund, Brazil is asking developed countries to offer low-cost, 40-year loans and guarantees of roughly $25 billion. Those would be housed in a special-purpose vehicle set up by a multilateral development bank and levered four times to borrow about $100 billion from mostly institutional investors. Brazil is targeting a triple-A credit rating for the vehicle, enabling it to borrow cheap — at an average target rate of under 5%, Luiza Sidonio, a project manager in Brazil’s finance ministry, told Bloomberg in an interview in London. No countries have committed money yet, but the UK, Norway, Germany, France, United Arab Emirates and, until recently, the US have all been involved in the fund’s blueprint, Sidonio said. She’s hopeful money will start to flow in the next few months. That $125 billion will then be invested in a diversified portfolio of mostly emerging market sovereign and corporate bonds, with target returns of roughly 7.6%, Sidonio said. The difference between the fund’s borrowing costs and the return on its investment is expected to generate as much as $4 billion annually — enough to pay countries $4 for every hectare of tropical forest they protect each year, she said. A group of about 70 forested countries would be able to apply to access the funds. If successful, Sidonio said the fund will “redefine” traditional global ties where rich countries donate money to poorer nations for environmental action. It’s “a win-win for everybody that doesn’t rely on grants,” she said. Countries also can spend the proceeds how they wish, as long as it’s on public forest conservation programs and they allocate at least one-fifth to support indigenous peoples. “They don’t need a Big Brother,” said Garo Batmanian, head of Brazil’s forest service and another architect of the fund. But in order to receive the payment, a country must have an annual deforestation rate of less than 0.5%. There’s also a discount on the total funds a country receives of up to $800 for every hectare of forest destroyed or degraded, which will be monitored using satellites with help from Brazil’s space agency.  A truck loaded with lumber drives near Sao Felix do Xingu. The TFFF fund could help rewrite the equation that trees are worth more dead than alive. Photographer: Jonne Roriz/Bloomberg For a country like Brazil with about 330 million hectares of tropical forest, of which about 1 million are lost each year, the fund could generate an annual payment of roughly $860 million. That’s more than the yearly budget of the country’s environment ministry. The fund has been designed to sidestep the challenge of additionality, a test of whether the forest would have been protected anyway in the absence of the payment, Sidonio said. It’s a hurdle that projects, in theory, would have to surpass in order to receive funding from carbon credits to justify their use in offsetting emissions. And it’s led to a perverse incentive that only benefits countries with a history of deforestation. The math also is based on hypothetical scenarios that have been open to gaming — and ultimately crashed the carbon market. But TFFF isn’t without skeptics. Frederic Hache, executive director of the Green Finance Observatory and a lecturer in sustainable finance at Sciences Po University, said the fund’s model boils down to a “leveraged bet” on future economic growth, interest rates and the skills of Wall Street fund managers. Hache also questioned how the $125 billion fund will yield its targeted returns and diversification while avoiding securities that ultimately drive deforestation.  The village of Metuktire in the Brazilian Amazon rainforest in Mato Grosso state. The Tropical Forest Forever Facility fund proposes to support indigenous peoples and tree preservation through investment returns from fixed income assets. Photographer: Pablo Porciuncula/AFP/Getty Images Sidonio said the fund will exclude certain sectors from its investments, like coal and peat. For emerging-market bonds, “we’re thinking of having a broader [exclusion] list relating also to deforestation.” For the smaller portion of funds invested in developed markets, the plan is to focus on green or sustainability-focused bonds, she said. Over time, the fund will migrate to a larger proportion of green instruments as that market grows. “We have to have one fight at a time,” she said. For Avinash Persaud, special adviser to the president of the Inter-American Development Bank, climate finance needs big new ideas. Brazil is “right to develop a financing tool” to protect standing forests, said Persaud, who was an architect of the Bridgetown Initiative on international financial reform. Persaud’s concern is that history suggests it’s unlikely to reach the scale necessary to achieve its goal. “It hinges on there being a core investor to seed the fund,” he said. “When we ask for that kind of capital today, we don’t get a lot: It’s not a slam dunk.” Read the full story on Bloomberg.com. | 
