Investors in forest carbon credits can reduce their financial risk and increase returns by establishing diversified investment portfolios in the tropics, according to a new report by Imperial College Business School and forest carbon accelerator Terraformation.

By bundling investments across forest ages, geographies and ecosystems, investors can reduce investment risk by at least half, according to a new paper entitled Forestry-Backed Assets Design. 

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Forests in the tropics boast high potential for both carbon capture and biodiversity restoration. (Photo by Ignacio Palacios via Getty Images)

‘Risk pooling’ is a common security design among asset-backed securities such as mortgages and credit cards, and could help make forests a more predictable asset class for a wider range of investors as carbon markets mature, states the research.

Carbon sequestration forestry projects in the tropics boast high potential for both carbon capture and biodiversity restoration, finds the research, suggesting a natural alignment between biodiversity and climate mitigation goals. These will become the most attractive locations for forest carbon investors in the future, state the authors.

The report was published by the Singapore Green Finance Centre, an initiative from the Centre for Climate Finance & Investment at Imperial College Business School and Singapore Management University, and backed by the Monetary Authority of Singapore and various global financial institutions.

“This paper provides important insights into the value of diversification for forestry-backed asset design that have been largely unexplored up until this point,” said Andrea Snavely, finance manager at Terraformation and a co-author of the paper, in a statement. “It is our hope that this research can be useful to practitioners, regulators and academics alike to promote wider participation in this asset class.”

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