The value of forest exceeds the market prices

An essential part of the value of land to the society – i.e. value of carbon sequestration, ecosystem values, health values, etc. – is only seldom seen in the open market value of land.
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A widely cultivated citation attributed to Mark Twain says that “buy land, they're not making it anymore”. This statement has been taken as a starting point for many investors considering investing in land property.

The development and adoption of corporate responsibility reporting and sustainability accounting has underlined the need for transparency and positive outcomes when making investments. Environmental, social, and governance (ESG) criteria are an increasingly popular way for investors to evaluate alternative investment objects.

Investors are looking for low-carbon, or better yet, carbon sequestrating, activities that also do no harm or even are a benefit to social cohesion and environmental resilience. An increasing number of investors are looking at forest to achieve this.

With potentially more capital flows to landscapes, it is essential to create a financial environment whereby a spectrum of sustainable land-use activities are those that are most attractive to different investors.

However, a major hurdle in creating investible opportunities for sustainable land-use practices is that the true societal and environmental value generated by forests is not reflected in the market price of land-use management that delivers these values.

Globally taken, an alarming fact is that the world has lost 178 million ha of forest since 1990, which is an area about five times the area of Germany. As forest become increasingly accessible, they are harvested for timber production or used for grazing. In more productive and accessible areas forests are cleared and then converted to agriculture.

Will the situation change in the future? In general, there exist three different ways to solve this type of market failures: private market solutions, government-imposed solutions, or voluntary collective actions. Market solutions may include means such as certification that transmits the hidden values to the prices. Policy solutions could be, e.g., rules and regulation for carbon trade, public incentives for societal benefits or taxes for societal harm. An example on voluntary collective action is a payment to compensate carbon emissions by investing it to afforestation.

To ensure that forest landscapes deliver the full range of forest functions and ecosystem services, land-use policy should seek to bridge the discrepency between the market value of forests compared to other land-uses and the societal or environmental value they provide.

Policymakers can also play an important role in setting long-term, reliable and predictable signals to investors of the intention to de-risk certain elements of land-use investments and phase out harmful activities, such as unabated deforestation.

Dr. Pentti Hyttinen, CEO, PenTen Ltd