A Comment on “Estimating Forest Sustainability Bond Prices for Natural Resource and Ecosystem Services Markets”

Xiaoyan Zhou, PhD
Research Associate, University of Oxford, UK

Paper Summary and Overall Comments

This paper introduces a sustainable forestry bond composed of wood products and ecosystem services and investigates the project-based financial performance, such as NPV, associated with this bond. Results show that the bond produces an increase in the cash flow compared to a traditional forest bond that, in turn, affects the security’s par value, and consequently impacts the return on investment (ROI). The results indicate that reforestation with multiple harvest species maximizes direct-use benefits and provisions of significant carbon sequestration benefits.

The paper tackles an interesting and relevant issue in today’s business environment. However, I observe several noteworthy conceptual and technical concerns that limit the potential of the paper and should be addressed in follow-up studies. I discuss my concerns below, starting with the ones that I believe to be most relevant.

Main Concerns

  • The main assumption of this study is that monoculture plantations add value through indirect ecosystem services provisioned by forests, such as carbon sequestered and water quality and quantity in a watershed. However, a report published at the Yale School of Forestry & Environmental Studies suggests that monoculture plantations that are quickly cut down “do little to tackle climate change or preserve biodiversity.”[1] A study published in Nature by Lewis et al. (2019) suggests that 45% of promised reforestation will be monoculture plantations of fast-growing trees like acacia and eucalyptus. It is argued that such forests hold little more carbon than the land cleared to plant them and often decrease biodiversity rather than increase it. This argument is supported by Liu, Kuchma, and Krutovsky (2018). So, in my opinion, the analysis, results, and implications of this study are not sufficiently convincing at this stage, if this assumption is biased. Hence, I argue that the paper’s contribution remains somewhat limited.

  • This paper attempts to analyze the financial performance of a newly introduced forestry bond. However, the results, based on the hypothesized dataset, do not provide sufficient evidence of the practical implications for investors. Therefore, I would encourage the authors to evaluate the forest bond’s financial performance using IFC forest bond trading data in any future research. In addition, the price of a bond largely depends on the value of the income provided by its coupon payment relative to the broader interest rate on the secondary market. And the authors seem to neglect important market factors, inflation among others.
  • The reference in the first paragraph of the Introduction that “For years, forest bonds have been used as a means to diversify an investment portfolio (Healy et al. 2005)” requires additional context. Despite the existence of forestry-related climate financial products, including under the 2008 launched UN-REDD (reduce emissions from deforestation and forest degradation in developing countries) programme, it should be noted that the first proper forest bond was issued in 2016. “On November 8, 2016, IFC opened trading on the London Stock Exchange to mark the listing of its innovative Forests Bond, a first-of-its-kind bond that gives investors the option of getting repaid in either carbon credits or cash.”[2], [3]

[1]. https://e360.yale.edu/features/why-green-pledges-will-not-create-the-natural-forests-we-need.

[2]. https://redd-monitor.org/2019/07/09/ifcs-forest-bonds-quantitative-easing-for-sub-prime-redd-carbon-credits/.

[3]. https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and


Dr. Zhou is a research associate at the University of Oxford. Her research interests focus on responsible investment, carbon disclosure/emission, and institutional shareholder engagement. Before joining the University of Oxford, Dr. Zhou was in charge of establishing two joint venture companies in China and fully participated two IPOs on the Australian Stock Exchange and the London Stock Exchange Alternative Investment Market between 2003 and 2007. She holds a PhD in Finance from ICMA Centre, Henley Business School, and an MLitt in Finance and Management from University of St. Andrews.


Lewis, Simon L., Charlotte E. Wheeler, Edward T.A. Mitchard, and Alexander Koch. 2019. “Restoring Natural Forests Is the Best Way to Remove Atmospheric Carbon.” Nature. https://doi.org/10.1038/d41586-019-01026-8.

Liu, Corsa Lok Ching, Oleksandra Kuchma, and Konstantin V. Krutovsky. 2018. “Mixed-Species versus Monocultures in Plantation Forestry: Development, Benefits, Ecosystem Services and Perspectives for the Future.” Global Ecology and Conservation. https://doi.org/10.1016/j.gecco.2018.e00419.

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