Our reponse to criticism of Vista Analyse's analysis of the Tropical Forest Forever Facility (TFFF)

The analysis of the Tropical Forest Forever Facility (TFFF) made by Vista Analyse for Rainforest Foundation Norway (RFN) has been criticized for misrepresenting the financial risk for countries who contribute as sponsors. We do not agree with this criticism and are confident that the analysis gives a fair representation of the risk for sponsors of TFFF, based on the information in the concept notes.

TFFF will reduce payments to tropical forest countries before reducing payments to sponsors

The criticism claims that it is wrong to say that rainforest countries “take first loss”, as they themselves do not have a financial stake in TFFF. We can disagree about what the right terminology here is, but for the analysis the impact is the same. The whole point of TFFF is that the surplus return on the investments goes to pay tropical forest countries (TFCs) for forest conservation. TFFF itself illustrates this as “each participating TFC would have an ownership interest equivalent to its Eligible Forest Cover as a percentage of the global eligible forest.”

The fact that TFCs don’t pay anything to assume a share of the TFFF returns (though Brazil has already committed sponsor capital) does not change its impact on the assessment of the sponsor capital risk done by Vista. As long as part of the returns on the underlying portfolio of BB+ rated fixed-income bonds are withheld to pay TFCs, and this payment is the first to be suspended if returns on the portfolio are reduced, then there can be quite a large drop in returns without reducing the interest sponsors receive, as the report shows. The sponsors’ risk of not receiving full interest payments is therefore generally lower than on a BB+ portfolio, where that impact would be immediate.

TFFF will be a long-term financial mechanism

When it comes to the risk of loss of the sponsor capital itself, it is correct that the sponsor capital will take losses before the market investors. However, TFFF is intended to be a large and long-term investor capable of “weathering” market fluctuations, where its capital from investors is “locked in” for a long period. The concept note 3.0 describes measures to maintain or recover the value of the investment portfolio, i.e. the investment capital of sponsors and market investors. In a situation of substantial portfolio value drop – such as during the financial crisis – TFFF would temporarily suspend interest payments and instead use returns to rebuild portfolio value (page 42). This could potentially also include interest payments to market investors, if necessary. When markets normalize the value/capital recovers, and payments can resume. Further, the sponsor capital can be repaid in annual installments starting in year ten, taking from the annual returns. These elements reduce the risk of loss/impairment of sponsor capital, which TFFF has estimated to be well below 1% over 40 years.

A unique opportunity that is worth taking risk

Sponsors do face a higher risk than investing in something rated AAA. But the sponsors are also clearly shielded against some of the risk on the underlying BB+ portfolio, as payments to TFCs will be suspended before reducing sponsor interest payment. Hence the assessment that sponsor’s risk is “somewhere between AAA and BB+”, which is the basis for Vista’s analysis.

RFN thinks it is important to be clear about the risk sponsors assume by contributing to the TFFF – which is what the analysis deals with. The report does say that the risk is higher than what sponsors will be paid for. This makes it a concessional loan, and in the Norwegian context the concessional part needs to be budgeted as an expense.

However, we also think that it is important not to exaggerate the risk for sponsors. We believe the sponsor risk in TFFF is relatively low, and clearly within the scope of what countries should be willing to assume to protect the world’s rainforests. The risks of not succeeding with that are orders of magnitude greater for the world, including the prospective sponsors.

TFFF is a unique opportunity for countries to contribute to rainforest conservation in a different and substantially larger way than before, precisely because they can give loans that will be repaid, and that is an opportunity countries should take.