With 4 billion hectares of forest area worldwide, representing 31% of the total Earth land area (1), the role this ecosystem plays in our planet’s balance is crucial. If major differences exist between tropical, boreal, temperate and subtropical woodlands, the world still has at least 1 billion ha of primary forest, the rest being planted trees.
Proportion and distribution of global forest area by climatic domain, 2020 
Source: Type of Forests, World, 2020
While we hear mostly about carbon storage, the wide range of ecosystem services provided by a healthy forest is now recognized: forests play a critical role in the fight against our ecological crisis, capturing carbon dioxide (2), but also regulating the water cycle, supporting biodiversity, reducing flood hazards, preventing erosion and landslide, providing economic benefits for endemic populations and offering valuable raw materials.
The escalating demand for wood exacerbates illegal logging issues.
There is no surprise in saying that forests are under substantial pressure from the rising demands for food, fiber, fuel, and minerals, often resulting in extensive land use changes, and significant reductions in tree cover. Since 1970, the production of raw timber has increased by 45% (3), while forest cover growth has decreased all over the world. If one can only agree with using sustainable raw materials, the escalating demand for wood exacerbates illegal logging issues, with more than six million hectares of primary tropical forests lost each year (4). This alarming increase in deforestation rates hides significant gaps between continents, with the most impacted areas being, unsurprisingly, developing countries.
Annual forest area net change, by decade and region
Source: Type of Forests, World, 2020
The consequences of deforestation include increased carbon emissions, loss of biodiversity, soil erosion, and impacts on the water cycle. Emissions from deforestation alone are estimated to contribute 20%-25% of annual global greenhouse gas emissions (5), making it, if it was a single country, the second biggest polluter after China.
More frequent and intense episodes of extreme weather events endanger forest resilience.
Unfortunately, human encroachment is not the only threat to natural assets. Indeed, just as people and property are subject to increased climatic pressure, forests are experiencing more frequent and intense episodes of extreme weather events, endangering their resilience. In Europe, where the damaging effect of deforestation is less visible, the direct and indirect impacts of rising temperatures and increasingly unpredictable precipitation patterns heighten the vulnerability of forests to pests, diseases, and fires. These impacts affect all types of forest, whether commercial or conservation, and jeopardize initiatives aimed at avoiding deforestation, reforestation, or new forest management strategies.
EUDR provides a regulatory framework that will help drive change in the forest value chain.
There are, however, market evolutions that will help answer this urgent need. First, the recent European Deforestation-Free Regulation (EUDR) gives a regulatory framework that will help drive change in the forest value chain. Three compliance criteria have been determined for all products imported into and exported from the EU: no deforestation or degradation after cut-off date, compliance with the legislation of the country of production, and coverage by a due diligence statement. Seven value chains are concerned (6), with stakeholders being forced to identify and disclose their raw material sourcing starting January 2025.
Source: Database on Forest Disturbances in Europe (DFDE)
With the GBF, protected forest parks should increase in the coming years, as 73% of forest ownership worldwide is public.
Then, public awareness of the necessity of protecting biodiversity led to the Kunming Montreal agreement, urging governments to commit to conservation efforts. The Global Biodiversity Framework (GBF) incorporates Target 3, known as “30×30”. This flagship initiative aims to designate 30% of areas as protected natural reserves by 2030 (7). As 73% of forest ownership worldwide is public (2015) (8), the development of protected forest parks should increase in the coming years. As an example, in 2022, Sweden increased its formally protected forest land by 29,200 hectares (9). Even if legal protection status does not always indicate active management (today, approximately 21% of global forest area is already under some form of legal guard) (10), this global commitment will be translated by local initiatives that should multiply the level of conservation programs.
Tools are multiplying to provide answers to carbon buyers who are questioning the sustainability and impact of their investment.
Third, the growing concern of organizations regarding their carbon emissions and footprint directly translates into a rising demand for carbon credits. Even if slowed down by recent scandals on REDD+ projects, still half of the carbon credits available on the Voluntary Carbon Market (VCM) come from the forestry sector. With almost ten years of market experience behind them, brokers and buyers are starting to understand how to evaluate the quality of carbon projects, with the valuable help of MRV actors (11). The selection of projects (respectively credits) for carbon investors (respectively buyers) is increasingly based on impact assessment criteria, not only on CO2 measurements but also on biodiversity and positive social outcomes. Traditional standards are evolving, such as Verra’s new Nature Framework, new standards are emerging, such as the ERS start-up, and tools are multiplying to provide answers to credit buyers who are questioning the sustainability and impact of their investment. Sound mechanisms that will help high-quality forest restoration or conservation projects find financing.
And indeed, financing is critical to addressing forest resilience and deploying sustainable practices. An estimated $70 to $160 billion of investment per year is necessary globally, while only 2% of that amount is covered today (12). Meeting the world’s demand for wood products alone requires about $50 billion annually. So, the challenge of mobilizing adequate financing for sustainable forest management is tremendous.
$70 to $160 billion of investment per year is necessary globally.
With direct investment and carbon credits, there is a third vehicle to finance forest protection at scale for private companies: Payment for Ecosystem Services (PES), a crucial mechanism for forest conservation (13), even if largely underutilized. By compensating those who maintain or improve forest health, PES helps to align economic interests with environmental sustainability, promoting practices that benefit both nature and people. Corporates with the highest standards of environmental quality are already using this financial tool, for instance, to source natural rubber, used in tire manufacturing. Instead of contributing to deforestation, these programs work with local communities to sustainably exploit the rubber naturally found in primary forests, financing biodiversity conservation and preserving carbon stock in priority areas (14).
The challenge? Find sustainable financing that meets the triple bottleneck of the social, societal, and economic challenges of the forest sector.
Our wager at AXA Climate is that – in the same way as regenerative agriculture promotes sustainable farming practices that have a positive impact on the soil – forest management must also evolve to become regenerative, by prioritizing an approach that responds to local needs and finds sustainable financing that meets both the social and economic challenges of the forest sector. For traditional forest plantations, the opportunity offered by the VCM may enable a transition to mixed-management practices that integrate the biodiversity component. The reduction in productivity due, for example, to the avoidance of clear-cutting or the staggering of harvests is offset by financial flows from the sale of credits. For reforestation or afforestation projects, public programs or private developers can tap into the carbon market to find fundings to maintain the new forests over the long term, while addressing the need to produce more sustainable wood and avoid illegal deforestation perpetuated elsewhere. On the pure conservation front, the fight against illegal deforestation and the preservation of natural forests is supported by regulations, whether they come from the UN, the EU or national government.
How can we accelerate the deployment of projects that are virtuous for the environment and for the industry?
As a company with a long history in the insurance industry, our position is to reduce perceived and real risks to increase trust between investors and foresters. As for any new market, faith is a key factor in its development. Accelerating the number of sustainably managed forests will only be possible if confidence is built between forest managers, project developers, private investors, and related public institutions. And this necessary trust is partly created through transparency and a clear understanding of what the risks are, as well as the associated mitigation solutions.
Reduce perceived and real risks to increase trust between investors and foresters.
Thanks to improved technology and years of research and local studies, there is an abundance of forest data available. The challenge lies in transforming the information sources into practical tools for forester stakeholders, providing both scientific reliability and performance to meet operational constraints. When well deployed, remote sensing tools can help create transparency on what is happening on site and understand the drivers of change, from the evolution of biomass to early warning systems, aligning project stakeholders on impact evolution and operational monitoring. The use of satellite imagery and lidar technology is a great help in designing powerful solutions at a competitive price. Data experts and foresters are increasingly working together to ensure accurate and efficient data processing, improve tools, and enable effective actions. It is the positioning of the SWIFTT (15) consortium, gathering forest managers, scientists, and data engineers to develop a platform at EU-level aiming at triggering early-warning systems and post-damage assessment solutions for wildfire, wind and insect outbreaks.
It becomes mandatory to look closely at climate-related threats as forestry projects are long-term.
But risk assessment is not a one-way street; some would divide risks into three categories: internal project risks (e.g.: management default), external project risks (e.g.: pandemics, political issues) and natural risks (e.g.: climate disasters, biodiversity or water dependencies). Due diligence analyses are supposed to clarify the levels of each type of risk for investors and help them make an informed decision. When investing in natural capital, the intricate link with climate and biodiversity makes it mandatory to look closely at climate-related threats as those projects are long-term and might impact the resilience of the area.
As a science-based climate company, our team is working on various solutions to provide access to this necessary knowledge, either at a global-scale level or at a very fine level. Species vulnerability and resilience to climate change can be analyzed to develop targeted strategies to mitigate these risks. For instance, wildfire risk and its drivers can be tracked, using state-of-the-art scientific modeling with adaptation integrated into vulnerability scenarios.
Example of maps indicating risk of wildfire in France, baseline vs 2050 projection
Source: AXA Climate
The insurance sector needs to address the ability to link climate adaptation and climate insurance.
When the due diligence phase is over, investors and foresters need to work hand-in-hand to identify the best risk-reduction solutions, including risk transfer mechanisms. Parametric insurance is one of them, as it provides rapid payouts triggered by predetermined thresholds, ensuring fast money to repair damaged ecosystems and limit the financial drawbacks. One of the necessary innovations that the insurance sector needs to address is the ability to link climate adaptation and climate insurance, so that the most resilient projects are insured with the most cost-effective coverage, thus promoting the adoption of sustainable practices. As part of the PIISA (16) research project, AXA Climate is leading two initiatives: the first, located in Germany, focuses on modeling the evolution of biotic and abiotic risks in relation to forest characteristics for insurance purposes, while the other, located in Portugal, aims to integrate adaptation strategies into forest fire insurance pricing.
Understanding and mitigating climate risks may not solve the whole puzzle of sustainable forestry, but it is at least a possible first step, with tools already available that can help accelerate dialogue and build trust between investors and foresters. We encourage all insurance companies and risk modeling experts to join us in our pioneering efforts to de-risk forest investments and enhance forest conservation worldwide.
Written by : Ariane Kaploun, Quentin Voituron and Luiz Galizia
