One of the major challenges of impact investing as a legitimate asset class is “the lack of transparency and credibility in how funds define, track, and report on the social and environmental performance of their capital”(Global Impact Investing Network). Although this remains a legitimate barrier in many sub sectors considered under the banner of impact investing, the defining, tracking and reporting of the climate change, social and environmental impacts of projects has become common practice in the context of forest carbon offset project development, potentially allowing forest carbon project investment to take a prominent role in this  sector.

Background
Forest carbon projects are set up to earn carbon credits (or carbon offsets) for the carbon dioxide absorbed through natural processes in trees. These carbon credits can be then be sold to firms, organizations or individuals who aim to offset their carbon impact in a cost effective way. Currently, the demand for the majority of forest carbon offsets remains in the over-the-counter (OTC) voluntary market, where entities voluntarily purchase carbon offsets to achieve voluntary emissions reduction targets, which complement their Corporate Social Responsibility (CSR) strategy. As compliance cap-and-trade markets develop to address global warming such as in Europe , California and most recently Australia, forest carbon credits may be eligible in the future for trade under these schemes, ushering a significant increase demand for these kinds of offsets.

Defining, tracking and reporting the climate benefits of forest carbon projects
A good quality carbon credit issued from a forest project should represent the validated and verified reduction (or avoided emission) of 1 ton of C0₂ . There exist protocols and standards that facilitate this accounting process in a transparent and scientifically rigorous way. These standards, such as the Verified Carbon Standard (VCS) allow the investors of projects to demonstrate the reduction claims are additional, verified and permanent. Once a project passes the standard’s  validation and verification process, credits are issued to the project developer which are tagged with a serial number and can be traced back to the project and the year it was issued. Furthermore, registry systems such as Markit Environmental Registry transparently facilitate market transactions- making sure that credits are not sold twice. Buyer and investors can search for credits on the registry and drill down to an individual project’s design documents and other credentials.  This infrastructure has been established in the past 5 years in anticipation for a global carbon market and has brought much transparency to forest carbon investments.

Defining, tracking and reporting social and environmental benefits
Forests are not all about carbon. Forest ecosystems provide many more benefits to biodiversity and local populations such as soil erosion protection, food for animal populations, forest, water purification etc.. Recognizing this, new add-on standards have been developed allowing forest carbon projects to define, track and report these additional benefits allowing their investors to demonstrate the positive social and environmental positive attributes of their investments. A common standard being used in the forest carbon sector is the Community Climate and Biodiversity (CCB) standard. Buyers for forest carbon credits pay a premium to have their carbon credits verified against this add-on standard, since it assures quality in a traceable way.

Conclusion
In recent years the forest carbon market has grown significantly as the role of forests in climate change mitigation is finally being recognised by the international community. Simultaneously, investors are increasingly demanding guarantees of the positive environmental and/or social impacts of the projects, businesses or funds they are backing. Forest carbon projects are well placed in the impact investment sector because of their use of industry standards and certifications such as VCS, CCB that allow investors to “define, track, and report on the social and environmental performance of their capital” in a credible and transparent way.

Written by Justin M. Whalen - Face the Future
Edited by Rocio Ochoa-Perez