Brazil-backed fund aims to provide long-term funding for tropical forests via a model that incentivises stewardship and crowds-in private investment.
The tropical forest fund hailed last week by Brazil’s President Lula has the potential to deliver policy change as well as cash flows, but further government backing is just one of several keys to investor support.
Speaking at the COP30 Leaders’ Summit, President Luiz Inácio Lula da Silva described the Tropical Forest Forever Facility (TFFF) as an “unprecedented initiative”, highlighting the leading role being played by governments from the Global South.
Initially unveiled at COP28, the US$125 billion facility has been seeded with US$1 billion commitments from both Brazil – which has also led its development – and Indonesia, while Norway and Portugal have committed U$S3 billion and US$1 billion respectively.
The TFFF is a ‘blended finance’ mechanism, with a US$25 billion loss- and risk-absorbing junior tranche supplied largely by governments via long-term loans.
The US$100 billion senior tranche will be raised through the purchase of AAA-rated TFFF bonds by institutional investors, with the proceeds invested in higher-yielding emerging markets (EM) corporate and sovereign bonds. Returns are shared between investors and tropical forest countries (TFCs) – at a rate of US$4 per hectare – providing they meet set criteria.
Nicolas Jaquier, Co-portfolio manager for Ninety One’s Emerging Market Sustainable Blend fixed income strategy, said attracting US$100 billion from institutional investors was “very doable” over time.
“I think there will be appetite amongst big investors in Europe for very high-quality paper that has a sustainable angle,” he said, adding that demand would be further bolstered if the TFFF secured a green or sustainable label.
As well as its origins in the Global South, the TFFF is regarded a game-changer because it shifts the financing of nature conservation to an investment-based model, making standing tropical forests more economically valuable than cleared land by funding forest stewardship. A minimum of 20% of payments to TFCs will go direct to Indigenous Peoples and Local Communities (IPLCs).
Frances Seymour, Senior Policy Advisor at the Woodwell Climate Institute, said the TFFF is significant because of its potential impact on government willingness and ability to tackle systemic risks, such as climate change and biodiversity loss.
“The TFFF incentivises the countries that host forests to proceed as quickly as possible with all the tools only governments can wield, in terms of law enforcement, fiscal policy, regulation of land use, and recognising the rights of indigenous people,” said Seymour, formerly senior advisor for forests in the Office of the Special Presidential Envoy for Climate at the US Department of State.
Some civil society organisations have criticised the TFFF’s financial hierarchy – which theoretically could see payments suspended or reduced in the event of fund under-performance – also noting that the US$4 per hectare rate is not tied to intrinsic value or verified conservation effort.
Seymour said the TFFF should be seen in the context of a wider range of changes needed to shift incentives for public- and private-sector actors in order to reverse deforestation.
“It’s less a silver bullet, than an arrow in the quiver. It’s an important addition,” she said.
At New York Climate Week in September, a coalition of 34 governments released a six-point plan to close the world’s forest finance gap and accelerate progress toward halting and reversing forest loss by 2030.
As well as financial innovations such as the TFFF, the Forest Finance Roadmap calls for actions to expand demand for high-integrity jurisdictional forest credits, accelerate the forest bioeconomy, align fiscal policies, redirect supply chain finance and leverage sovereign debt to incentivise forest resilience.
Response to market failure
Deforestation rates in Brazil have fallen by half since Lula’s return to office, dropping 11% in the year to date compared with 2024, according to the Program for the Calculation of Deforestation in the Legal Amazon.
According to the UN Food and Agriculture Organisation, deforestation rates have fallen dramatically over the decade to 2025, but progress across regions is varied, and the world is collectively off-track to meet the COP26 commitment to halt and reverse deforestation by 2030.
But policy action is slowing in key jurisdictions, with the European Commission slowing the implementation of the EU Deforestation Regulation, which requires firms to demonstrate imports of key commodities are ‘deforestation-free’.
NGO Global Canopy has calculated that the 150 financial institutions with the greatest exposure to deforestation risk provided US$8.9 trillion to the deforestation economy in 2024.
The TFFF seeks to address this market failure by assigning a monetary value to the ecosystem services provided by standing and restored tropical forests, such as carbon sequestration, water management, biodiversity preservation, and global climate regulation.
Jaquier draws parallels with debt-for-nature swaps in the use of a credit enhancement mechanism to buy discounted bonds, then allocating the savings to conservation projects.
By financially valuing ecosystem services and attracting return-seeking capital to support conservation, the TFFF aims to channel consistent and reliable funding to TFCs that maintain or increase forest cover.
Its two-tier structure consists of the Tropical Forest Investment Fund (TFIF) – the financial arm responsible for raising and managing resources – and the facility itself, which manages the rewards system, eligibility, monitoring, and disbursement rules. The World Bank has been confirmed as the trustee and interim host.
Although its precise investment universe is being worked out, the fund will exclude investments in sectors that cause significant negative environmental impact, such as those linked to deforestation, coal, peat, oil, and gas.
Leonardo Gava, Brazil Country Manager at the Climate Bonds Initiative (CBI), said investing in ‘labelled’ instruments aligned to established standards would help ensure strong institutional demand for TFFF bonds.
“By establishing clear investment criteria aligned with the Green, Social and Sustainability (GSS) universe, the fund could further stimulate this demand. GSS instruments are consistently heavily oversubscribed, reflecting strong and growing investor interest,” he said.
According to CBI, aligned GSS+ bond issuance reached USD262.3 billion in Q1 2025, a 7% increase over the average quarterly volume recorded since 2021.
Jaquier said identifying US$100 billion of bonds within the TFFF’s sustainability guidelines was “feasible”, noting the increasing liquidity of the EM bond universe. Increasing green bond volume would offer investment opportunities for the TFFF, pointing out that the fund’s existence could further stimulate issuance.
“There’s also a case of the demand creating the supply. Whoever they hire to manage the fund can work with issuers to signal increased demand, to structure bonds.”
Signals to governments and investors
According to Ross Pamphilon, Head of Fixed Income at Impax Asset Management, the task of mobilising US$100 billion from institutional investors will depend on as-yet-unconfirmed details around capital structure, credit ratings, maturities and spreads, with the amount of junior capital being the biggest unknown.
“As with any securitisation, the structure is designed to make it attractive for senior bondholders as they are protected by a sizeable junior capital buffer from sovereigns and philanthropies. If spreads/defaults impact past this capital buffer, then senior bondholders would be impacted,” he said.
In addition, institutional investors will be focused on governance, risk management (including exclusions), transparency, and impact. “This isn’t just about returns; it’s about measurable forest protection and support for local communities,” said Pamphilon.
The two are closely linked, with some questioning the ability of the TFFF to deliver expected returns, especially given the economic fortunes of already-indebted nations could be further hampered by the physical risks of climate change.
Critics contend that TFCs’ taxpayers would ultimately absorb the risk, while the profits guarantee returns for global investment institutions, who profit from existing financial inequities.
On the other hand, the TFFF’s potential to incentivise the implementation of policies that mitigate and adapt to climate change could offer upside to issuers and investors.
“Ultimately, the facility’s success will depend on its maintaining credibility with both financial markets and forest countries: transparent, robust governance, strong environmental integrity, rigorous scrutiny and a rating-worthy structure are all essential,” said Anita de Horde, Executive Director of the Finance for Biodiversity Foundation, which has launched a new Sovereign Debt Nature Assessment Model to provide investors with systematic guidance for integrating nature-related risks and opportunities into sovereign debt analysis.
“If these elements are delivered, the TFFF could become a cornerstone example of how global finance can contribute to biodiversity protection while remaining consistent with institutional investors’ fiduciary duties.”
Payments on the ground
Payments to TFCs are subject to annual adjustment for inflation and discounts for deforestation or fire-related degradation. To be eligible, a country must have a deforestation rate, averaged over the previous three years, of no more than 0.5% of its total forested area.
If it works as anticipated, the TFFF offers a measurable way to contribute to the conservation of a global public good and manage systemic climate and biodiversity risks. The fund life is predicted to be 30 to 40 years, offering a consistent, long-term financial instrument.
“The payout would itself provide welcome resources that countries are often constrained from deploying. But also having public annual accounting of how countries are maintaining their forests will increase governments’ accountability to their citizenry,” said Seymour.
Jaquier said the TFFF can also increase pressure on governments for accelerated policy action on deforestation, particularly among the communities that stand to benefit through direct stewardship payments.
“You would expect incentives to grow for people to be quite vocal on limiting deforestation and becoming eligible for these funds. That should be a very important signal.”
Satellite-enabled monitoring will increase transparency on deforestation rates, similar to how KPIs introduced by sovereign-issued sustainability-linked bonds have helped to identify and address unexpected rises in countries’ emissions levels. “I wouldn’t be surprised if the TFFF creates a similar set of incentives,” said Jaquier.
Civil society groups have raised concerns, including that the low canopy cover threshold (20-30%) for defining a forested area is “not scientifically credible” and could allow payments even where industrial logging is occurring.
Further, the current TFFF proposal only considers fire-damaged areas as indicators of degradation, potentially neglecting selective logging and roadbuilding. Additional government scrutiny may need to be boosted to ensure action against structural drivers of deforestation, such as monoculture expansion.
CBI’s Gava admitted the effectiveness of TFFF’s payment mechanisms remain to be tested. “The types of projects that could benefit are often numerous and decentralised. The fund still needs to demonstrate a solid governance structure to ensure its goals can be effectively met,” he said, adding that its structural design made this “feasible and achievable”.
Much may depend on the development of the TFFF operations manual that must codify the detailed rules and procedures for monitoring, and the extent to which feedback from civil society and Indigenous communities is taken onboard. Oversight could be strengthened to include both fire and non-fire degradation factors by fine-tuning measurement standards, aligning the minimum mapping unit with finer satellite data resolution (10- or 30-metres), and ensuring open, independently verifiable data.
Critics have also questioned other aspects of the TFFF’s governance structure, with IPLCs expected to have consultative roles, while the facility’s board will be populated by donor and recipient governments and the directors of the fund will be by sponsoring countries.
Back to Belem
With government commitments standing at US$5.5 billion, following the UK’s last-minute pull-out at the COP30 Leaders’ Summit, the question of junior capital is the largest one currently hanging over the TFFF.
Sources have told Sustainable Investor that “there are still some pennies to drop” in terms of expected further pledges from both public and private sector sources before the summit closes.
While these will provide an important further signal to the private sector, it will be just one step of many before the TFFF fulfils Lula’s ambition.
“It’s not going to be self-implementing. It’s going to take advocacy from all quarters to really keep the momentum going,” added Seymour.
“There’s an element of ‘watch this space’, but overall, it’s a serious attempt to scale up forest finance in a way that aligns with institutional investor requirements,” said Pamphilon.
