Authors: Enrico Biffis, Giuseppe Brandi, Lyndon (Yi Xian) Lee and Andrea Snavely
In this report, we consider in detail security design mechanisms in relation to forestry projects bundled into forestry-backed securities. We focus on foundational concepts of forest aggregation, which should be of interest to any originator of forestry-linked securities. Once the mechanics of risk aggregation are well understood, it becomes relatively straightforward to tranche the forestry pool to deliver forestry-backed instruments with different yields depending on investors’ risk appetite. We therefore devote our attention to understanding the aggregation of forestry assets along different dimensions, separately and jointly. The main risk drivers we consider in our analysis are geography, forestry vintage, wildfire risk exposure and carbon sequestration potential. We also provide examples of multidimensional project screening, taking into account also the biodiversity dimension.