Author: Sophus zu Ermgassen, University of Oxford
Forest financing still linked to timber
Europe has an extensive forest estate, and historically, the major driver of revenues from forest creation and restoration has been the sale of timber and forest products. However, demands on European forests to deliver more multifunctional benefits are growing. Various European policy strategies set goals and targets for the restoration of forests and the delivery of non-market goods and services such as carbon sequestration, recreation, biodiversity objectives, and other ecosystem services.
A recent analysis by a SUPERB team (Lovrić et al. (2025) evaluating the major drivers of revenues across European forests found that the vast majority of revenues still come from production forestry. As a result, European forests are underdelivering other ecosystem services that are not directly linked to the sale of timber and forest products. In order to deliver more multifunctional forests that achieve a wider set of European policy objectives, many believe it is necessary to financially reward forest owners for providing a broader range of ecosystem services beyond timber and other provisioning services (Löfqvist & Ghazoul 2019).
How can we incentivise forest owners?
There are many ongoing initiatives that aim to assign financial value to these non-market ecosystem services delivered by forests, thereby incentivizing forest owners to generate a more diverse set of benefits (zu Ermgassen & Löfqvist 2024). Such mechanisms seek to commodify changes in environmental quality associated with forest management practices and then enable forest owners to sell credits representing improvements in environmental quality (zu Ermgassen et al. 2025b). These include forest-based carbon markets and carbon credits, and there is an increasing emphasis within the EU on nature credits via the EU’s nature credits roadmap, which represent commodified improvements in biodiversity.
As it stands, these potential revenue streams are not yet well developed or mature. However, many believe that if forests are to deliver greater multifunctional benefits, these new revenue streams would need to become credible potential sources of income for forest owners. The EU is implementing several initiatives to develop markets for carbon and nature credits, with the potential to drive private investment in forest restoration for more than just timber benefits (zu Ermgassen et al. 2025a). These initiatives are still in their early stages, and the revenues generated from selling carbon and nature credits are not yet sufficiently attractive to draw widespread private investment in forests for ecosystem service delivery.
What is needed to upscale private investment in biodiverse forests?
In general, to attract private investment, these mechanisms must deliver competitive returns compared with other common investment types or alternative forest management approaches focused on timber value. At present, they do not yet match the risk–return profile of more conventional investments and are therefore not attractive to most private investors (Flammer et al. 2025). However, many envision that with supportive policies, these revenue sources have the potential to scale up significantly.
Our research on SUPERB has explored how policy frameworks, emerging biodiversity measurement methodologies, investor motivations, and regulatory structures play a foundational role in upscaling private investment in forest restoration for the delivery of these multifunctional benefits (Liu et al. 2025; Wunder et al. 2025; zu Ermgassen et al. 2025b, 2025a).
Our research also demonstrates that, to date, the biggest barrier to private investment in forests for diverse ecosystem services is the lack of demand for the credits produced through these mechanisms (Duffus et al. 2025; zu Ermgassen et al. 2025a). In 2023, the international voluntary carbon market experienced a major shock following the discovery of widespread non-additionality of carbon credits (West et al. 2023). This effectively transformed credits that many investors viewed as assets into liabilities, as those who had purchased carbon credits faced scrutiny and occasionally reputational damage. Consequently, the value of voluntary (avoided deforestation) carbon credits fell, increasing the risk associated with credit-based investments. This setback made private investment in forest-based carbon credits in the international voluntary carbon market less attractive; and has also made investors in other nature credit systems more wary of potential risk (zu Ermgassen et al. 2025a).
What can governments do to help?
To scale up private investment in diverse forest benefits, a strong driver of demand for the credits generated through forest restoration is required—most likely through government intervention to create mandatory demand drivers. Historically, markets that rely solely on voluntary participation have not scaled to the same degree as mandatory markets – by far the world’s largest nature markets are the regulation-driven wetland mitigation markets of the USA, where policies creating a mandatory driver of demand have existed since the 1970s (Damiens et al. 2020; UNEP 2023).
It is still too early to evaluate the ecological or financial performance of many emerging initiatives designed to capture the broader ecosystem service values of European forests. Our research has explored various aspects of these developing systems. In a series of recent review papers, our SUPERB team examined dozens of different nature credit mechanisms, evaluating them based on how they measure changes in nature, estimate the impact of investments, and meet other relevant criteria (Wauchope et al. 2024; Wunder et al. 2025).
Alongside the nature credits roadmap, the EU is currently developing its Carbon Farming Regulation, which aims to establish rules and guidelines for carbon offsetting in Europe through forest restoration and other nature-based solutions. Many European countries also operate their own domestic nature-based carbon markets. A few—such as England and Germany—have introduced biodiversity or landscape-related markets that drive private investment in ecosystem and forest restoration (zu Ermgassen et al. 2025a).
The financial performance of many of these investments remains largely unknown, as most of these initiatives are still in their early stages. What is clear, however, is that we are not yet seeing substantial investment in forest restoration for the delivery of ecosystem services beyond the traditional provisioning services of timber and other forest products (Lovrić et al. 2025); but that there is a great deal of policy innovation occurring at the EU level and within member states currently, as countries grapple with how to increase private investment in nature to achieve objectives in policies such as the EU restoration regulation, and Target 19 of the Kunming-Montreal global biodiversity framework.
References
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