This article first appeared in The Edge Malaysia Weekly on December 30, 2024 - January 12, 2025

The perennial question in the world of climate finance has been how capital from the private sector can be channelled to forest conservation. In Malaysia, this is complicated by the fact that forests are under the purview of each state, which has its own priorities and strategies.

However, as the demand for carbon credits is expected to increase from corporations and entities that want to offset their emissions, the federal government recognised the need to streamline this process at the national level.

That was why the Malaysia Forest Fund (MFF) was established by the Ministry of Natural Resources and Environmental Sustainability in 2021 to facilitate and mobilise financing for the forestry sector in Malaysia.

The MFF offers two main instruments — the Forest Conservation Certificate (FCC) protocol and the Forest Carbon Offset (FCO), which serve the different needs of companies. The FCC is a non-market-based instrument that pools voluntary contributions from the private sector to support forest-based projects.

“Before this, companies were doing corporate social responsibility (CSR). Now, they’re looking into impact financing. We do that by providing third-party assurance on how much these players are supporting the forest [projects],” says Suhaini Haron, senior director of corporate and strategy at MFF.

Eligible activities under the FCC include protection or conservation of existing forests; increase in forest area of permanent reserved forests, permanent forest estates, protected areas or totally protected areas; restoration of degraded forests; and community engagement.

According to MFF, verification of forest conservation benefits is a core feature of the FCC, where participants have to report a set of mandatory indicators based on the eligible programmes to provide transparency. There will be project reviews, third-party audits and a public registry.

MFF is currently evaluating three verification bodies to perform the assurance service. 

It must be noted that obtaining the FCC is a voluntary effort and it does not generate carbon credits.

“In the early years, companies focused on tree planting because it was a tangible project that could be reported. But now, they can go beyond tree planting, where the FCC recognises the full spectrum of forest management,” says Suhaini.

For instance, the MFF has identified a forest in Sungai Besi Tambahan that was gazetted as a forest reserve in 2019. However, necessary activities such as land demarcation have seen prolonged delays due to the need for additional funding.

“How companies can support projects like these is to fund the land demarcation or even the development of the forest management plan,” she says.

This is a pilot site given to MFF to evaluate the FCC protocol and test if such public-private partnerships can be efficient.

Providing funds for the rehabilitation of gazetted forest reserves, however, is typically the responsibility of the government. Why is the FCC required for this purpose?

When asked, MFF responds that the idea behind the FCC is to mobilise private sector funding for forest initiatives, so that it does not just rely on government funding.

The MFF has so far profiled seven states in Malaysia and identified 79 potential sites that can be supported through the FCC. One example is a forest newly gazetted as a replacement forest for the Sungai Besi-Ulu Klang Elevated Expressway in Kuala Lumpur. Again, even though this forest was gazetted in 2019, the physical boundaries have not been determined and there has been no management plan.

“This is a former mining site. If you were to plant trees, they would die because there is no top soil. What they can do is to start restoration by doing soil treatment, before doing tree planting … We also look into how funding can be channelled to improving connectivity among fragmented forests,” says Suhaini.

When asked why a former mining site was chosen as a replacement forest, MFF says it is outside of its mandate as it focuses on financing forest initiatives. One view is that such efforts can rehabilitate degraded forests, which would otherwise remain in its damaged state.

The forests are not necessarily on government land. Some companies have submitted applications for their land as well. For instance, some companies have high conservation value areas within their plantations. Their efforts to restore and manage these forests can be recognised through the FCC, says Suhaini.

The duration of projects recognised by the FCC will be up to the donor and project developer. Suhaini says MFF wants to encourage companies to go beyond CSR activities and support projects in an area for a longer timeline.

“If you’re looking at tree-planting programmes, some projects only require a one-off type of support, but the continuation of tree monitoring to ensure its survival has to be maintained.”

For companies that want their forest conservation efforts not only recognised but also used for offsetting their own emissions, the FCO becomes more suited for purpose.

The FCO is essentially a carbon credit, which is a market mechanism that transfers emissions reductions from a forest-based project to buyers. It was envisioned as an alternative to the international carbon credit standards, which may not consider certain contexts particular to Malaysia.

Thailand, for instance, has its own national carbon credit standard. “We realised that government-based crediting systems are usually coupled with tax or emissions trading scheme programmes that provide some sort of flexible measures for companies to transition before they can achieve net zero or carbon neutrality,” she says.

Therefore, the FCO is meant to quantify, measure, monitor and verify greenhouse gas (GHG) removal or avoidance benefits from forest-based projects that can be used by companies as a solution for achieving net zero emissions. It includes methodologies for GHG estimation, addresses permanence and leakages through buffers or adjustments, requires independent assessment, monitoring and reporting of emissions reductions, and independent review and verification.

MFF aims to fully operationalise the FCO by next year so it can be submitted for consideration under the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation programme.

The FCO will also be aligned with Verra and Gold Standard to the extent where it is possible, says Suhaini. A memorandum of understanding has been signed with the former, while MFF is under final discussions with the latter.

“We are approaching them because we don’t believe in starting from zero. Some of our programmes can actually be co-labelled. We are looking at potentially creating a specific methodology within that system that can be mutually recognised,” she says.

This means MFF can utilise some of the existing standards and fill in any gaps that it identifies.

“International standards are designed to be as broad and inclusive as possible, accommodating diverse circumstances in different countries. While these standards can be highly rigorous, their generic nature may not fully address the unique challenges and priorities of specific nations,” says Suhaini.

“A government-based system, on the other hand, allows for tailored approaches that directly respond to local conditions and needs, ensuring greater relevance and practical impact.”

Certain standards, for instance, would only recognise an area for reforestation if it has not been deforested in the last 10 years. “In Malaysia, an area that is not deforested for 10 years would have been lost to agriculture or other land use,” she says.

Another example is that in Malaysia, commercial activities like tree plantations for harvesting are allowed in forest reserves. An improved forest management programme in these plantations would not be allowed under some of the international standards.

“As we progress, when we have the methodology and more such projects implemented in Malaysia, we will begin to understand that not all activities or methodologies in international programmes will be applicable in the Malaysian context,” says Suhaini.

It is worth noting that if the project is too small, the investment required to get it verified according to international standards might not be feasible, she adds.

“It is a question of economies of scale. The cost of certification and project development or consultancy will add up. And for a small project, it is not sizeable enough [to make economic sense].”

The FCO is being developed with a technical working group (TWG), which includes the Ministry of Natural Resources and Environmental Sustainability, the Forestry Department of Peninsular Malaysia, the economic planning units of several states, several universities, companies such as Petroliam Nasional Bhd (Petronas) and Samling Timber Malaysia, and consulting firms.

But how can Malaysia convince others that its national carbon credit standard is credible?

Suhaini says the FCO will meet market requirements set by the likes of Corsia and the Integrity Council for the Voluntary Carbon Market.

“The intention for the FCO is not to lower the standard. It’s really about building a system that is tailored to Malaysia’s circumstances, rather than developing a system that is more relaxed,” she explains.

MFF is planning to come up with seven methodologies for the FCO, which covers improved forest management, afforestation, reforestation, wetland restoration, avoidance of emissions and reducing deforestation.

A public consultation on four of the methodologies will be held next year, while another three are still being developed. The FCC has already been launched. Fourteen applications for projects have been received from seven states, says Suhaini, and the advisory committee has endorsed two projects. “We are now matching the projects with donors. We hope to sign at least two conservation agreements by the year end,” she adds.

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