With ESG investing, it can sometimes be hard to see the wood from the trees. But sustainable forestry could offer the ultimate ‘hedge’ against inflation, given its predictable cash flows. Trees continue to grow no matter what is going on in the economy, and can be continually replenished. Not just that, but as trees grow they absorb (or ‘sequester) carbon, making sustainable forestry a key factor in the fight against global warming.
The April report from Global Impact Investing Network (GIIN), ‘Scaling Impact Investments in Forestry’, describes the opportunity that the forestry sector presents to impact investors. Based on 24 interviews with asset managers, asset owners and services providers, plus analysis of 37 funds and vehicles in sustainable forestry, it found a rise in the launch of impact and sustainable forestry funds, with eight vehicles launched between 2014 and 2016 and another ten between 2017 and 2019.
It is also a relatively easy space to verify sustainability credentials: all of the funds in the GIIN report pursue certification with either the Sustainable Forestry Initiative (SFI) or Forest Stewardship Council (FSC). Most of the funds (73%) identified primarily target environmental impact, with common strategies including climate change mitigation, land conservation/restoration, biodiversity conservation, anti-poaching efforts, and water stewardship. Another 27% of funds explicitly target both environmental and social impact. Among these, common social impact strategies include community development, quality job creation and wage growth.
And what of the investment return? GIIN found, “top quartile funds in the impact universe generating net returns of 8.6% or higher compared to 4.2% or higher among conventional peers.”
It’s not just GIIN that are extolling the virtues of impact forestry investing. The Forestland Group in the US, for example, has set up several real-estate investment trusts for sustainably managed timberland. It makes the following pitch for its product:
“Biological growth of trees provides the engine of returns from timberland investments. As a tree grows, it gains value not only from increases in volume, but also by moving into higher-priced wood-product categories, a process known as in-growth. Tree growth is continuous and is not dependent upon macroeconomic factors that influence most investments. Regular harvests of the timber can capture this growth, or the wood can be stored on the stump while awaiting optimal market conditions.”
To date, The Forestland Group has organised a series of eight core funds, the three most recent of which are structured as private Real Estate Investment Trusts, typically with a 10–20 year investment term. The GIIN report lists many other such forestry funds, too, covering timber, carbon offsets, land rights and land leasing, biomass energy, downstream manufacturing, and tax credits.
While North America dominates the market currently, there are global funds too, such as the Tropical Asia Forest Fund (which manages USD 150 million with investments in Malaysia, Laos, and Indonesia) and the Criterion Africa Partners’ Africa Sustainable Forestry Fund (with eight portfolio companies in Swaziland, South Africa, Tanzania, Uganda, and Gabon).
“We are seeing increasing global interest from leading investors who want to help mitigate climate change and its effects on people and the planet”, says Amit Bouri, CEO of the GIIN. “The forestry sector, if not overlooked, is certainly under-appreciated for the contribution it can make to the environment as well as to the health of communities. Impact investing in forestry has demonstrated favourable financial performance, a sustained track record, and a positive impact on carbon sequestration as well as a number of other environmental conservation benefits.”
According to McKinsey, environmental-conservation projects face a dramatic shortage of funds. Estimates indicate that $300 billion to $400 billion is needed each year to preserve and restore ecosystems but that conservation projects receive just $52 billion, mostly from public and philanthropic sources. Given that earlier research by Cambridge Associates showed that the financial performance of sustainable timber investment managers outperforms that of conventional timber, it’s possible that sustainable forestry investing could be the rapid growth area that environmental-conservation desperately needs.
Interested in reading more about sustainable investing? Here are a few more articles from this series: