Forestry has gotten a pretty bad wrap in recent years, particularly in the UK where the collapse of Ethical Forestry in 2016 due to severe mismanagement and alleged fraud jeopardised the savings of more than 3,300 investors.
However, a recent report from the Global Impact Investor Network (GIIN) suggests that the sector could be ready for a resurgence, with its research suggesting that sustainable forestry investments can significantly out-perform non-sustainable investments.
The report, Scaling Impact Investments in Forestry, follows a study in 2017 in which GIIN and Cambridge Associates compiled a series of investment benchmarks (baskets of different types of investments) that tracked ‘real’ impact assets like forestry.
The performance of the timber benchmark, comprising 18 impact funds at the time, showed that the average sustainable forestry fund delivered 8.6 per cent per year compared to just 4.2 per cent for non-sustainable forestry peers.
Interestingly, GIIN’s findings are supported by recent figures from The Investment Property Databank UK Annual Forestry index, which showed that in the ten years to 2015 UK forestry delivered annual returns of 18.4 per cent. By way of comparison, the FTSE 100 index of the UK’s biggest companies returned 4.8 per cent per year.
What is forestry?
As one might imagine, forestry involves trees: growing them, harvesting them and using them for things like paper and furniture. This can be done unsustainably – as has sadly been the case for decades – or it can be done sustainably, with methods used either preserving or enhancing woodland.
You can invest directly in forestry, however you will need a fair amount of disposable cash. Minimum investment amounts range from around £50,000 for a small plot of woodland in the UK to £3 million to get involved in commercial scale operations. For the former check out Woodlands.co.uk and for the latter consult your wealth manager.
The best way for the average investor to get involved, however, is through funds. According to GIIN, though, there are currently just 37 forestry funds in the world that it deems to be truly sustainable. Moreover, their combined assets under management (the total amount of money inside all of them) is around $9.4 billion. Again for comparison, the total market value of Apple – the world’s eighth biggest company – is $265 billion.
Opportunity knocks (on wood)
This, argues GIIN, underlines the significant opportunity that exists in sustainable forestry, which it says has the potential to contribute meaningfully to a cleaner, greener and more sustainable future.
For example, of the 37 funds it assessed GIIN claims that nearly three quarters (73 per cent) target environmental impact, with common strategies including climate change mitigation, land conservation and restoration, biodiversity conservation, anti-poaching efforts and water stewardship.
Moreover, another 27 per cent of funds explicitly target both environmental and social impact, with strategies including community development, quality job creation and wage growth, management of land and land rights conflicts and health and nutrition.
Amit Bouri, CEO of the GIIN, concludes: “We are seeing increasing global interest from leading investors who want to help mitigate climate change and its effects on people and the planet. The forestry sector, if not overlooked, is certainly underappreciated for the contribution it can make to the environment as well as to the health of communities.
“Impact investing in forestry has demonstrated favorable financial performance, a sustained track record, and a positive impact on carbon sequestration as well as a number of other environmental conservation benefits.”
As highlighted above, currently forestry is a highly niche investment area. In the UK, private investors have access to just a few main market funds including the iShares Global Timber & Forestry UCITS ETF and the iShares S&P Global Timber & Forestry Index – neither of which have a sustainability mandate.
Pictet Timber is another option. It states that it does not invest in “ecologically sensitive areas or countries where the integrity of the forest is not guaranteed.” The manager notes, however, that the fund does invest “across the entire forest value chain” which includes consumer companies such as Kimberly-Clark, who manufactures products made out of wood fibre such as tissues, paper towels, and other hygiene products.
Other opportunities exist, however as underlined by the collapse of Ethical Forestry (which was subsequently investigated by the serious fraud office) they are usually unregulated and high risk.
John Fleetwood, director of 3d Investing, comments: “Unfortunately the spivs got hold of forestry investment and sold dodgy deals in developing countries where most people lost all of their money.
“However, there are real benefits. I was a founding director of the Cochabamba Project, an industrial and provident society investing in an Amazonian reforestation project in Bolivia. All in all though, investing in forestry hasn’t yet proved to be financially rewarding, and so I would be wary.”
The above is not a point missed by GIIN, who in its report outlines a number of recommendations that could open up forestry to further investment and expansion, including strengthening communications between forest owners, fund managers and investors and improving products to be clearer and better defined.
Pete Murphy, Market Building Manager at the GIIN, concludes: “This report confirms that forestry presents significant opportunity for impact investors at a time when we can no longer avoid the realities of climate change.
“In fact, we’ve long seen significant interest from institutional portfolios driven both by impact and return, as well as by the unique profile of the assets – forests. The biological growth cycle of trees is not influenced by economic cycles and provides longer tenured investments that often match institutional investors’ portfolio management needs.”
With all this potential, then, forestry may be the next big impact investment trend – once the vehicles are there to take investor cash, that is. In the meantime, watch this space.