Why Global Funds Now Eye Forest Markets for ‘Compelling Returns’

Fri 20 Oct 23


Global banks are looking to invest in productive forestry, which now “combines a large-scale sustainable investment with compelling risk-adjusted returns.”

That is, according to Ben Avery, Senior Manager from APG, one of three investors who secured Forico in one of the most significant investments in Asia-Pacific forest markets.

APG joins the UK Pension Protection Fund and UniSuper and is the latest institutional investor to go after forestry assets.

As reported by Top 1000 funds, Nest, the UK’s £30 billion pension contribution scheme, has appointed one or more fund managers to help its 12 million members invest in production forests.

Forestry, it says, “shows low correlation with traditional stocks and bonds and is resilient to shorter term-market dynamics,” allowing the forest managers to delay harvesting times if wood prices are low. 

Last year, New Forests Chair, Dr David Brand, said, “Forests are perpetual assets, and you can hold them as long as you.”

With over $10 billion in assets under management across more than 1.1 million hectares of forests, New Forests manages “nature-based assets” in Australia, New Zealand, Southeast Asia, Africa and the UK.

Dr David Brand will be talking about nature capital investment. Footage courtesy of @CNBCInternationalTV.

For Dr Brand, it is also the solution for climate change “both in terms of the potential of forestry assets to absorb and store carbon dioxide from the atmosphere and also to provide low embodied energy and low emission substitutes for higher emitting materials.”

Returns from forests tend to strongly correlate with long-term inflation trends, with many investors, including the Church Commissioners for England, New Zealand Super and the Swedish AP funds, investing in the market over recent years.

“We’ve been exploring ways to include natural capital investments into our portfolio as we diversify our private markets allocation, take advantage of complex and scarce investment opportunities, and decarbonise as we move closer to net zero targets. Forestry (Timberland) ticks all of these boxes,” according to Stephen O’Neill, head of private markets at Nest. 

“The performance of the asset speaks for itself. It’s offered stable total returns underpinned by strong cash yields and should play a complementary role in our portfolio alongside our other illiquid investments.”

According to Mr O’Neill, the key for bidders is the assurance that the asset has a strong focus on “sustainable forest management” and enough scale to maintain a consistent portfolio allocation.

Following the launch of the LEAP framework (short for Location, Evaluate, Assess, and Prepare), financial institutions are now under greater scrutiny to demonstrate the “nature positive” impact of investments.

The AP2 criteria stipulating investment includes adherence to the TNFD and that all forest investments are certified under PEFC or FSC certification.

AP2, the SEK 440 billion (US $44.1 billion) Swedish fund, is also conscious of sustainability and has drawn up ten criteria for classifying its forestry assets as a climate investment. 

AP2 began investing in forestry in 2010, and most of its investments are in Australia and the US in forest assets that produce saw timber and pulpwood.

“An investment in forests is not automatically beneficial to the climate and needs to live up to certain criteria to be classified as climate investment,” according to CEO Eva Halvarsson.

The benefits of vertical integration

According to Mr Avery, the recent acquisition “includes vertically integrated assets and operations.”

Forico is one of Australia’s largest plantation hardwood estates by productive area and consists of vertically integrated assets and operations spanning 90,000 hectares of plantation forests – including access to mills and ports.

“Vertical integration provides greater control over each step of the supply chain,”

Forico’s ‘vertical integration’ includes two sawmills, access to a port and management of a substantial native forest with carbon value. (Photo Credit: Forico)

Allocating money to forestry projects also offsets emissions from other investments and will deliver attractive returns as the price of carbon rises to reflect the increasing pollution costs.

“The investment also brings positive exposure to carbon sequestration capacity. The forests sequestered 123 million tonnes of carbon in 2022,” according to Mr Avery. 

By comparison, the Netherlands’ total emissions in 2021 were equivalent to 168 million tonnes.

“To make another comparison, the carbon balance stored in these forests in 2022 is equivalent to the annual emissions of roughly eight million people in the United States, or taking 27 million vehicles off the road annually,” he continues.

Most of the acquired estate is native forests, which the investors will manage for biodiversity conservation.

“Production forests are typically the primary focus of our investment strategy,” he said.

“However, we recognised a unique opportunity to acquire and become stewards of significant natural infrastructure with assets such as trees, soil, air and water all essential to a wide range of services important to society.”


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