Interest in sustainable and impact forestry investing has been growing steadily over the past two decades, according to a new report by The Global Impact Investing Network (GIIN) titled “Scaling impact investing in forestry”. This presents an opportunity for impact investors to push for social and environmental change in the forestry asset class.
Sustainable forestry projects adhere to commonly accepted certifications such as those by the Forest Stewardship Council and the Sustainable Forestry Initiative. This balances the needs of the environment, wildlife and forest communities and it supports decent incomes while conserving forests for future generations.
Some of the factors driving this trend include the conviction that forestry investments can generate a positive environmental impact such as climate change mitigation, land restoration and social impact. Another factor would be the heightened awareness among investors of climate change, where it is seen as a pressing problem that needs to be resolved.
“It affects everyone in every geography. At this point, it is an inevitable reality of the world that we live in. So, there is a lot of appetite from investors to combat climate change. It is also aligned with one of the sustainable development goals, which impact investors are increasingly targeting,” says Sapna Shah, managing director of GIIN. “Sustainable and impact forestry provide an opportunity to remove carbon from the atmosphere through carbon sequestration efforts. That is aligned with climate change mitigation goals.”
The most common strategies for generating revenue while sustainably managing forests are through sales of timber, other forest products and carbon offsets. This is followed by leasing of land or land rights and sale of land rights for permanent conservation.
The GIIN study of investments into sustainable forestry started in 2017, in a collaboration with Cambridge Associates. They found that the performance of a timber benchmark that consisted of 18 impact funds compared favourably with that of a conventional timber fund universe.
According to the report, the top quartile funds in the impact universe generated net returns of 8.6% or higher as compared to net returns of 4.2% or higher among conventional peers.
Cambridge Associates is a privately held investment firm based in the US. It provides investment portfolio management and advisory services to institutional investors, including foundations and endowments, pensions, private clients, and corporate and government entities. “It was interesting to see that there was a sound financial and impact story there. It shows that this may be a sector that would be of interest to impact investors,” Sapna says.
In general, forestry is a sector that is already present in many investors’ portfolios, particularly for pension funds and family offices. This is due to timber’s historical ability to hedge against inflation and the predictability of cash flows from forests’ biological growth cycles, which could take up to 10 years.