Forestry and natural capital

This article is not investment advice.

Why we think sustainable productive forestry should form the basis of a natural capital portfolio.

Natural capital encompasses the world’s natural assets – air, water, soil, and biodiversity – these combine to provide a flow of benefits to people. Some of these benefits are reflected in today’s nature markets which are mostly made up of commodity production, including timber and agriculture. These are established markets with known risk/return profiles for investors but varying outcomes for nature.

Investors building natural capital portfolios may want to consider how they can create a strategy that is grounded in established, sustainably managed nature markets, such as sustainable productive forestry, and then build on this base  through additional allocations to newer nature markets.

Newer nature markets gaining traction include carbon credits, biodiversity creation and sustainability linked bonds. These nature markets can often rely on voluntary commitments from corporations or governments, making the return profile uncertain, which can be a challenge for some investors and an opportunity for others.

Here we highlight five reasons we think sustainable productive forestry should be considered as a key component of any natural capital portfolio:

Scale
There is the confidence in sustainable productive forestry to make sizable investments in land and trees and many forestry funds available to institutional investors would be at least $500 million in size with a three year investment period¹. Scale can be achieved with certainty even where forest assets are in small, fragmented holdings such as the forestry assets we manage in the UK and Ireland. This is starkly contrasted by emerging natural capital opportunities where investment opportunities are currently relatively small.

Investment return
Sustainable productive forestry has a long track record of delivering stable, long-term returns. In a recent study, productive forestry investments outperformed all other key asset classes over a 25-year period². In addition to higher returns, productive forestry has been shown to be less volatile than many other asset classes and also provides some protection against inflation³. When looking at other natural capital opportunities, these lack the long-term track record of returns. Certainly, there are opportunities for high returns, such as conservation offsets and forest avoidance projects, but these are usually associated with higher risk.

Risk
Growing trees for timber products is a mature and well understood business. In addition to the long track record as an asset class, it is underpinned by large macroeconomic trends. These include a growing demand for timber products by population growth/urbanisation, housing shortages and an increasing requirement for timber to replace carbon intensive products like cement and steel. While some of these drivers are shared with other natural capital opportunities such as fisheries and regenerative farming, it is the lack of track record and market development that differentiate the risk profile of these opportunities.

Integration
A core allocation in sustainable productive forestry provides the means to integrate many natural capital aspects into the same asset base. This includes environmental and social values including carbon sequestration and biodiversity. Unlike traditional agriculture, sustainable productive forestry, including afforestation, supports the reduction of existing carbon emissions by sequestering carbon and storing that carbon in wood-based products which can substitute carbon-intensive materials and contribute towards a circular economy. International forestry standards ensure that biodiversity is maintained, conserved and enhanced. Sustainable productive forestry also provides social benefits for rural communities with critical employment opportunities as well as access to nature.

Market acceptance
An allocation to sustainable productive forestry means investors can be confident they are allocating to an asset class with a proven long-term track record, credible return profile⁴ and a solid base to underpin investments in a range of developing natural capital markets.

Commitment to sustainability

It is also crucial for investors building a natural capital portfolio to be aware that not all existing nature markets are good for nature. When assessing opportunities in established and new nature markets it will be important for investors to ensure appropriate sustainability practices are applied to generate long-term returns for investors and for nature.

Here at Gresham House we manage forests in line with relevant sustainable forestry standards⁵ and certifications, looking to enhance these requirements where practical. We also monitor a range of sustainability key performance indicators (KPIs) and are looking at how to better measure the biodiversity in the assets we manage so we can develop plans to enhance outcomes for nature across our forests. Further detail on our sustainable forest management approach can be found in our Forest Charter (available on request).

About Gresham House’s natural capital platform

We are the ninth largest natural capital manager globally⁵ and are investing in an increasing range of scalable and profitable natural capital assets.

We provide our clients with a platform of return generating natural capital assets with established track records, including sustainable forestry, carbon forestry, sustainable agriculture and biodiversity creation. Each asset has different risk and return profiles and outcomes for nature. We work with our clients to provide access to these options to create their natural capital portfolios and promote the transition towards a more sustainable economy.

1. Source: Gresham House
2. Source: NCREIF, Bloomberg, S&P, MSCI, Bureau of Labor Statistics, Macrotrends. Gresham House, Investing in forestry: resilience and future growth prospects, December 2022
3. These include the FSC® (Forest Stewardship Council®), and PEFC™ (Programme for the Endorsement of Forest Certification)
4. Source: Gresham House, Investing in forestry: resilience and future growth prospects, December 2022
5. Source IPE Real Assets, January/February 2024

Disclaimer: Capital at risk. Investors may get back less than they originally invested. This does not constitute investment advice. The value of an investment and the income from it is not guaranteed. Case studies presented are for illustration of the strategy and should not be construed as investment advice.

Gresham House Asset Management Limited (FRN 682776) is authorised and regulated by the Financial Conduct Authority.