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Institutional investment
in sustainable forestry
David Brand and MaryKate Hanlon, New Forests Pty Ltd, Australia
I
nvestors acquire forests or ‘timberland’ to generate long-
term returns from both the sale of harvested timber as
income and the capital appreciation from biological growth
of the tree crop.
1
Forestry investment by institutional inves-
tors has grown steadily since the 1980s, and it is estimated
that approximately US$48-60 billion has now been invested by
pension funds, insurance companies, foundations, endowments,
and sovereign wealth funds.
2
This growth in forestry invest-
ment has come about because the annual returns tend to show
low volatility, have limited correlation with other asset classes,
and have a positive correlation with inflation, and also due to
the fact that long-term investment in relatively illiquid assets
such as forests provides a good match for the long-term nature
of most institutional investor liabilities. Therefore forestry or
timberland can provide both portfolio diversification benefits
and a hedge against inflation.
Institutional investment in forests largely originated in
the United States, where the bulk of invested capital
remains today; however, in recent years the forestry
asset class has expanded internationally. An increas-
ing amount of institutional capital is directed to Latin
America, Australia, New Zealand, and now also Eastern
Europe, Asia, and Africa. As the level of investor interest
has grown, specialist fund managers have emerged to
offer regionally focused investments and also thematic
funds focused on particular species or niche investment
strategies. Such focused and thematic investment strate-
gies offer the potential to harness institutional capital
to support the expansion of sustainable forestry in key
new markets. New Forests
3
expects institutional inves-
tors will play an important role in defining the future of
the forestry sector, including bringing an emphasis on
sustainability, placing capital in new regions with new
market opportunities, and bringing new technology and
management know-how to emerging markets.
Investor demand for sustainable forestry
Through its interactions with institutional investors,
New Forests has seen an increasing emphasis on the
ways that managers integrate environmental and social
sustainability into their investment strategies. Generally
speaking, institutional investors are paying increased
attention to environmental, social and governance
(ESG) factors throughout their investment portfolios,
including in research and analysis, manager selection
due diligence, reporting requirements, and operational
management guidelines or standards. Some of these
investors may be concerned that potential investments in
real assets, such as timber, agriculture, natural resources
extraction, energy, and infrastructure, may have nega-
tive social and environmental impacts. These negative
effects may create significant risks for project cash flows
as well as wider reputational risk for the investors. In
order to help manage these risks, some investors require
their managers to become signatories to the United
Nations Principles for Responsible Investment (UN
PRI),
4
develop comprehensive ESG policies and ensure
their investments adhere to strict performance standards
such as those developed by the IFC, Forest Stewardship
Council or PEFC. Some investors are taking a long-term
view and actively looking to invest in assets that may
hedge against the potential impacts of climate change or
The island of Kolombangara
The island of Kolombangara in the Solomon Islands demonstrates a
mixed-use land-use system that combines production, conservation, and
community land use zones in geographically distinct areas. Kolombangara
Forest Products Limited (KFPL) holds a lease over approximately three-
quarters of the island
Source: KFPL