The Paris Agreement, adopted in 2015, sets the ambition to limit global temperature rises to 1.5°C above pre-industrial levels. Recognizing the need to act now, companies and investors are paying attention to the carbon footprint of their investment portfolios and seeking ways to reduce it.
Leading the pack are forestry investments – true impact investments that can really reduce the carbon footprint. According to several studies, forestry is an efficient and low-cost way to remove and store atmospheric CO2.
Roger Naylor (M.Sc. Forest Economics) is in charge of Evli’s new Evli Impact Forest Fund I that offers institutional investors and high net worth individuals access to the world’s leading forestry funds.
Naylor is a “forestry veteran”, with more than 16 years’ experience in forestry investing. During his career, he has evaluated more than USD 3.7 billion in global forest investments. Who would be better suited to outline the key benefits of forestry investing on a global scale?
Best of both worlds – positive carbon impact with higher expected return
Traditionally speaking, Finns are, of course, fond of their own forests. Naylor knows this well, having graduated from the University of Helsinki. But that’s not to say it’s a bad idea to look for “green investments” elsewhere.
“A global forestry investment can target a carbon sequestration effect that is five times greater than seen in Finnish forests,” he says. “For example, a €1 million investment in Evli’s forestry fund can remove an estimated 21,000 tonnes of CO2 from the atmosphere.”
In addition to greater carbon impact, a global forestry fund has higher expected return. Historical returns in the US are over 8 percent annually versus 4.5 percent in the Nordics. “Trees simply grow faster in the target geographies; wonderfully, this drives both the carbon impact and higher return – the two goals are linked,” Naylor points out.
Defensive asset class with cash flow
Admittedly possessing “green DNA”, Naylor says that there’s a lot to like about forests. He gives four reasons:
1. Forestry investments are a secure and most cost-effective way to remove and store atmospheric CO2. Carbon sequestered by the forestry fund is measured and reported to investors on a regular basis.
2. Forestry is a very defensive asset class, which withstands economic cycles well, thereby preserving capital. There is flexibility to time harvests, selling timber during strong markets. In weaker markets, trees are left to grow, increasing the asset value.
3. Forest investing diversifies an investment portfolio very effectively – with low correlation to other asset classes.
4. Forest funds can provide good inflation protection. Naylor is referring to two things here, investing in sustainable real assets with intrinsic value and the diversity of wood products used in the global economy.
The fight against climate change is obviously one consideration in the minds of environmentally conscious investors, but Naylor points out that the impact forest fund offers a rare opportunity to do good and make a return. Forestry offers “a natural climate solution,” he says.
“The demand for wood is growing; for instance, eco-construction using wood instead of high emissions materials like steel and concrete is gaining popularity; urbanization and the need for increased house building are further drivers.”
In addition, population growth is expected to have a positive impact on wood price development over the 14-year life of the fund.
How to invest in global markets?
The fund managed by Naylor is a fund of funds which is an attractive structure from the investors’ perspective. It offers easy access to the world’s leading forestry funds, creating a well-diversified portfolio.
“Forestry fund managers are specialists, highly skilled in acquiring and operating forestry assets on behalf of institutional investors, family offices and high net worth individuals. Reporting, including ESG metrics, meet the requirements of these demanding investors,” he says.
Naylor also points out that some of the funds have a “buy-in” minimum of 10 million dollars. “This creates a significant barrier for some investors, but through a fund of funds, you can gain access to these large-scale funds also.”
$300 billion market, full of opportunities
All in all, the forestry investment business is globally speaking a USD 300 billion market. “Half of that market is in the United States,” Naylor says.
Given this background, it is no surprise that Naylor favours American forests. “These forests offer good cash yield, being already established and located in regions with an extensive wood processing industry,” he adds.
Then there’s the “core plus” region: namely, South America. Plantation forests there have the tremendous advantage of exceptional growth rates: eucalyptus trees, for instance, can grow many times faster than trees in Europe. “South America is very much about planting new forests,” Naylor says.
In addition to the major commercial forest types in the US and South America, Naylor keeps an eye out for high-grade, specialty hardwoods, such as teak.
Good time to invest?
Naylor has spent his career scouring the globe for the best managers and funds. “Now is an opportune time to invest in forestry,” he says.
The long-term fundamentals of demand are positive. New strategies focused on ‘carbon forestry’, which create and sell carbon credits, have become investable. New entrants to the asset class are recognizing that a forest investment can act as an important component in meeting emission reduction targets.
WhoRoger Naylor (M.Sc. Forest Economics)
- Portfolio Manager, Evli Impact Forest Fund
- More than 16 years’ experience in forestry investing, having evaluated more than USD 3.7 billion in global forest investments
NB! Evli Impact Forest Fund is intended for professional investors and a limited number of non-professional clients who make an investment of at least € 100,000 and who are considered to have an adequate understanding of the fund and its investment activities.
Text: Sami Anteroinen
Photos: Roope Permanto