Investors have traditionally been attracted to forestry for portfolio diversification, inflation hedging, and good risk/return performance. Now forest funds attract investors who want to meet net-zero targets.
Forestry is a niche asset class which invests in sustainably managed commercial forests. Returns are delivered via a combination of capital appreciation – from the volume growth of the trees and land and timber price rises – and cash yield from timber harvesting revenues. The long-term 30-year return from US forestry has been 8 percent annually. In 2021, it was was 9.2 percent, according to the NCREIF US Timberland Property Index.
The asset class began in the US in the 1980s when changes to tax laws meant ownership by the forest industry companies became tax-inefficient. A period of divestiture followed. Specialist forestry fund managers called Timberland Investment Management Organizations arose and established commingled funds to acquire and manage the forests.
The major investment regions comprise the US, South America, Oceania, and to a lesser extent Europe. Today, institutional ownership is around USD 100 billion, and the investable universe is estimated at between USD 300 and 400 billion. If carbon markets and prices continue to develop, forestry could become a trillion-dollar asset class.
In the forefront of net zero solutions
Investors have traditionally been attracted to forestry for portfolio diversification, inflation hedging and good risk/return performance. The biological growth of the trees occurs regardless of the state of the economy, providing continued capital appreciation to investors. In periods of lower timber demand and prices, harvesting can be curtailed. This unique characteristic means forestry has a low correlation to other asset classes and has proven to be a very defensive investment, holding its value well in market downturns.
Recently, forestry has moved to the forefront of net zero solutions to mitigate climate change. The ability of forests to remove atmospheric carbon dioxide and store the carbon in growing forests and long-lived wood products is now recognized. Carbon sequestered in a forest investment can be measured, reported, and used to offset emissions from other investment activities within a portfolio through carbon accounting protocols.
Legislation requiring the reporting of carbon footprints is likely to increase, and many organizations have already announced net-zero targets. It is difficult to see how these targets will be met without adding forestry to a portfolio.
Renewed interest in forestry funds
Forestry is attracting renewed interest as long-term fundamentals favor the increased use of wood, and the sustainability characteristics become better appreciated.
Evli offers the opportunity to invest in forestry as part of the alternative investment offering. We have the tools, track record, and experience to deliver successful forest investments.
Evli's Private assets team. Starting left: Richard Wanamo, Nina Skogster, Ville Toivakainen, Roger Naylor, Emma Honkanen, Oskar Karlsson, Ben Wärn.
Our investment model uses a fund of fund structure, which enables constructing a portfolio diversified across managers, regions, strategies, and end markets effectively and speedily. Many target funds have minimum commitment sizes of up to USD 10 million, representing a barrier to entry or making it hard to replicate a well-diversified portfolio without considerable sums to invest.
We have developed in-house tools that enable investors to construct the optimal portfolio to meet their needs. With the intention of rolling out a family of forestry funds, exposure to the asset class can be built over time. A regular pattern of investment creates vintage year diversity.
Our in-house Sustainability Team helps create the ways to evaluate and measure the ESG performance of our target funds. We have a stated carbon sequestration target for our forest investment program and will report the positive impact to investors, allowing them to enter a pathway towards a carbon-neutral portfolio.
NB! Evli's alternative investment funds are intended for professional investors and a limited number of non-professional clients who make an investment of at least EUR 100,000 and who are considered to have an adequate understanding of the fund and its investment activities.