Impact forest investments: Seeing the carbon sink for the trees

4814910020

Forests can be valued not only for their timber but for their ability to capture carbon dioxide also. For the carbon-conscious investor, forestry investments offer a way to reduce the carbon footprint of their portfolio.

As the world is looking for different ways to tackle the climate crisis, investing in forests, is undergoing a renaissance.

Traditionally, institutional investors have been drawn to forests due to good long-term returns with low volatility, the defensive nature of forestry and the low correlation with other asset classes. Now, forests have become a very attractive option for the carbon-conscious investor, too.

“An investment in forestry can reduce the carbon footprint of an investment portfolio and move it towards carbon neutral,” says Roger Naylor, M.Sc., Forest Economics.

Forests act as carbon sinks, removing and storing carbon dioxide from the atmosphere and are an efficient and low-cost solution to mitigate climate change according to several studies. Investing in forestry can reduce the overall carbon footprint of an investment portfolio and be used to compensate for carbon emissions from investment activities elsewhere.

“In order to maximize the carbon impact in forestry investments, you need to invest globally – for example in regions like the US and South America. Trees just simply grow faster in those geographies. Wonderfully, this delivers both greater carbon impact and higher annual return – the two goals are closely linked. For example, the historical returns from US forestry are over 8% annually versus 4.5% in Scandinavia, where trees grow slower,” Naylor tells.

Commercial forests capture carbon in several ways

Investors can estimate the carbon emissions of their investments using carbon footprint data provided by rating agencies such as MSCI. Naylor explains that leading forestry fund managers have developed metrics around sustainability reporting for demanding institutional investors.

“Based on appropriate carbon accounting methodologies, forestry fund managers can report the amount of carbon captured on an annual basis,” he explains.

The methods and understanding of how much carbon forests can capture has developed significantly in recent years. This holds true especially for commercial forests.

“From the climate’s viewpoint, it doesn’t matter in which part of the tree the carbon is stored”, says Juho Penttilä from Simosol, a Finnish company specialising in forest optimisation and carbon modelling.

Modern carbon capture models are based on scientific research and satellite data from forested areas. To fully assess the value of the forest as a carbon sink, you need to consider the entire biomass of the tree, not just the commercially valuable bits: the stem, the roots, and the branches. The soil in which the trees grow captures and stores carbon, too, for example from litter fall, dead wood, and harvest residues. Normally this results in accumulation of vast amounts of carbon in the forest soils.

And it doesn’t stop there. To make the modelling complete, you need to take into account the carbon stored in the wood products, their transport and manufacturing emissions, the lifecycle of the products as well as the impact of replacing more emission-intensive products, such as steel, concrete and plastics with wood-based products – in short, the entire value chain of the industry.

As forest investments mainly target forests managed for wood production, this kind of holistic approach to carbon capture helps investors evaluate the carbon footprint of their portfolio more accurately.

“In the same way investors receive a yearly report on how the commercial value of their forest is evolving, they can now follow and interlink long-term strategic objectives with the climate impact targets for their forest investment. Real impact comes from pushing the status-quo and turning ambitions into strategic decisions,” Penttilä says.

The changing value of the world’s forests

It is becoming more and more evident how important forests are for capturing carbon and fighting climate change. This function of the forest can be taken into account in the value of the forest, in addition to the commercial timber value.

The Boston Consulting Group estimates that the total value of the world’s forests amounts to a staggering 150 trillion dollars, almost double the value of the global stock market. The largest part, up to 90 per cent, of that value comes from the forests’ ability to regulate the climate through carbon storage.

When it comes to forestry investments, this aspect is still largely unpriced, Naylor notes. However, change is already happening:

“Pioneering fund strategies offering ‘climate-smart’ forestry are now available.”

Emission Trading Schemes, such as the California carbon market have created a new source of revenue for forestry investors. Forest owners can be paid to leave the trees standing instead of harvesting by issuing verified carbon credits. A carbon credit is created through a measurable removal of atmospheric carbon dioxide. As the forest grows, additional volume can either be sold as logs into traditional wood markets or as additional carbon credits in offset markets.

“Forests are currently undervalued. These carbon credit strategies are a first step to addressing that and can provide enhanced returns to investors. The forest sector is increasingly recognised as a source of green building materials and other low-carbon products for the bioeconomy. There is tremendous opportunity in an investment you can feel good about holding in your portfolio”, Naylor concludes.

Read also

Evli's Roger Naylor: 4 reasons to invest in forestry

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.