As demand grows for nature-based investment solutions, the ability of managed forests to provide uncorrelated and inflation-linked returns alongside the promotion of natural habitats can be attractive to many investors. However, generating attractive long-term returns from timberland while supporting nature requires an experienced forestry manager.
Sustainable and resilient forests
The nature-based credentials of investible timberland are clear. Forests are home to 80% of all land-based species on Earth, providing critical habitats for many rare, threatened and endangered species. Forest assets can also provide additional nature-based outcomes, such as carbon sequestration and water conservation, while still giving investors the chance to generate attractive, uncorrelated returns that have the potential to increase in tandem with inflation.
Delivering outcomes that have both nature-positive and financial objectives from sustainably managed working forests requires the application of science and technology, backed by experience. To pursue these dual objectives, landscape level optimisation plans can be coupled with site-specific treatments to promote a healthy forest condition, which both supports species richness and is more resilient to climate change.
Capturing carbon
Forests are the world’s largest natural terrestrial carbon sink, absorbing roughly 2 billion metric tonnes of carbon dioxide equivalent (tC02e) each year according to research led by the University of Oxford (“The State of Carbon Dioxide Removal, 1st Edition”). The ability of trees to efficiently sequester carbon through photosynthesis means that actively managed timberland offers decarbonisation benefits. Investors have an opportunity to reduce the carbon footprint of their overall portfolio by reallocating capital to a less greenhouse gas intensive asset class, or to generate verified carbon assets (VCAs), or carbon credits, which they can sell to generate yield or retire to further offset their own carbon footprint.
VCA forest carbon projects that target additionality encourage forest growth and biodiversity by incentivising improved forest management projects, or via afforestation, which is the conversion of land that was not previously forested into forestland. VCAs are only generated from the delta, or difference, between these carbon sequestration projects and business-as-usual sequestration.
Supporting nature
Seeking to maximise timberland returns by focusing on nature creates other co-benefits. With 75% of the world’s accessible freshwater coming from forested watersheds, for example, managed forests can help promote soil and water conservation using setbacks, which are spaces in a forest closest to rivers and streams that cannot be harvested to protect waterways and prevent soil erosion.
Advanced forestry management techniques, which work to improve the health and resilience of a forest, also bring additional benefits in terms of the protection they can offer to habitats for a wide range of species. Forest thinning, for example, works by selecting younger trees for harvesting, which opens the forest canopy and allows more established trees to grow faster. While income is generated from the processing of the younger trees, and the value of the older trees can increase as they mature, thinning also supports the many species that depend on older trees, or open spaces to thrive.
In this way, techniques such as forest thinning go hand in hand with conservation. Any rare, threatened, or endangered species identified as potentially living in an area of timberland can be registered and the forest’s management plan can be adapted to maintain the generation of returns while helping to support native wildlife or vegetation. For instance, restrictions can be imposed to specify that no timber harvesting occurs within a certain distance of a nesting site, or of a migration pathway.
Measuring impact
While the nature-based aspects of sustainable forest management are clear, the recommendations of the Taskforce on Nature-Related Financial Disclosures (TNFD) are leading to increased interest in investable timberland.
In the same way that the Taskforce for Climate-Related Financial Disclosures (TCFD), and now International Sustainability Standards Board (ISSB), enables more effective disclosure of climate risks and opportunities, the TNFD aims to do the same for evolving nature-related risk exposures. However, quantifying the total impact of an investment on nature remains challenging despite these reporting developments, particularly for nature-based real assets, such as timberland. Most existing metrics focus on the negative impacts that an investment could have on biodiversity but often fail to take into account the potential benefits.
To try to address some of these limitations, timberland managers can develop programmes to identify and record natural attributes, such as unique habitats, species, cultural heritage sites, and waterways that may exist on the property. Managers can then look to measure the impact that their management of specific properties has had on nature, or on carbon sequestration, for example.
Conclusion
When it comes to investing in sustainably managed timberland, the potential for generation of positive economic returns goes hand in hand with the maintenance of healthy, resilient forests. With ongoing efforts to measure the impact of investments on the natural environment highlighting timber’s nature-based credentials, the ability of forests to support wildlife habitats, or to offset carbon emissions through photosynthesis, is helping to drive further interest in the asset class.
