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ESG Focus: Impact investors Eyeing Off Forestry

ESG Focus | May 03 2019

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ESG Focus: Impact investors Eyeing Off Forestry

  • The Global Impact Investing Network (GIIN) has published a report into capital flows in forestry
  • Land-use regulation and carbon-credits are fostering interest in the industry
  • The UN Sustainable Development Goal 15 calls for an end to deforestation, bringing the industry under the SASB guidelines
  • Research from the Leonardo Dicaprio Foundation identifies deforestation as one of three key planks to halt and reverse climate change

By Sarah Mills

The Global Impact Investing Network has published its Scaling Impact Investments in Forestry report in late April.

Forestry is considered a key factor in dealing with carbon emissions and, as a result, impact investors are eyeing off sustainable forestry as a key opportunity, from both an environmental and carbon-credits perspective.

There is a reasonable level of expectation that greater land-use regulation, and a carbon tax, will be introduced within five years. 

The New York Declaration on Forests is just one of a number of government initiatives already in play to halt deforestation, and has been signed by 37 governments, 20 sub-national governments, 53 multi-national companies, 16 groups representing indigenous communities and 63 non-government organisations.

The UN Sustainable Development Goal (SDG) 15 calls for an end to the practice, which means the Sustainable Accounting Standards filings introduced recently, which are linked to the SDG goals, should start having an impact within the next five years.

However, success to date has fallen short of the Declaration’s pledge to halve the rate of deforestation by 2020.

While net global deforestation has slowed -50% over the past 25 years according the UN Food and Agricultural organisation, this is partly because much of the forests have already been denuded, and planted forests have increased. But lopping is continuing across large swathes of the Amazon old-growth rainforests and in other tropical regions such as Indonesia, albeit at a slightly slower rate.

But the carbon profile of the investment is compelling.

The Leonardo Dicaprio Foundation (LDF) One Earth Climate Model published earlier this year by scientific publisher Springer Nature, identifies forestry as a key component in its roadmap for meeting at surpassing the Paris Climate Agreement targets.

The report states that up until now, it was assumed to be almost impossible to achieve the carbon targets needed to keep temperatures below 1.5 degrees Celsius (we would have to cease using all fossil fuels within seven years).

But the LDF research shows that this could be achieved through a rapid transition to 100% renewables by 2050 (65% by 2030), alongside massive reforestation and conservation efforts, which would include a moratorium on land conversion by 2030 (this would have interesting investment repercussions in itself), and a shift to regenerative agriculture.

Research from UTS of the world’s electricity grids suggest that shifting to 100% renewables is not only a possibility but it would be cheaper.

From an investment perspective, it would require a global annual investment of $1.7trn a year, which pales beside current government subsidies to fossil fuel companies (estimated at $5trn by the International Monetary Fund))

The GIIN report notes that interest in sustainable and impact forestry investing has grown steadily over the past two decades.

The report examines asset owners and managers and provides recommendation on unlocking capital into the sector.

An earlier GIIN report, produced with Cambridge Associates, shows that sustainable timber typically outperforms conventional timber. GIIN notes that this has primed the pump for the institutional capital flows.

The report outlines recommendations that will be needed to provide the transparency and predictability to clear the path for that capital:

  • Improve and clarify product market fit – fund structures are often underpinned by different and disparate cash flow, making projection on risk and return difficult.
  • Use blended finance – to mitigate risk for mainstream investors.
  • Develop partnerships – with conservation organisations to access land-rights sales and enhance sustainability (conservation easements in the US have influenced regulation to conserve land into perpetuity while managing and deriving value from the land).
  • Integrate vertically – many sustainable operators are opting for vertically integrated supply chains by investing in management or processing companies, cutting cost and allowing environmental management across the chain.
  • Strengthen communication – to help asset owners understand the business models and risks of forestry funds.

There are those in the market who perceive the forestry business as a long-term commitment, building positions now in the event of regulation on land access – which is expected to be a certainty within the decade.

However, the industry as it stands can be fraught, ranging from companies in land rights battles with natives between Chile and Argentina, government-backed deforestation in areas such as Indonesia and the Amazon, to poorly management tax schemes.

Regulation, standardisation and time will be required to set the stage for these capital flows.

In the meantime, the focus is honing in on supply chains to pressure them to remove non-sustainable timber from operations.

Peter Murphy, Market Building Manager at GIIN, says: “…we’ve long seen significant interest from institutional portfolios driven both by impact and return, as well as by the unique profile of the assets – forests.

The biological growth cycle of trees is not influenced by economic cycles and provides longer tenured investments that often match institutional investors’ portfolio management needs.

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