WHY INVEST IN TIMBERLAND?
From the financial point of view, timberland investments present a number of characteristics that make them particularly attractive for long-term investors:
- Competitive risk-adjusted returns – this means that, for a given level of risk, timberland investments provide higher returns compared to other asset classes or, conversely, that they involve less risk for a given rate of return;
- Inflation hedging capacity –timberlands are real asset that maintain or increase its value over time, timberland investments provides protection against inflation;
- Low correlation to the main assets –timberland returns have historically shown to be inversely or negatively correlated with traditional asset classes in the stock market.
These characteristics result from the nature itself of this asset class: biological growth, being the most important return driver, is independent of macroeconomic and financial markets conditions typically affecting traditional asset classes. Moreover, the flexibility in terms of harvest timing (harvest when market conditions are ideal) reduces the risk, making timberland investments a good opportunity in terms of portfolio diversification.
POSITIVE AND MEASURABLE ESG IMPACTS
Besides the financial performances, timberland investments are increasingly attractive in the framework of Sustainable and Responsible Investment (SRI) and impact investments strategies, in particular for those segments related to climate-change mitigation and adaptation. Indeed, forests play an important action absorbing carbon dioxide (CO2) from the atmosphere and are essential for the provision of renewable raw materials as well as many other valuable environmental services such as the conservation of soil properties, regulation of the water cycle, protection of biodiversity; moreover, they play an important role for human social and economic development.
At the core of SRI and impact investments strategies there is the ability to measure Environmental, Social and Governance (ESG) impacts and monitor progress and, in this regard, the forestry sector is at a very advanced level, adding substantial value to the asset. Specifically, today there are more than 50 standards, quality protocols and rating systems applicable to forestry investments to ensure their environmental sustainability and to mitigate technological, legal, reputational and social risks
WHAT IS AN INVESTMENT IN TIMBERLAND?
Timberland investments represent an allocation of financial capital in a real asset, and consist of the acquisition and management of bare land to afforest or of a forest stand, with the goal to obtain a financial return, which is generated by four components:
- The biological growth of trees producing timber, fibres or other marketable forest products, which is considered to be the most important return driver;
- The long-term forested land capital appreciation.
- The increase over the medium long term in the prices of timber and wood products, since the demand for timber has been estimated as increasing by over +30% from the present to 2030. This increase is driven, on the one hand, by the evolution in consumption habits that are shifting towards products with low environmental impact and, on the other hand, by bioeconomy policies that foster the transition towards production and energy systems based on biomaterials, such as timber and biomass.
In addition, in recent years, timber trade is no longer the one and only purpose, but the investment models are often extended also to the marketing of other forestry products and services. Therefore, an increasingly important component of timberland investment returns derives from High and Better Use (HBU) sales, such as CO2 sequestration, recreational services, biodiversity protection, soil conservation and other ecosystem services.
Average composition of timberland return (%)
Timberland investments have been traditionally held by forest products industries to secure their timber supply as well as by local landowners as a source of income or for maintaining their capital. Timberland investments as assets for financial investors have a more recent history.
The first remarkable examples of financial timberland investments have been promoted by pension funds in the United States and in the United Kingdom already in the 1970s and 1980s, which started to invest in timberland as a mean to diversify their investments to minimize the risk of large losses.
In recent decades, research highlighted the strategic potentials of timberland investments within investment portfolio, attracting new professional investors and expanding into new regions and market segments. Globally, the capital placed in timberland has increased from about 1 billion USD in the 1980s to over 100 USD billion at present.
Source: Bridge Ventures modified (2015)
HOW DOES THE INVESTMENT PROCESS WORK?
Etifor provides consultancy support to investors throughout the investment process and portfolio management:
We are members of the Italian Sustainable Investment Forum (ItaSIF) and signatory of the United Nations Global Compact. In addition, we are a members of the Forest Stewardship Council (FSC®) and 100% of the investments supported by us are certified according to the FSC standard, an independent third-party certification which is the international reference of environmentally appropriate, socially beneficial, and economically viable forest management.
- Pra, A., Pettenella, D. (2019). Investment returns from hybrid poplar plantations in northern Italy between 2001 and 2016: are we losing a bio-based segment of the primary economy? Italian Review of Agricultural Economics. In press.
- Pra, A., Brotto, L., Mori, P., Buresti Lattes, E., Andrighetto, N., Polato, R., Masiero, M., Pettenella, D. (2019). Profitability of timber plantations on agricultural land in the Po valley (northern Italy): a comparison between walnut, hybrid poplar and polycyclic plantations in the light of the European Union Rural Development Policy orientation. European Journal of Forest Research. https://doi.org/10.1007/s10342-019-01184-4
- Petrovska, R., Pra, A., Brotto, L. (2018) Investimentos florestais sustentáveis e normas ambientais e sociais relacionadas. Pp. 59-62. In: Oportunidades de Negócios Sustentáveis nas Florestas Tropicais Brasileiras. GIZ – Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH. Available at URL: http://cooperacaobrasil-alemanha.com/oportunidades.htm
- Pra, A., Brotto, L. (2018) Finanza a impatto e cambiamento climatico: Investimenti forestali. Pp. 54-57. In: Venturi, P. and Perra, G. (eds.) La finanza di impatto per i cambiamenti climatici. AICCON – Italian Association for the Promotion of the Culture of Co-operation and of Nonprofit. Available at URL: www.aiccon.it [English translation available]
- Brotto, L., (2017) Foreste e Agricoltura Sostenibile. In: Impact Investing: la finanza a supporto dell’impatto socio-ambientale. Forum per la Finanza Sostenibile. Available at URL: http://finanzasostenibile.it/wp-content/uploads/2017/12/manuale-impact-investing-WEB.pdf
- Pra, A., Pettenella, D. (2017). Stima dell’andamento della redditività delle piantagioni di pioppo alla luce delle politiche di settore. Forest@ 14: 218-230 [online 2017-08-01] URL: http://www.sisef.it/forest@/contents/?id=efor2394-014
- Brotto, L., Pettenella, D., Cerutti, P., Pirard, R. (2016) Planted forests in emerging economies: Best practices for sustainable and responsible investments. Occasional Paper 151. CIFOR, Bogor, Indonesia. URL: https://www.cifor.org/library/6136/
- Masiero, M., Secco, L., Pettenella, D., Brotto, L. (2015) Standards and guidelines for forest plantation management: A global comparative study. Forest Policy and Economics 53:29–44. URL: https://www.sciencedirect.com/science/article/pii/S1389934114002366