Trend 2018: Blended finance and biomass ‘to buoy timber markets’

Climate decisions will loom large next year as investors of various nature consider whether they should go after timberland assets, according to a prominent market player.

MaryKate Bullen, an associate director at New Forests, said a rising trend poised to support investment in the sector is what insiders dub ‘blended finance’, in which concessional, public or philanthropic funds are used to catalyze private sector investment.

“In the wake of the Paris Agreement, there is a much-increased appreciation that the forestry sector will be second only to the transition to renewable energy and electrification of transport in terms of action to achieve net greenhouse gas emissions reduction targets,” Bullen told Agri Investor, referring to global efforts to limit worldwide temperature increases to 2°C.

“As a result, there is substantial effort to find ways to harness private investment alongside blended finance in ways that lead to reduced emissions and net uptake of carbon in forest landscapes,” she added.

Pointing out that the Portfolio Decarbonization Coalition now represents investors with more than $800 billion in assets under management, she noted that the challenge for 2018 would be to “coalesce” around frameworks for measuring progress.

Rising interest, and interest rates

David Brand, New Forests’ chief executive, acknowledged that rising US interest rates would probably push discount rates up by 75 to 100 basis points, in turn putting a cap on further rises in asset values. But he expected sturdy demand worldwide to support price stability and boost returns coming from income.

“Timber prices in the US have recovered strongly, and Chinese demand looks set to remain strong for both lumber and log imports in 2018,” he said.

Timberland markets, Bullen argued, would start to develop a stronger link with the energy sector. With peak oil demand set to occur in the next 10 to 15 years, energy groups are rapidly expanding their investment and trading arrangements in biomass and bio-energy markets, she observed.

“Look to see significant new partnerships and investment opportunities around biomass energy, white and black pellets, biofuels and biomaterials. This rising demand may also translate into a new wave of intensive plantation development in the southern hemisphere and tropics to produce biomass as efficiently as possible.”

She cautioned that investors would need to carefully manage land acquisition and land use planning to show that new plantations do not come at “unacceptable costs to local communities, indigenous peoples, environmental quality, and biodiversity.”