Known for being a valuable inflation hedge, timberland continues to perform well even against the volatile macroeconomic backdrop, while the long-term sustainability tailwinds are attracting new investors.
Globally, demand for timber is set to soar over the coming decades. The Word Bank estimates that global demand will quadruple by 2050, while the Confederation of Forest Industries (UK) says UK demand could increase by 78 percent by mid-century if it continues to grow at the same pace that was posted over the past 10 years.
Surging demand is clearly good news for timberland operators and managers, but unless the sector can produce products sustainably the environmental toll will be immense. Last year alone, the tropics lost 4.1 million hectares of primary forest – a 10 percent annual decline – releasing the equivalent carbon dioxide into the atmosphere as India’s total annual fossil fuel emissions, according to data from the University of Maryland.
Environmental pressures will no doubt increase the importance, but also attractiveness, of timberland assets that can genuinely showcase sustainability. In regions, particularly tropical, that implement reforestation and sustainable forestry, local communities can benefit from the employment opportunities, while also preventing further biodiversity losses and habitat destruction. The World Economic Forum estimates that more than half the world’s GDP is moderately or highly dependent on nature, yet in 2020 only received around 3 percent of climate finance.
Playing their part
The sector has a long way to go to close the financing gap, but one positive trend for timberland investors is the sheer number of multinational corporations and governments promising to plant trees and reforest land.
In April, Apple announced a major expansion of its Restore Fund, doubling the firm’s initial $200 million commitment for nature-based carbon removal projects. The US tech giant plans to restore 150,000 acres of sustainably certified working forest, and protect a further 100,000 acres of native forests, grasslands and wetlands in Latin America. Combined, the projects are expected to prevent 1 million metric tons of carbon dioxide from being released into the atmosphere each year.
Other large corporations are also taking similar action. In June, pharmaceutical company AstraZeneca announced a $400 million investment in its AZ Forest program to plant 200 million trees across 100,000 hectares globally by 2030. By the end of 2022, over 10.5 million trees had already been planted by the corporation.
Governments are also getting in on the action. In November, world leaders from 26 countries plus the EU announced a joint partnership to reverse deforestation at COP27. That followed a package of announcements at COP26 when world leaders representing 90 percent of global forests made a similar pledge for the end of the decade. How these promises translate into direct action will be the real litmus test, but should at least make the asset class more attractive for investors.
South of the border promise
Latin America is one region that holds huge potential for reforestation and sustainable forest management. The Atlantic Forest alone once covered roughly 330 million acres, almost double the size of Texas, and since 1985 has lost 6.6 million hectares of native vegetation to agriculture and pasture, an area larger than Togo.
Deforestation and conversion to pasture over much of the interior has resulted in poor quality soils, a reality that the Brazilian government is keen to remedy. In August, the Ministry of Agriculture announced plans to raise $120 billion to restore 40 million hectares of degraded pasture over the next decade. The project was recently presented to government agencies, investment banks and funds across Asia and the Middle East. While the program focuses on converting pasture to more productive agriculture, much of Brazil’s degraded land was once tropical forest and could potentially be reforested.
Forestry manager BTG Pactual Timberland Investment Group (TIG) estimates that 30 percent of managed forestry potential lies in Latin America, with Brazil holding a 15 percent stake (only matched globally by Indonesia). Favorable climate conditions and closeness to the Equator make the Amazon particularly attractive to sustainable timberland investors. Native high-yielding tree species such as bolaina, capirona and marupa perform well, while non-native species with a strong track record in the region are also preferred.
The benefits and opportunities of investing in Latin America are also reflected in the timberland strategy of many agri managers. Timber-focused agriculture funds in the region account for roughly 41 percent of all funds in market, the highest of any region and $2 billion ahead of the nearest regional competition.
The credit fund of alternative asset manager Patria Investments is the fourth-largest timberland fund in market today, and the largest across Latin America. The vehicle’s strategy focuses on Brazil and is targeting $1.16 billion at final close.
The next two largest Latin American-focused funds, ranked sixth and seventh across the entire asset class respectively, were both launched by TIG. The LatAm Impact Fund and Timberland Fund II are both targeting $1 billion in capital; the former launched in 2021 while the latter reached first close on $125 million back in 2020.
Asia eyes forestry funds
Another development over the past 12-24 months has been Asia-based LPs targeting more timberland funds. In September 2023, Japanese conglomerate Mitsui & Co and financial services group Nomura each made commitments of an undisclosed size to timberland investment manager New Forests’ Tropical Asia Forest Fund 2. This comes after Mitsui & Co and Nomura acquired the manager in 2022.
Mitsui’s foray into timberland follows a series of moves by other Asian LPs doing the same. For instance, Sumitomo Mitsui Trust Bank entered the forestry sector for the first time in 2021, investing in Manulife Investment Management Timberland and Agriculture’s Hancock Timberland and Farmland Fund, and then New Forests’ Tropical Asia Forest Fund 2 in March 2022. Development Bank of Japan also invested in Timberland Investment Resources’ Europe Forestry Fund II in 2021.
But what is driving this move to timberland? Initially, it appeared to be the desire to gain exposure to environmental assets as a way to meet ESG and net-zero targets. Speaking about Mitsui & Co and Nomura’s acquisition of New Forests at the time, Yoshihiro Namura, senior managing director and head of the investment management division at Nomura, said: “As a large global financial services group, we play a significant role in helping to solve environmental challenges, and we see investment in sustainable land use and forestry as a key part of the solution.”
New Forests CEO and chairman David Brand added: “The rising need to substantially increase investment in sustainable land use, along with increasing investor interest, is creating an opportunity to accelerate the growth of New Forests.”
There is also a growing recognition of the opportunities that investing in alternative assets can provide, as shown by the willingness of LPs in the region to commit more capital to strategies in asset classes such as infrastructure. The fact that forestry can be seen as an inflation-busting asset may also be part of the equation. Regardless of the reasoning, what we do know is investment in forestry is here to stay as we enter 2024.