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Playing with fire: understanding climate change risk in forestry

Aquila and New Forests say where they think the main risks lie and suggest which areas LPs should be aware of when doing their due diligence.

Forestry investors and managers need to understand the effects of climate change in order to manage the growing risks posed by it, Aquila head of farm and forest investments Nils von Schmidt told Agri Investor.

“It is something that at the very least investors should be asking: What do you think about climate change? How do you address that in your due diligence, deal sourcing, and appointment of management and in terms of your exit?” he said, adding that the effects of climate change – an increased likelihood of strong winds, pests or fires in a property – were becoming increasingly evident to foresters.

Aquila bought 3,100 hectares of forest in Scotland in January across three locations. Von Schmidt said his firm carried out research on weather risk by interviewing previous managers and local residents on changes over the last two decades, on top of checking meteorological records. “We tend to avoid areas where there is a higher risk. When we look at Scotland we would rather buy a forest on the east side that in the west because winds prevail [there],” he said.

LPs ask most often about fire as a climate change risk, von Schmidt said. Scientists suggests that as the planet heats up, fire risks will increase in the US, and could even become a problem in countries like Sweden.

“Actually, from our experience managing forestry the idea that fire is the major risk is simply not the case … our own records in Australia show it can be managed,” von Schmidt said. He added his firm’s experience in geographies like south-east Australia, where Aquila manages one of its largest pine plantations, have helped it be prepared for risk elsewhere.

“You constantly monitor the risk level,” von Schmidt explained. “The existing risk though could be increased by climate change, and based on that I wouldn’t invest in a forest in central Australia, but one much closer to the coast.”

David Brand, who founded international timberland investment manager New Forests in 2005, is also keenly aware of the danger of fire based on his experiences in Australia and Indonesia, where human behaviour increases the risk. In Indonesia, for example, fires have been exacerbated by practices like burning to clear land for illegal palm oil plantations.

Across the world, on the US west coast, the Forest Service budget is increasingly dedicated to firefighting, Brand pointed out. “There is a big issue with the US and climate change driving increasingly large fires. Work needs to be done to fit forests to make them less flammable and investment in fire prevention and preventative burning,” he said, adding that getting rid of undergrowth in colder months meant there was less fuel for wildfires in warmer ones. He added that thinning and interspersing forest with farm or other land could also reduce wildfire risk.

In Northern Europe, more complex problems could emerge, including an increase in pests or weather patterns limiting when trees can be harvested. “If you look at the northern hemisphere, say Scandinavia or Russia, heavy snow could pose a problem. A lack of frost means you could have some waterlogged areas, and you can only harvest where the soil is frozen, limiting harvesting capability.”

It’s not all bad news though. Von Schmidt said that changes like the possibility of warmer weather supporting faster-growing species could turn out to be beneficial for investors. “You could earn some more on the production side,” he said. “[Warmer weather] typically leads to shorter rotations and production periods. If you have a rotation period of 25 years, for example, the risk of losing everything is much lower than [one] of say 50 years.”