This is the time of year when we all go out and buy our Christmas trees. Mostly, we are thinking about baubles and maybe a fairy. What we aren’t thinking about is where they come from and their carbon footprint, as well as the fact they might be a sound investment. But forestry is a growing area in sustainable investing and here’s why.
Investors are pouring money into Environmental, Social and Governance (ESG) funds and they have become a pillar of investing, holding more than $30tn of assets after impressive growth of 34 per cent over the past two years. So powerful is momentum, the fund industry will most likely embrace a near 100 per cent ESG-based model by 2030.
As a result, investors are looking across all asset classes and beyond equities into areas whose returns are uncorrelated to financial markets. As we all know, trees and woodlands play an important role in the removal of carbon dioxide, which is taken in by trees and stored as carbon in the trunk, branches, leaves and roots.
International agreements to regulate carbon emissions such as the Kyoto Protocol recognise the importance of forests as carbon sinks. What’s more, wood is a key sustainable product in replacing environmentally damaging raw materials such as iron ore and fossil fuels. Carbon credits are awarded for the planting trees, or sowing seeds, in a barren land devoid of any trees to create a forest, which help companies offset their carbon emissions.
An increasing number of forestry investors are considering ESG factors, as well as investors considering forestry as a route to achieve ESG goals. Assets Under Management (AUM) for the sector are close to record levels, and with a significant amount of unrealized value to be released more money is poised to flow into the sector. Forestry funds continue to attract investor commitments beyond their target sizes. North America remains the most targeted region, but more and more investors are targeting the UK for investment.
The forestry investor universe continues to expand in number and by investor type, with investors in the sector seeking to increase their allocations and the majority targeting unlisted funds. Despite recent increases in UK timber prices, in real terms they are still only at the same level as in 1995, showing the potential for significant further real increases.
So when you buy your tree, look at is a part of a growing investment universe, and feel confident you are doing a good thing by supporting UK forestry and most probably boosting your pension fund for retirement at the same time. Merry Christmas!