Forestry plays key role in impact investment strategy
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Impact investments look set to become big news in 2016 as people become increasingly aware of global issues and how their financial and consumer decisions impact things on a bigger scale.
Among consumers, we’re already seeing a huge level of growth in the number of ethical businesses, not just launching, but succeeding. These companies are clear that their commitment to things like organic produce, Fair Trade agreements and good treatment of their workers and supply chains comes first.
This is translating into good news for investors with stakes in these companies. But impact investments are also making a difference on a more direct level as the heightened global awareness drives development – and demand – for sustainable resources.
There are various assets now coming onto the financial market to cater to this rise in empathy among investors as people seem to know that they are making money and having a positive effect on other people’s lives or the future of the planet.
But one asset class is perfectly positioned to lead the pack in this regard: forestry investment.
As companies are being forced to review their supply chains, they are committing to using wood from sustainable sources that can be independently verified. Naturally this is increasing demand and those who invested in the growth of these trees years earlier are quite literally reaping the benefits of what they have sown.
The industry is benefiting further from the rise in state support and action against deforestation, which is shifting further attention towards sustainable forestry management practices and removing a lot of the competition as illegal loggers find themselves up against more and more barriers to operation.
These factors make forestry the perfect example of an effective impact investment, removing the need for an investor to choose between maximising their returns and ‘doing good’. Instead, forestry investment slots into global economic factors and provides investors with excellent returns while also moving industry towards a sustainable long term solution.
The asset offers some incredible returns which can outstrip almost any traditional investment class. Returns can vary from four percent right through to upwards of 20 percent but they are highly dependent on location of the investment and the global balance of economic supply and demand, alongside political and stability factors.
Speaking to the Financial Times, Paul Simon, special adviser to the family office of former hedge fund manager Stanley Fink, highlighted the opportunities for significant returns from sustainable forestry investments in areas including Uganda, Tanzania and Rwanda.
“Along the equator, we are realising returns in the low 20s,” he said. Mr Simon explained that this compares with traditional returns from forestry of between four and six percent from forests in areas like Finland.
In the US, meanwhile, returns are somewhere in-between according to the National Council of Real Estate Fiduciaries, which noted that US timber returns averaged 15 percent a year between 1987 and 2010.
Interestingly, impact investment is proving to be of interest across almost all levels of investors from billion dollar funds through to smaller scale single investors. Figures from GIIN and JPMorgan indicated that in total $10.6 billion was poured into this ‘brand’ of investment in 2014 and the figure is expected to rise to around $12.2 billion by the end of 2015.
What all these investors tend to hold in common is their commitment to long-term returns. As James Barrett from GWD Forestry explained: “Given their biological nature, forestry investments take some time to mature and while there are options available for those who only want to lock their funds up for a year or two, the best returns by far will be for investors who can afford to wait for their investment to mature.
“This mindset further celebrates the key role that forestry plays in the growth of impact investments, offering not only an excellent range of financial returns, but also a broader attitude that fits perfectly with the underlying ethos of impact investing and prompts people to view their assets, and the planet on which they’re established, as something to protect for the future.”