Impact investors have started raising more funds to invest in the forestry sector as devastating environmental problems caused by rising temperatures demand growing investments to reduce carbon emissions across the world.
There are 34 asset managers globally who manage $9.4bn in forestry assets. In the two years to 2019, these firms raised 10 new funds to invest in forestry or forestry-related assets, more than double the four funds raised between 2008 and 2010, according to a survey from industry group, the Global Impact Investing Network (GIIN). Investments continue to be concentrated in the hands of a few fund managers, mostly in North America and Europe.
Since the financial crisis some investors – particularly institutional investors – have avoided dedicated allocations to timber and have chosen to review funds on a case-by-case basis, according to GIIN. However, nearly all firms interviewed by GIIN believe that there is scope for returns to grow due to the illiquidity in the space, which means companies are significantly undervalued.
The Paris Agreement, signed in 2016, included a commitment to reduce emissions from deforestation and forest degradation. The target set in the agreement is therefore expected to help increase forest prices, which will be further boosted by carbon markets and rising land prices, the report added.
“Asset owners consider the ecosystem services provided by forests to be fundamentally undervalued…most viewed that as an opportunity and felt that changing regulatory and consumer pressures would shift forest valuations in the next 5-10 years,” GIIN noted.
There is still some way to go. Others interviewed by GIIN felt the changes were less imminent and therefore the time for purchasing forests as a value play was still far off.
Most forestry funds (73%) primarily target environmental impact in companies that promise to help with climate change mitigation, land conservation and restoration, as well as biodiversity conservation and water stewardship. Funds target annual risk-adjusted returns between 7% and 18%. In emerging markets, firms expect returns in the high teens, GIIN said.