Written by Richard Kelly, Investment Manager, Foresight Sustainable Forestry Company Plc (ticker: FSF)
Natural capital is the term we use to describe the world’s natural assets that underpin everything from clean air and water to food production and climate regulation, providing essential ecosystem services which make human life and industry possible. However, despite its critical role, society often overlooks natural capital as an economic asset requiring investment for its preservation, as well as being a source of potential returns.
A significant shift over the past decade has seen the increasing emphasis of natural capital into forestry investment. As governments around the world move towards a net-zero future, the role of forestry goes far beyond timber production, and investors are increasingly seeking investments that combine financial returns with positive environmental impact.
UK timber demand highlights need for increased domestic supply
As of 2023, approximately 80% of all timber used in the UK was imported, making us the third-largest global timber importer after China and the US. In addition, World Bank data has forecast that global demand for timber will increase three-fold by 2050.
Bringing in timber from external countries makes it harder to ensure that the supply chain is compliant – for example, since the start of the Russian invasion of Ukraine, the EU has pledged to reduce the flow of Russian timber into the supply chain. Whilst these measures may be relatively effective, it is difficult to be 100% sure that materials are not coming from conflict zones, or areas which are dogged by irresponsible forestry practices. This supply chain risk creates an opportunity for responsible UK forestry managers, as an over-reliance on foreign timber can result in compromised sustainability pledges, exporting the consequences of deforestation and environmental damage halfway around the world in an ‘out of sight, out of mind’ manner.
Closely linked to these concerns is the immediate problem of Europe’s energy crisis, with biomass materials (used for bioenergy power plants) becoming increasingly scarce. The EU has seen a 150% increase in bioenergy use since 2000 and the UK government’s recent Biomass Strategy – a key part of its Net Zero plan – has pledged to generate more bioenergy using sustainable chipwood for fuel, placing further upward pressure on timber prices in the UK.
The natural answer to the net zero challenge
Carbon sequestration and biodiversity, often overlooked in traditional forestry models, have now become a growth catalyst for the sector through the generation of high integrity carbon credits. The UK’s Science Based Target Initiative (“SBTi”) framework for corporate net zero pledges has seen more than 6,000 businesses sign up to the initiative, including big names such as Rolls Royce and Heineken. The reality is that reaching SBTi net zero will simply not be possible for many corporates without the use of carbon removals-based credits to offset unavoidable emissions.
As this pathway to net zero is being adopted by more and more businesses, the importance of high-integrity and independently audited voluntary carbon credits, such as those generated by Foresight Sustainable Forestry, will only likely increase. Notably, the price of credits verified by the Woodland Carbon Code (WCC – regarded by the industry as gold standard for its high integrity levels) has seen a remarkable 60.7% price increase in just 2.5 years, clearly demonstrating the growing demand for high integrity nature-based solutions.
Diversification and inflation benefits alongside environmental value
Whilst forestry has long been regarded as a useful diversifier by sophisticated investors, there are many additional benefits – both economic and ecological – that are often overlooked. Due to the non-perishable nature of woodland, managers can leave trees to continue growing indefinitely depending on market conditions. Additionally, with a harvesting window of 5-10 years, managers can monitor timber prices to judge the best time to sell and secure the best price. In the meantime, trees continue to add biomass in a steady and predictable manner, regardless of the economic backdrop. Forestry portfolios are underpinned by a portfolio of freehold land offering a hedge against inflation.
With only 13% of forested land in the UK compared to an average of around 45% for our European counterparts, there is significant value to be derived from converting new afforestation sites into established woodland over the next decade. Since IPO, FSF’s first six afforestation projects, have seen 1.4 million trees planted, that created 143k voluntary carbon credits, with these properties almost doubling in value once planted. FSF has a further 37 afforestation properties in its portfolio, that will see FSF plant c.9 million trees and create 1-1.2 million carbon credits since its inception. Overall FSF’s afforestation portfolio is material in scale at a national level and once fully planted it is equivalent to over one third of the total area planted across entire UK in the year to March-23. FSF has provided forward guidance that 2,700 hectares of its remaining 4,500 hectares are expected to be planted by March-24, with £21m (12p per share) of imminent (i.e. next valuation) associated NAV gains expected. The balance of planting and a further £14m (8p per share) of associated NAV gains are expected to be completed by March-25.
A progressive approach which prioritises biodiversity management ensures FSF can target net gain biodiversity improvements on the woodland sites it manages in parallel to commercial concerns, tracking performance in an annual Sustainability & ESG report. Forestry remains firmly at the forefront of the net zero agenda, making it an appealing option for a wide spectrum of investors looking to align their portfolios with robust and measurable sustainability criteria.
This article has been approved by Foresight Group LLP (“Foresight”) as a financial promotion for the purpose of Section 21 of the Financial Services and Markets Act 2000 (“FSMA”). Foresight Group LLP is authorised and regulated by the Financial Conduct Authority (“FCA”), under firm reference number 198020. Foresight’s registered office is The Shard, 32 London Bridge Street, London, SE1 9SG. This article is intended for information purposes only and does not create any legally binding obligations on the part of Foresight. Without limitation, this article does not constitute an offer, an invitation to offer or a recommendation to engage in any investment activity. This article is only directed at financial intermediaries that are authorised and regulated by the FCA. The product described in this article is not suitable for all investors and puts investors’ capital at risk. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future performance. Foresight does not provide financial, legal, investment or tax advice. Personal opinions may change and should not be seen as advice or a recommendation. Investors must read the relevant Prospectus and Key Information Document before making an investment decision.
