Access to Forest Assets
Alongside direct investment in ‘physical’ forest assets, such as forests and processing capacity, investors can allocate capital to ‘financial’ forest assets offering indirect exposure to the asset class.
The global investment universe of managed forest assets is estimated at between €300 and €500bn, and is expected to grow by a further €100bn by 2030.
The US has the single biggest pool of investible forests, followed by Australia and NZ. Russia has the largest proportion of global forest resource, but to date an uncertain business and policy environment has held back significant institutional investment. The European asset base, although small by comparison, seems poised for rapid growth in response to structural changes in the forest products sector, growth in demand for bio-fuels, growing investor interest, and the overall growth of alternative investments within the asset allocation process.
The majority of the global forest resource is spread across Latin America, Asia and Africa. Latin America and Asia are increasingly important as producers of forest products; strong market prospects, advantageous growing conditions, low cost and increasingly favourable platform (tax regime, regulatory environment) all underpin favourable investment conditions for plantation development and acquisition. Some African countries, such as South Africa, Mozambique or Tanzania, also offer good growing conditions, adequate infrastructure and stable policy and economic environments, although development is at an early stage.
The global investment universe for ‘financial’ forest assets includes corporate bonds and structured products issued by pulp and paper companies, and bonds issued by governments and multilateral organisations to fund their forest related activities.
Global efforts to reduce emissions from deforestation and degradation involve a raft of measures and incentives aimed at encouraging the sustainable management and conservation of forest resources across the tropics. Recent estimates put the cost of implementing the programme, known as REDD+, at between $18-26bn a year up to 2030. Multinational agencies and donor governments are set to tap capital markets for at least a proportion of this funding, creating a major new class of financial forest asset.
At the other end of the spectrum lending to small scale forestry and agro-forestry entrepreneurs and communities, who play an increasingly important role in the management and conservation of natural forests look set to increase, generating a geographically diverse pool of financial forest asset.
Accessing attractive sustainable forest assets, whether physical or financial, requires a strong practical and financial insight coupled with a solid grasp of key environmental, social and governance considerations.
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