Investor Demand
At present institutional investors including pension funds and insurance companies own roughly 10% of the global forest investment universe. Historically capital has been allocated as long term equity (‘patient capital’) through specialist Timberland Investment Management Organisations (TIMOs).
For institutional investors forestry offers:-
- An inflation hedge – mitigating corrosive impact of inflation on returns
- A diversifier – reducing overall levels of risk within a portfolio
- Duration – matching long term liabilities (e.g. pension annuity) with long term asset
Whilst TIMOs have proved effective as investment vehicles in low risk jurisdictions such as the US, their suitability for higher risk jurisdictions, where the majority of untapped and yet to be developed forest resources is located, is much less certain.
Better management of tropical forests has emerged as a central component in the near term response to climate change; as a consequence the international community is now striving to overcome barriers to greater private investment in sustainable forestry and conservation across the tropics. Measures being implemented both globally and nationally are catalysing new private and public private forest finance initiatives.
Leading investors have already acknowledged that they must ‘do more now to actively manage climate change risk’.
Forest bonds offer institutional investors an alternative route to TIMOs for gaining exposure to forests, swapping uncertain upside for lower risk and secure returns underwritten by new market-based incentives and risk mitigation mechanisms. Appetite for green bonds, of which forest bonds are a variant, is demonstrated by the recent success of issues by SEB on behalf of the World Bank. Potential demand is huge; institutional investors collectively hold and manage $120 trillion.
For fund managers and developers addressing this opportunity the bywords are simplicity and clarity. Forestry remains an ‘alternative’ asset class within the institutional investment community; capacity is limited for evaluating structures based on traditional timber and land value, much less those embracing high risk locations and emerging non-timber markets.
Institutional investors considering forest bonds will need to ensure that they or their agents have sufficient oversight on subsequent use of funds, especially with regards environmental social and governance performance.
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