An Irish forestry fund was recently dubbed by its management company as one of the best investments in the country. The fund, which last year reached a 10-year maturity, declared 83 per cent gross return rates. The average initial investment in the fund back in 2000 was estimated at 9,400 euro. It is expected to bring in a tax-free payout of over GBP17,000, according to fund managers.
The founder of a UK-based bamboo bond promises even better results for investors. An initial investment of as little as GBP10,300 in the fast-growing grass used for its sturdier-than-steel stems, he claims, can bring in a return of 503 per cent over 15 years.
In a crisis-ridden financial environment, forestry funds are generating popular press for their portfolio-diversification properties, inflation-hedging abilities and relatively low-risk investment potential. As with any other investment ventures, however, increased popularity may lead to eco-hazardous business practices in service of greedy interests and the need for financial security. With these, unfortunately, forests cannot afford to compete. Therefore, investors who look to forests as the next long-term home for their investment capital need to also seek forestry funds with sustainable forest management practices. Only then will they be able to reap the full benefits associated with forestry funds. – don’t really get this last couple of sentences. How can forestry be eco-hazardous?
According to the World Bank’s International Finance Corporation (IFC) forestry funds typically rely on three main sources of revenue – growth and sale of timber products (i.e. logs, woodchips and pulp for paper), sale of non-timber products (i.e. edible products, colorants, products for perfumes and cosmetics) and land appreciation. Besides the monetary value that comes from these three sources, the IFC also recognizes that forestry funds may generate value that is not reflected on the corporation’s annual spreadsheet – the value of the landscape, biodiversity, social and cultural sustainability, carbon sequestration and even value in minimizing damage from natural disasters such as floods. As the UN-supported Millennium Ecosystem Assessments forestry report points out,the combined economic value of ”non- market” forest services may exceed the recorded market value of timber, but forestry fund managers often fail to give it proper credit when making investment decisions.
There is an increasing number of forestry funds, however, which employ sustainable forest management practices to protect the non-commercial value of forests. The Centre for International Forestry Research defines sustainable management as “maintaining or enhancing the contribution of forests to human well-being, both of present and future generations, without compromising their ecosystem integrity, i.e., their resilience, function and biological diversity.” Beyond investing in forests for timber, these sustainable forestry funds look to fund natural forests, which are valued for their carbon sequestration capacity and their role in community sustainability and development.
Mitigating the Risks
There are several key factors investors need to take into account to make sure they minimize the risks associated with their investments and maximize the returns:
- Political environment — forestry funds investing in areas with tropical forestation might fall under the jurisdiction of unstable local governance or a region with conflicting local political interests. Moreover, some governments may impose restrictions on timber harvesting. Investors should be fully aware of the political environment of the country where their forestry funds are operating. This is where investing locally makes sense – being familiar and comfortable with the local legislation and knowing how the political process works can be of great advantage and give investors a sense of security.
- Economic environment – as the Millennium Ecosystem Assessments report points out,there is a widespread corruption in the forestry sector, especially in developing countries with poor local governance. The stability of the local currency and the economic track record of the country are also essential for the return on investment of the forestry funds. Here, too, choosing funds that oversee local forests might be a better idea than going for tropical forests in remote locations, which investors might not be educated well enough about to make an adequate investment assessment.
- Property rights – who owns the forestry land? Who leases it and what is the duration/conditions of the lease? Some forests are operated by the state. Others are owned by private businesses/individuals. Others still are under NGO proprietorship. These are also important aspects that need to be addressed before investors choose their forestry funds in order to avoid future challenges that might tamper with revenues.
- Transparency of operations – this key factor has to do with monitoring performance and evaluating the efficacy of the forestry management. If the forestry fund is investing in an offset, for example, investors need to be informed on how the carbon sequestration is being measured, who verifies it and how the carbon credits are issued.
Property loss – are natural disasters characteristic for the geographic location of the forestry project? If so, what property damage has historically occurred? This information will help investors evaluate the degree of risk posed on the forestry funds by external ecological factors. This way, potential shareholders will be able to calculate the potential loss in revenue and the insurance costs associated with it.