Scaling Impact Investment in Forestry
Sustainable and impact forestry investing has grown steadily over the past two decades, with an increase in both the number of forestry-focused vehicles and the volume of capital being channeled to create environmental and social benefits through the forestry sector. Yet gaps remain between asset managers and asset owners that constrict the flow of capital into the space.
Specifically, asset managers expressed interest in better understanding asset owners’ motivations for investment in the sector. Through interviews, asset owners indicated a variety of reasons to target forestry. These include timber’s historical ability to hedge against inflation, the predictability of cash flows from forests’ biological growth cycles, and – for certain investors with long-term horizons – a portfolio match with the longterm lock-up period associated with forest investments. Further, asset owners and managers both express deep conviction in the ability of forestry investments to generate environmental impacts, such as climate change mitigation and land restoration, as well as social impact, such as community development and quality job creation.
Asset owners, however, did want to better understand the various revenue sources and drivers of risk for forestry-focused asset managers. Five common revenue-generating strategies are described through in-depth fund profiles in this report, namely timber sales, sales of carbon offsets, sales of other forest products, sales of land rights for permanent conservation, and leasing of land and/or land rights. Further, data from a database of 37 forestry vehicles indicate that perceived risk consistently outweighs actual risk.
Building from interviews with asset owners, asset managers, and intermediaries, and from the database of forestry vehicles, this report identifies five opportunities to strengthen and grow the sustainable and impact forestry market that connect asset owners’ motivations with asset managers’ products and strategies:
• Improving and clarifying product-market fit;
• Using blended finance, particularly to drive investment in untested strategies or markets;
• Developing additional partnerships with conservation organizations for the sales of land rights; • Integrating vertically for greater operational efficiencies; and
• Strengthening communications between asset owners and asset managers.
This report begins to address some of the communications gaps that restrict capital flows into the sustainable forestry market and seeks to uncover opportunities to unlock further investment. Investment in these vehicles is critical, both to the conservation of critical biodiversity and animal habitat and to the ability to deliver a low-carbon or negative emission future.