For many investors, terms such as ESG and SRI may conjure up images of wind turbines or solar panels, and justifiably so – these are certainly the ‘poster’ themes of responsible investing.
On the next tier down, perhaps electric cars, water energy or even corporate governance indices might spring to mind.
However one theme that remains something of a ‘Pointless Answer’ (a term owed entirely to my increased exposure to daytime television) within the space is that of forestry.
This is, on one hand, quite understandable as our Fund Manager James Sullivan explains:
“Forestry is, by its nature, fairly illiquid and for many investors, the investment horizon associated is simply not an option. Pair this with the stigma attached to funds that have fallen foul of said illiquidity and it’s easy to see why the theme remains on the peripheral. Nevertheless, the investment case for forestry is compelling.”
Global deforestation is one of the key contributors towards climate change and has already had a significant economic impact, with the World Bank attributing an annual market loss of c$10B to illegal logging.
Through active forest management and indeed, afforestation, the effects of carbon emissions can be at least partially offset.
Domestically, the building industry is gradually shifting towards timber usage, with engineered wood products viewed as more carbon efficient than many other materials.
This dovetails with the increase in off-site construction, an initiative supported by the government to increase housing production, of which timber frames make up the lion’s share.
It is expected that this method of construction will surge significantly over the short to mid-term and the UK is well positioned to capitalise.
“The Sitka Spruce, the UK’s main commercial tree species, is easily harvestable, providing a greater volume of timber, over a shorter period of time, than its European counterparts”, James explains. “The harvesting window is c15 years, affording owners space to consider market conditions, whilst their investment quite literally continues to grow.”
A perfect storm of stringent sustainability standards, a reduction in illegal logging and legislative pressures (ie Brexit) are expected to restrict supply chains, thereby organically raising the price of timber both globally and domestically.
But putting aside its thematic qualities, one could rightly question whether forestry truly is an investible theme and if so, what it might bring to a portfolio.
“In terms of investment characteristics, forestry displays a close correlation to inflation and may therefore offer protection on real returns, within a diversified portfolio”, notes James.
He continues, “However, when managing a daily trading multi asset fund or even a model portfolio, we too must be mindful of the liquidity risk and investment horizon associated with such investments. To circumvent this, we have sought exposure to the theme, and others, via a direct investment in Gresham House Plc – a specialist asset management company.“
Gresham manage a variety of mandates, including those focused on the aforementioned ‘poster themes’ solar and wind, but have c50% of their assets in forestry. They oversee upwards of 100,000 hectares of forestland on behalf of their investors, all of which is managed to the stringent principles of the Forest Stewardship Council’s approved standards (under the UK Woodland Assurance Standard).
Of the investment, James concluded, “We view Gresham House, which we hold in both our Balanced and Opportunities funds, as a very liquid way for us to play the forestry theme without locking up long term capital.”
We do however recognise that for mandates such as ours, direct investment into forestry will likely remain a taboo.
But with companies such as Gresham House, we find a readymade timber frame, the likes of which can be safely manoeuvred in and out of our portfolios, as the landscape evolves.
Such flexibility is key, as whilst we endeavour to invest for the long term, not all investments are meant to be evergreen.