March 10, 2022

By Lynda Kiernan-Stone, Global AgInvesting Media

A number of factors have made commercial forestry investments attractive to institutional investors. But Scottish independent fund manager Par Equity has found that high-net worth individuals are also increasingly looking to commit capital to the climate friendly asset class. 

As a specialist forestry investor, Par Equity stated that individual investors are seeing a win-win scenario here where they can generate positive environmental and financial returns.

After being an investor in the space for more than a decade, the manager stated that this enthusiasm is being manifested in the unprecedented demand it’s seeing for its newly launched Par Forestry III LP. 

With a minimum investment requirement of £50,000 (US$65,560), the fund initially raised approximately £5 million (US$6.56 million) – more than double its target, with two more rounds expected to be completed this year. And each year after, Par Equity intends to raise £10 million (US$13.1 million) per year to invest in existing forests and new plantings.

“It is not surprising there is growing interest in investing in the forestry sector, since it delivers environmentally friendly returns in a sustainable way,” said Paul Atkinson, partner in charge of forestry investments, Par Equity. “It is notable that individual investors are turning to these opportunities in view of the proven financial returns now being coupled with investing in an asset that is playing its part in addressing climate change.”

Beyond their ESG benefits, UK investments in forestry are also favorable from a tax point of view, being exempt from inheritance tax after an initial holding period of two years. Also, capital gains tax does not apply on value growth of the timber, which when sold is income tax-free.

“We have been delighted by investor interest to-date and we are looking forward to our second close which finalizes on April 29, 2022,” noted Tom Croy, investment manager, Par Forestry III.

“People understand that investing in a natural product such as timber should be done over a long-time frame. However, the potential to generate some earlier return is built into the fund mandate.”

On The Institutional Side

Climate change, net-zero emission goals, and public policy shifts are all coalescing to make forestry an enviable asset class.

As part of the country’s strategic scheme to meet the benchmark of achieving net-zero emissions by 2050, the UK government has pledged to support the planting of 30,000 hectares of trees per year by 2025.

Along with offering the reassurance of government support, forestry investment and management also provides portfolio diversification, reliable returns, and a channel for impact investment – factors that have attracted the likes of the UK Church Commissioners and Danish pension fund Sampension.

For the 10 years culminating with the close of 2017, forestry returned 15.7 percent per year, compared to 6 percent per year for bonds, equities, and UK property investments, per data from Tilhill and the IPD UK forestry index, according to Institutional Asset Manager. 

However, economic pressure is also building. As of January 2021, climate reporting is now compulsory for certain major listed companies in the UK, sending companies such as Amazon scurrying to mitigate their carbon footprint through securing carbon credits, or even planting trees.

All of these factors combined have resulted in ever greater capital being allocated to alternative assets by institutional investors who are nearly universally incorporating ESG considerations into their investment decisions.

Also driving investment is the UN’s Principles for Responsible Investment forecast that corporate demand for carbon removal and offsetting could represent $800 billion annually for investors by mid-century, along with initiatives such as the universal consideration of the SFI standard, which acknowledges the impact on the use of sustainable forestry practices on the capacity of working forests to sequester carbon and other greenhouse gas emissions.

Aside from these factors, recognizing that carbon sequestration by forests is one of the most highly effective investments that can be made to combat climate change, Gresham House, the largest commercial forestry manager in the UK, launched the Gresham House Forest Growth & Sustainability Strategy in June 2021.

This new fund intends to deliver a “double bottom line” –  sustainable capital growth via the creation of more than 10,000 hectares of new productive woodland, as well as through exposure to existing income generating forestry, and the sequestration of carbon to drive the generation of carbon credits.

“By combining exposure to commercial forestry and carbon sequestration, this strategy offers an opportunity to benefit from capital growth and income generation, whilst meaningfully combating climate change,” said Anthony Crosbie Dawson, director of forestry and private clients, Gresham House, upon the launch of the strategy. 

Crosbie Dawson continued, “Additionally, sustainable forestry offers protection against mounting inflationary pressures, alongside strong portfolio diversification due to its uncorrelated returns. By increasing the UK’s forestry stock, we are also contributing to the UK’s natural capital, enhancing the country’s climate, biodiversity and flood mitigation.”

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– Lynda Kiernan-Stone is editor with GAI Media, and is managing editor and daily contributor for Global AgInvesting’s AgInvesting Weekly News and  Agtech Intel News, as well as HighQuest Group’s Oilseed & Grain News. She can be reached at lkiernan-stone@globalaginvesting.com.