Earth’s forests are a vitally important, yet often overlooked, resource.
Not only do they play a pivotal economic role, but they also serve as critical pillars for biodiversity and the fight against climate change.
So, could this readily available, natural commodity present the next sustainability-orientated investment opportunity?
Forestry: an unrecognised economic force
Forests cover more than 4 billion hectares[1] or around 30% of the Earth’s land area and are composed of naturally regenerating forests and planted forests. These natural systems provide many ecosystem goods and services, primarily timber but also non-timber products which can contribute to human health and well-being – including food, medicinal plants and raw materials for pharmaceutical products – and outdoor recreation and culture, such as sports and tourism.
Aside from being a major source of natural capital, the forest sector accounts for 1% of global jobs, employing more than 33 million people[2]. Forests also provide important environmental services like air and water purification, soil protection, nutrient recycling, carbon sequestration and climate regulation. And they are one of the most important harbours of biodiversity, providing a natural habitat for a vast range of animals, plants, and other living organisms.
Despite pledges by world leaders to end deforestation by 2030, natural forests remain threatened by deforestation – in 2022 an area the size of Denmark was lost[3]. However, commercial timber plantations – known as timberland – are starting to play a more productive economic and environmental role.
Growing demand for sustainable supply
Timberland plantations only account for around 3% of the world’s forest area yet produce a third of global industrial timber[4]. What’s more, commercial timberland is forecast to take up a much larger share of global wood production, with the FAO forecasting global demand for timber will increase by 37% to 60% between 2020 and 2050.
This heightened demand stems from multiple drivers, including world population growth, urbanisation, an increase in per capita income, the availability of wood, and product and technological developments. In addition, consumers are also increasingly demanding that wood be certified as sustainably produced, meaning it needs to be responsibly sourced and authenticated. These more stringent environmental regulations should further propel the supply of timber towards timberland plantations.
Another source of demand stems from the pressing need to decarbonise the built environment. Plans to lower emissions are steering the construction industry towards greater use of biomaterials, such as cross-laminated timber (CLT), which have a much lower carbon footprint than steel or concrete. The CLT market is expected to grow by 14.9% (CAGR[5]) from 2023 to 2030[6] and has already been successfully used in complex structures such as skyscrapers and bridges.
Amid this sustained growth in demand, supply pressures will certainly arise and demand is expected to exceed accessible supply by 2040. This imbalance is expected to lead to a long-term increase in timber prices. Therefore, investing in sustainably managed timberland could be a way to profit from the growing demand for wood.
Fostering climate and biodiversity solutions
Sustainably managed timberland also offers a tangible way for investors to contribute positively to climate change adaptation and / or mitigation, as well as meeting several of the UN’s Sustainable Development Goals.
Managed forests can play an important role in battling climate change. Firstly, they have the potential to reduce greenhouse gas (GHG) emissions through the prevention of deforestation and forest degradation. Secondly, forest management and restoration can maintain or enhance forests’ role as carbon sinks. Finally, greater carbon storage over the long term can be facilitated by the greater use of sustainable wood products and emissions can be avoided through the substitution of emissions-intensive materials.
Activities related to forest restoration, afforestation and reforestation alone could offer more than a third of the response options needed by 2030 to prevent an increase in global temperatures exceeding the 2C threshold set out in the Paris Agreement.
Positive policy and market dynamics
Given that 75% of the world’s forests are controlled by governments, regulatory developments can have a significant impact on forest management. In particular, policies relating to responsible sourcing strategies, renewable energy development and green building standards should be supportive of wood production and trade. However, it is the shift towards carbon taxes and credits that could have the biggest impact on forestry by creating an alternative income stream.
A forest carbon credit is created when forest owners undertake specific projects (e.g. afforestation or reforestation, avoided conversion and improved forest management) to increase the forests’ ability to absorb CO2 and store carbon or reduce, delay or avoid CO2 emissions. This is then monetised by buyers purchasing registered carbon credits to offset, neutralise or compensate for the carbon emissions produced by other activities – such as air travel or through industry.
Although the carbon credit market has been subject to negative press in recent years, demand for quality carbon credits remains robust. The global market was estimated to be USD 479.41 billion in 2023 and is expected to grow at a CAGR of 39.4% from 2024 to 2030[7]. Nature-based credits, including forest carbon credits, can offer a valuable basket of additional environmental and social benefits (e.g., increased biodiversity, funding for land conservation and job creation) and can therefore often command premium prices relative to credits produced from engineered solutions.
A climate and nature-positive investment option
For investors looking to increase their exposure to greener investments in low-carbon, climate-aligned areas, sustainable forestry offers a palpable and readily available opportunity. Timberland currently represents an investible universe of around USD 200 billion, with about half of available timberland investments located in the US, 21% in Latin America, 17% in Oceania, 9% in Europe and 5% in Asia and Africa[8].
It can play an effective and significant role in investment portfolios as it exhibits several distinctive characteristics including attractive risk-adjusted returns, stable annual income, diversification benefits due to its low correlation with other asset classes, and inflation-hedging properties. Unique to the timberland asset class is the ability to generate additional income from other contributory sources, such as recreational leases, hunting fees, conservation easements, sale of carbon offsets or mitigation credits, and leases for renewable energy installations. And it is particularly suited to institutional investors, as its duration characteristics match the long-term liabilities arising from pension funds’ and insurers’ obligations.
However, timberland investment is not without risk. Market risks include the volatility of timber pricing; physical risks involve factors that can affect the volume and quality of timber, such as fire, storms, drought, insects and disease; while regulatory / legal and policy risks can arise from changes made to land use regulations, environmental laws, green certifications or tax codes that may have potentially adverse effects on timberland’s investment returns. These risks can largely be mitigated through portfolio diversification across geographies, species of tree, age classes, products and end markets.
A natural capital solution for a changing world
The positive trend by macroeconomic factors – population growth, increase in per capita income, green transition – alongside its role as a natural climate solution and its attractive investment attributes mean sustainable forestry presents a compelling opportunity for investors. At BNP Paribas Asset Management, we believe sustainable timberland can help deliver positive real-world outcomes alongside industry-leading financial returns to clients. Our strategy provides clients with inflation hedging and capital appreciation investment opportunities that also have the potential to deliver positive environmental, climate and social benefits.
References
[1] UN Food & Agriculture Organization (FAO), 2020
[2] https://blogs.worldbank.org/en/voices/forests-healthy-people-economies-and-ecosystems
[3] https://wwf.panda.org/wwf_news/?10925941/Five-positive-signs-for-forests-in-2024
[4] FAO, 2020
[5] Compound Annual Growth Rate (CAGR)
[6] https://www.grandviewresearch.com/press-release/global-cross-laminated-timber-market
[8] IWC and New Forests, 2021
