Forest Stewardship Council engages with the investment world

I have just returned from the Forest Stewardship Council General Assembly in Seville, Spain where I was honoured to be invited to speak on one of three CEO discussion panels on the issue of "Good Investment". Specifically I was asked to comment on the "current and new instruments for investment into forests and plantations (for instance green bonds) and the role of new intermediaries (TIMOs, banks, pension funds etc)".

Of note was that I was the only representative from a temperate climate, developed country on the panel, so I prefaced my commentary with the fact that the economic, social and environmental issues faced by plantation managers in our part of the world are quite different from those being dealt with by managers of tropical natural forests, which were the subject for the rest of the panel.

I outlined the high level investment rationale for the institutional owner – that plantation forests represent a low risk investment to balance riskier parts of the portfolio, and that well-managed forestry investments combine both long-term capital growth with annualised cash returns which are less volatile than, for example, agricultural commodities.

In this context I made the point that is often missed by stakeholders in the FSC system – that we are managing forests that are part of an investment portfolio which underpins a secure and comfortable retirement for pensioners and superannuants around the world – these are mum and dad investors, not deep-pocketed corporate entities that many like to suggest. Therefore, for environmental investment instruments to work they need to make sense in terms of securing or enhancing the basic investment.

To achieve this, environmental instruments need to achieve one or more of three objectives:

  1. Generate an investment return in their own right.
    This can only be achieved where there is a monetised market for environmental services, for example carbon pricing. Unfortunately, this has proved difficult to achieve in both Australia and New Zealand.
  2. Reinforce or enhance the returns associated with the fundamental forestry investment.
    Essentially this is about achieving a social and/or regulatory licence to operate which provides preferential market access, premium pricing or both. Ultimately this is a role that certification has played over the last decade.
  3. Appeal to the sentiment or sustainability preferences of the investors.
    While this sounds a bit subjective and difficult to measure, it is in fact a point of difference that some TIMOs are pressing. For example our largest client in Australia – New Forests – has exploited this space effectively with a very strong and well-documented commitment to sustainability which forms part of its investment model.

The further concluding point was that good forest management achieves these core objectives without necessarily requiring the intervention of additional incentives and pseudo-regulation. In fact, this is the very point of certification – to provide an independent consideration of the extent to which the management of a forestry investment achieves sustainable social and environmental outcomes.