Taking custody of a historical timber landscape as a sustainable forestry investment

Commercially managed forests (timberland) offer a compelling case as a long-term, sustainable investment for investors looking to align Environmental, Social and Governance (ESG) objectives with financial goals. Although these managed forests account for just 3% of the world’s forest area, they meet around a third of global industrial timber demand.¹

In 2023, BNP Paribas Asset Management acquired a majority stake in the Copenhagen-based International Woodland Company (IWC), a natural capital investment specialist. One of the direct investments made on behalf of our latest sustainable forestry strategy, a cooperation between BNP Paribas Asset management and IWC, is in an 8,700-acre forest in Maine, USA – Project Leavitt. Heavily logged in the 18^th and 19^th centuries, the forest has been undergoing restoration for the past century thanks to targeted regeneration practices.

As forestry investors, we buy into the biological growth of the trees of commercial forests. Project Leavitt’s appeal as an investment lies to a significant degree in the high-quality softwood (typically conifer trees like pine and spruce) and hardwood (broadleaf tree species) we will be able to harvest from it. One of the key end-markets for the wood is furniture-making, providing access to resilient future income streams.

From a portfolio perspective, ensuring we have diversification in wood types is important. Project Leavitt focuses on both softwood and hardwood, for a multitude of uses in the society: flooring, furniture, construction, but also pulp. As owners, we also benefit from potential capital appreciation of the land itself.

The ability to harvest timber is an important element of forestry investment – provided it is carried out sustainably. While timber-producing plantations account for a small proportion of the world’s forested area, ending production in one location would simply shift demand to other forests, potentially affecting less carefully managed ecosystems.

Project Leavitt benefits from a conservation easement that provides the forest owner with payments in exchange for implementing protection measures such as preserving habitats and maintaining public access. At the same time, responsible timber harvesting is permitted when conducted with consideration for the forest ecology.

Another key reason behind the acquisition is the region’s existing timber industry infrastructure. Successful commercial forest investments require ready access to harvesters, log yards, and forest product converting facilities that support large-scale logging operations.

While the timber industry in this part of Maine has struggled in recent decades, our involvement should help maintain the sector and local jobs. The investment is expected to run for at least 12 years, during which we anticipate making a significant impact on forest management and long-term sustainability.

Sustainable forestry is a long-term investment. When evaluating Project Leavitt, we created detailed forecasts spanning several decades. For example, we estimated sustainable harvest rates over a 50-year period and assessed how end-use timber markets might evolve over the years.

Such long-term forecasts inherently involve uncertainty, so we also carry out in-depth risk assessments related to climate and other potential vulnerabilities of the opportunity. These assessments are based on the European Union’s taxonomy for forests, which considers a variety of climate scenarios over a 100-year timeframe. This approach helps us build a picture of timber production over the long term, including possible risks to habitat quality.

For our direct sustainable forestry strategy, we only invest in forests that are (or can be) certified by the Forest Stewardship Council, which means management meets strict ESG standards. But we also aim to go beyond these requirements by implementing additional interventions known as “signature actions” to address issues such as habitat and biodiversity loss. In Project Leavitt, one of our signature actions involves maintaining and enhancing habitats for deer populations struggling to find over-wintering areas in the region’s more intensively managed forests.

Our theory of change is based on the principle that we can deliver improved sustainable forest management – both environmentally and financially. We seek out forests owned by likeminded and ethical landowners who may lack the expertise to manage forests sustainably. In some cases, we might consider planting more commercially valuable species of trees to enhance productivity while also implementing non-financial measures that improve biodiversity.

Our investments are under constant review. We monitor everything from timber prices and market trends to carbon storage and natural hydrology in the forests we acquire. This allows us to update our forecasts and recalibrate the assumptions made in the initial evaluation process. We focus on the sustainable end of the forestry spectrum, investing predominantly in the US, Europe, Australia, and New Zealand.

Sustainable forestry is an increasingly popular asset class, playing a growing role in the global economy. As a forestry investment manager, we balance commercial viability with a strong commitment to improving biodiversity, habitat quality, and climate resilience.

[1] Source: FAO, 2020.