Talking Heads – Capitale naturale: i molteplici meriti di una silvicoltura sostenibile gestita

This is an audio transcript of the Talking Heads podcast episode Natural capital: the multiple merits of managed sustainable forestry

Andrew Craig: Hello, and welcome to the BNP Paribas Asset Management Talking Heads podcast. Our aim is to bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be introducing the role that forestry investments can play in an institutional investor’s portfolio.

I’m Andy Craig, Co-head of the Investment Insight Centre, and I’m joined by Celine Claudon, Chief Commercial Officer for the International Woodland Company (IWC), and Maxence Foucault, Private Asset Lead at BNP Paribas Asset Management’s Sustainability Centre.

IWC, based in Copenhagen, is a leading natural resources investment company. It has extensive experience investing in global, sustainable timberland, responsible agriculture and ecosystem restoration. IWC currently manages or advises on USD 6 billion in assets for institutional and private investors. The BNP Paribas Asset Management Group acquired a majority stake in IWC in 2023. IWC brings to us its long experience and expertise, which goes back over more than 30 years since its formation in 1991. Welcome, Celine and Maxence, and thanks for joining me.

Celine Claudon: Pleasure to be here.

Maxence Foucault: Very glad to be here with you today.

AC: Celine, could you describe for us what a sustainable forestry investment actually consists of?

CC: When we talk about institutional forest investment, we mean an investment in sustainably managed timberland. Timberland is a forest whose primary objective is timber production. Generally, commercial forests are established to meet the growing demand for wood. One main feature of such investments is the predictable biological growth of the trees, which can be modelled.

Another feature is the stable land values as investors usually acquire both the land and the trees. A third characteristic is that there is usually no downstream industry, so you only invest in the forest. You do not invest in a sawmill, for example, although in some cases it may make sense to invest further down the value chain. Generally, there is little or no debt.

Finally, and this is a key aspect, IWC’s policy is to get third-party sustainable forest management certification on all our assets. This external stamp really ensures that the way we manage the forest meets environmental and social standards, and it documents our forestry practices, biodiversity and a number of social aspects.

AC: Isn’t forestry a niche asset? Maxence, can you explain the potential of this asset class for an asset manager like BNP Paribas Asset Management?

MF: It is true that [forestry] can seem quite niche, but in the end, it is actually central to our lives. Historically, it’s been valued and used because it is easily accessible and convertible, robust and flexible, so it can respond to many kinds of needs.

Today, it continues to be used in an incredible number of products as it is a natural multipurpose material which has the quality of being renewable. To put that into perspective and show how it continues to be used today, world production of wood has more than doubled since the 1960s, with two main final markets for its use being construction and consumer goods. This is mainly driven by population growth, which is continuing, and revenues.

But what do we see for the future? Well, we anticipate it to grow steadily as the economy needs to transition towards more [environmentally] respectful practices. For example, the need to have alternatives to plastic products or to have decarbonised material as replacements for steel or concrete to help the transition.

Today, wood is used in many sectors. In construction, it’s particularly relevant because this is an industry that has a strong need for decarbonisation and [timber] is a viable option with many applications. We can see more and more players integrating this expertise into their ways of building. So this industry is starting to adapt and wood is used in many things, even in multi-storey buildings. More and more players are setting minimum targets for wood in their constructions.

[Wood] is also used in sustainable packaging. As you know, many companies have decided to either reduce or get rid of plastic, so wood is definitely relevant for that, the [main] challenge being that we need to maintain a high recycling rate.

Wood fibre is also interesting. It’s still marginal, but increasing. Beyond that, wood residues can be used as a source of energy through biofuels and in pharmaceutical products, clothing and food. So, the view of forestry may be that it is niche, but in fact it is widely important and has a strong potential for growth.

AC: Celine, could you give us some information about forestry in terms of the asset class and the size of the investment universe?

CC: We estimate the institutional timberland universe to be about USD 200 billion and actual institutional timberland investments are around USD 100 billion. However, the universe could be larger, mainly through afforestation – planting new forests.

Historically, institutional forest investors have been large pension funds in the US, Canada, the Netherlands, the UK, Denmark and Sweden, as well as insurance companies, notably in Germany and in France, and superannuation funds, notably in Australia and New Zealand.

Today, we see more institutional investors, but also corporates and wealth managers looking into the asset class. So why is that? From a financial perspective, we see such investments as having clear benefits.

First of all, core timberland has a low correlation to public markets. Biological growth is a unique return driver. That means that timberland is a great portfolio diversifier. Also, timberland investments provide a hedge against inflation and a number of our clients have put their investments in their inflation hedge bucket. And finally, core timberland investments can provide attractive risk-adjusted returns and stable yields composed of both an annual income and capital appreciation.

AC: The asset class has many interesting characteristics from a financial point of view, especially in the current context. So, Maxence, could you talk us through the environmental, social and governance aspects of these investments and what they can bring to BNP Paribas Asset Management and our investors?

MF: Investments [in this asset class] have numerous advantages. Firstly, they contribute to providing essential materials that will accompany the economy in its transition. And if we want the economy to decarbonise and rely more on renewable material, forestry is definitely relevant.

Secondly, there is the challenge of carbon neutrality. Most human activity and most human infrastructure tends to destroy biodiversity. That is not the case with forestry.

When you grow a new forest, when you plant trees, it creates shelter for life and enables biodiversity to thrive. So this asset is essential to promoting biodiversity. Just as climate was not part of the world of investing a few years ago, [biodiversity] has become central and is now a real part of what asset managers and investors are involved in. This is why forestry can play a strong role in this challenge.

I should add that simply having a forest does not make it sustainable. We need to make sure forests are managed sustainably, that good practices are put in place, rely on robust frameworks and make sure we talk about biodiversity. But we also need to create habitats within these commercial forests, corridors, wetlands and so on, so that biodiversity can develop and increase within these assets.

AC: Well, thank you, Celine and Maxence, for joining me.

CC: You’re very welcome.

MF: Thanks a lot. It was a pleasure to be here.