The best of both worlds?

FSF offers strong ESG credentials and potential returns with low correlation to traditional assets...by David Kimberley

Assuming its existing pipeline of projects are seen through to fruition, Foresight Sustainable Forestry (FSF) will plant approximately 9m trees in the UK over the next 2 years, creating over 4,000 hectares of newly forested land in the process. This is equivalent to about a third of all tree planting that took place in the UK over the course of 2022.

Planting new trees provides two key benefits to the UK. Firstly, forests, including those managed commercially on a rotational basis for supply of timber, act as carbon sinks, meaning they take more carbon out of the atmosphere than they release. Although it’s easy to forget amidst a constantly changing news cycle, the UK government does still have a net zero target, aiming to reduce 1990 emissions levels to zero by 2050.

In reality this will be difficult to achieve by cutting emissions alone. But as an October 2022 report from Energy Monitor noted, the eight countries that are already at net zero have managed to achieve this largely by having extensive natural carbon sinks. Much of this is due to forestry. For example, Suriname is carbon neutral due to having 93% forest cover. The UK is unlikely to replicate this but it does illustrate the potential that FSF’s investments have in helping the country hit its carbon neutral targets.

Also FSF will provide high quality sources of certified local timber to buyers. Demand for timber globally is already causing huge amounts of illegal, unsustainable harvesting. For example, the WWF estimated in 2021 that 94% of Brazilian timber is illegally harvested. Assuming the World Bank estimate that timber demand is going to quadruple over the next 25 years is accurate, this problem is only going to get worse.

FSF is thus in a good position to offer an alternative supply of sustainable timber as global demand rises, particularly given the UK currently imports about 80% of its timber and wood products. At the same time, buyers in the UK will know that FSF is a high quality, sustainable supplier, thus helping to meet their own internal ESG policies.

This may go some way in explaining why the afforestation sites FSF invests in have, at least so far, seen substantial uplifts to valuation. For those unfamiliar with the term, these are unplanted land which the FSF managers acquire and then transform into new forests and woodland.

Since inception in 2021, FSF has completed planting on six afforestation sites, with another 34 in the current portfolio and in development. Those six sites have already delivered combined total returns of 98.5%, or a near doubling in their value.

They have also helped to provide meaningful employment opportunities to local people living in the areas FSF is investing in. FSF’s completing of the afforestation process at those six sites has added approximately 1.5m new trees across 689 hectares of land. The planting and maintenance that this requires meant the managers decided to pilot launch a training programme for young people in 2022, called the Forestry Skills Training Programme (FSTP).

The project was initially confined to people in Wales and involved training four individuals, on a fully-funded basis, enabling them to go on and gain full time work in forestry. Its success meant the trust decided to fully continue the FSTP in May of this year, expanding its reach to Scotland and increasing the number of people on the programme to 10. This is in addition to the approximately 700 employment opportunities that FSF’s planting programme is creating in the rural areas that the trust is active in.

Aside from these strong ESG credentials, the returns those afforestation sites generated illustrate the lack of correlation between FSF’s returns and traditional asset classes, like equities and bonds.

Despite facing severe macroeconomic headwinds, FSF has managed to deliver positive NAV total returns, in cumulative terms around 11% since IPO in November 2021.

Uplifts to completed afforestation sites are part of the reason for that, but there are other drivers of returns for the trust as well. Carbon credits, which FSF generates via afforestation, are one important factor. At the end of last year, FSF became the first investment company to receive the Voluntary Carbon Market (VCM) designation from the London Stock Exchange, which gives reassurance to prospective investors that FSF’s carbon credits are of a verifiable, high quality.

Carbon credits may offer strong potential upside to FSF as corporates seek to hit their own net zero targets. The supply and demand dynamics are extremely favourable here, with McKinsey estimating in 2021 that demand for carbon credits would increase 15-fold by 2030, with no commensurate increase in supply. This is why the FSF board wants to keep accumulated credits on balance sheet until the end of this decade, at which point shareholders can either receive them as in-specie dividends or at their market value in cash.

Timber harvesting will also produce cash flows for FSF. A key point here is that timber has a long harvesting window, so production can be held off – for years if need be - until prices are more favourable. The trees also grow in that time, meaning there is more timber to be harvested if it is left ‘on stump’ and then sold at a more favourable price later down the line.

Moreover, timber has multiple uses – used in construction, panel boards and packaging with the waste products used for renewable bioenergy production, for example – and those markets are not necessarily correlated with each other. The result is that there can be multiple drivers of timber prices and so FSF is not susceptible to the supply and demand dynamics of a single industry.

These factors go some way in explaining why the trust has managed to withstand major macroeconomic headwinds and proven popular with institutional investors thus far. Alongside meaningful sustainability and ESG credentials and the high potential upside from a burgeoning carbon credits market, the trust provides investors with an attractive risk-adjusted return profile, that has low correlation to traditional assets – which is exactly what most alternative investors are looking for.

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Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Foresight Sustainable Forestry. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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