It is said that the Year of the Wood Dragon will bring great energy and transformation. And with the spotlight returning to the element of wood in Chinese astrology this year, it is also hoped that forestry funds and other nature-based real assets will bring more fortune as they move into the investment mainstream.

In the wake of geopolitical uncertainties and interest rate hikes, investors in Asia have been re-evaluating their asset allocation strategies with many attracted to sustainable investing, according to the Schroders Global Investor Study 2023,

“The findings of the [study] underlined the widespread but growing recognition of the importance of active ownership to sustainable investment,” says Andy Howard, global head of sustainable investment at Schroders.

And forestry funds could be an emerging star of alternative investments, says Laurent Capolaghi, partner, private equity leader at EY Luxembourg. He points out that one of the primary values of investing in timber and forestry is the potential for long-term growth.

“Timber is a slow-growing asset, and it can take years or even decades for a tree to reach maturity. However, once a tree is harvested, it can be sold for lumber, pulp and other wood products, generating a return on investment. Additionally, the value of timberland tends to appreciate over time, and timber prices tend to increase as demand for wood products grows,” Capolaghi explains.

Robust valuations

While there may be ongoing instability in the short term due to geopolitical and economic factors, the long-term forecasts for forestry assets, based on sustained demand and supply shortages, suggest robust valuations, says David Shelton, managing director, Australia and New Zealand, and global head of investments at New Forests, a Sydney-based investment manager of nature-based real assets.

“Emerging markets such as India and Southeast Asia are seen as potential areas for growth in the forestry sector, albeit with considerations for infrastructure development,” says Shelton.

“The forestry market is considered a long-dated asset class, and the region generally experiences a supply shortage. Despite short-term fluctuations, the broader context of a regional supply shortage keeps the market dynamics strong and compelling for investors.”

Shelton also points out that the forestry sector was given a boost during the last days of COP28 in Dubai when the Forest Carbon Results and Credits roadmap was launched by 15 governments.

The scheme outlines a plan to scale investment in forest carbon results and credits, underscoring the significant potential of forest carbon markets to scale payments for climate and environmental services.

More than 150 businesses and financial institutions announced plans to set climate and nature targets under the forest land and agriculture frameworks of Science Based Targets Network and Science Based Targets initiative.

Under these frameworks, businesses agree to increase investments in nature-based solutions and to begin assessing, managing and disclosing their nature-related impacts, dependencies, risks, and opportunities through the Taskforce on Nature-related Financial Disclosures (TNFD) framework.

Asia carbon market

Carbon credits are also gaining prominence as countries pursue their decarbonization objectives to fight climate change. The idea of carbon credit was first proposed in the Kyoto Protocol of 1997 as a financial instrument to compensate for greenhouse gas emissions.

Forests are a well-established and easy-to-understand carbon offsetting tool. And sustainable forestry investment generates opportunities to develop carbon projects for the voluntary carbon market, including afforestation, reforestation and revegetation of plantation forests with the intent to harvest and repeat planting cycles.

New Forests says carbon credit project development can be integrated into forestry asset management processes, thereby augmenting and boosting the value of forestry assets.

Despite the growing demand for timber, Southeast Asia is lagging behind other regions such as South America in the development of commercial plantations for high-value uses. The combined plantation area in the region’s key forestry countries of Cambodia, Laos, Malaysia, Indonesia, Vietnam and Thailand, is estimated at only five to six million hectares.

However, New Forests believes these plantations can transition to higher-value species over time and see Southeast Asia’s share of timber production rise from 39% in 2013 to 62% of world plantation production by 2050.

Japan forestry fund

It’s not only in Southeast Asia that the development of commercial plantations is accelerating. Last year, Tokyo-based Sumitomo Forestry created a forestry fund together with nine Japanese companies, including oil refiner Eneos Corporation and Osaka Gas Company.

The fund has raised 60 billion yen (US$430 million) to contribute to “the realization of a decarbonized society through investment in forest management”, according to Sumitomo Forestry.

The firm expects that the fund will generate carbon credits worth about 1 million tonnes of carbon dioxide equivalent a year on average, by increasing forests’ capacity to absorb CO2 chiefly through afforestation. The fund will be operated for 15 years and carbon credits and proceeds will be distributed to the investors in line with their stakes.

“The fund can not only create economic value through timber trading but also contribute to the global environment through forest preservation and expansion and helping investors offset their carbon emissions,” says Sumitomo Forestry president Toshiro Mitsuyoshi.

Also announced at COP28 was a joint statement from 17 countries calling for the use of sustainable wood in construction, a boost for nature-based asset managers such as New Forests and Sumitomo Forestry.

Jim Roland, head of Asia-Pacific at Federated Hermes, says: “Nature-based solutions are an exciting and developing part of the market and a crucial part of achieving net zero. We are seeing growing interest, particularly from institutional investors, in APAC and elsewhere.”

Beyond the Year of the Wood Dragon, the long-term outlook for the forestry fund sector looks positive, driven by sustained demand, supply shortages, regulatory support, and a commitment to sustainable practices.