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SUSTAINABLE FORESTRY INVESTMENT. Cary Wingfield Raditz, CFA. Total Global Forestry Investment. Total investable and leasable global forestlands estimated > 870 million ha Value > US$480 billion Forestry investment growing 20% p.a. for 20 years US$35 billion invested mainly in US

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sustainable forestry investment

SUSTAINABLE FORESTRY INVESTMENT

Cary Wingfield Raditz, CFA

total global forestry investment
Total Global Forestry Investment
  • Total investable and leasable global forestlands estimated > 870 million ha
  • Value > US$480 billion
  • Forestry investment growing 20% p.a. for 20 years
  • US$35 billion invested mainly in US
  • US$20 billion held by institutional investors

Cary Wingfield Raditz, CFA

timber the investment class
Timber: the Investment Class
  • Predictable biological growth
  • Asset growth= forest growth
  • Inventory=stored on the stump
  • Strong historical returns
  • Moderate risk
  • High returns on risk*
  • Portfolio diversification characteristics

* Sharpe ratio

Cary Wingfield Raditz, CFA

returns risk 1973 2002
Returns & Risk 1973-2002

*Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation]

Cary Wingfield Raditz, CFA

attributes of return
Attributes of Return
  • Biological tree growth
  • Timber price changes
  • Changes in the value of the underlying land asset
  • Non-timber forest products and services—ancillary cash flows

Cary Wingfield Raditz, CFA

timber reduces portfolio risk
Timber Reduces Portfolio Risk

Cary Wingfield Raditz, CFA

investment suitability of timber
Investment Suitability of Timber
  • > 10 years = illiquid
  • Long-term institutional portfolios
  • Endowments, foundations, pension funds, insurance companies, high-net worth
  • Matches maturity of longterm assets to maturity of longterm liabilities
  • Low correlation to equities and fixed income provides diversification
  • Certified forestland suitable for socially responsible investors

Cary Wingfield Raditz, CFA

investment vehicles
Investment Vehicles
  • Purchase forestland—manage timber assets
  • Forestry product equities
  • Forestry product bonds
  • REITS—real estate investment trusts
  • TIMOS—Timber Investment Management Organizations
  • Private equity partnerships

Cary Wingfield Raditz, CFA

environmental issues
Environmental Issues
  • Climate change
  • Soil and freshwater conservation
  • Loss of biodiversity
  • Forest systems play a critical role in managing environmental problems

Cary Wingfield Raditz, CFA

forestland management methods
Forestland Management Methods
  • Clear cutting (controversial)
  • Pure conservation—tax deductible gifts of forestland
  • Sustainable forestry management—”pure play”
  • Forestry operations includes processing
  • Certified forests (FSC)—biodiversity
  • Non-timber forest products (NTFPs)
  • Capturing PES cash flows--e.g., CERs
  • Structured methods—e.g. easements

Cary Wingfield Raditz, CFA

tropical forestry investments
Tropical Forestry Investments
  • Fast growing in tropics (short rotation)
  • High discount for Emerging Markets risk
  • Controversial (Equator Principles)
  • Lessons learned: Mitigate country risk (management, rigorous internal controls, portfolio diversification)
  • :Factor costs of poor infrastructural
  • :Neutralize corruption risk
  • :Coop local community participation in forest management
  • :Certify forests
  • :Manage non-timber forest products
  • :Monitize tradable carbon emissions rights (CERs)

Cary Wingfield Raditz, CFA

payments for eco services
Payments for Eco-services
  • Carbon sequestration--CERs
  • Water use rights—local (New York City)
  • Biodiversity—FSC certified (Precious Woods)
  • Eco-tourism (Texas Inland—hunting rights)
  • Conservation easements (USA e.g., Forest Legacy Trust)
  • Tradable development rights (USA locally regulated)

Cary Wingfield Raditz, CFA

implications for investment valuation
Implications for Investment Valuation
  • Value = Σ of discounted future cashflows
  • NTFPs and PES are real options
  • When exercised: PES provide ancillary cash flows
  • “Value enhancements”
  • Reduce illiquidity in afforestation
  • PES converge private good and public good agenda

Cary Wingfield Raditz, CFA

timber conservation strategies
Timber Conservation Strategies
  • Pure Conservation
  • Sustainable Harvesting
  • Creative Structured Solutions
  • Example: Selling Easements

Cary Wingfield Raditz, CFA

pure conservation
Pure Conservation
  • No return of principal or income
  • Forestland gift is tax deductible
  • Appropriate for land having special value or unsuitable for logging
  • Example: green belts near urban centers, old-growth riparian forests

Cary Wingfield Raditz, CFA

sustainable harvesting
Sustainable Harvesting
  • Land harvested sustainably (< 6% of board ft/year)
  • Sub-optimal timber returns, but is still solid investment
  • Short-term positive impact on environment
  • Either requires very long investment horizon or sale of most of land to capture principal and return on capital

Cary Wingfield Raditz, CFA

structured solutions
Structured Solutions
  • Incorporate PES
  • Tax sensitive strategies--Easements
  • Partner with non-profit govt and NGOs (Sierra Club)
  • Structure for socially responsible investment market

Cary Wingfield Raditz, CFA

selling easements
Selling Easements
  • Conservation easements
  • Development easements
  • Optimal or near optimal investment returns
  • Fair short term/Good
  • long term environmental impact
  • Requires foundation and non-profit funds

Cary Wingfield Raditz, CFA

easement return and impact
Easement Return and Impact
  • Benefits: Conserve wildlife habitat, clean watersheds, prevent urban sprawl, preserve valuable forestland
  • Purchase land with merchantable timber
  • Agree to environmental easement on the property at beginning
  • Satisfy the environmental guideline test
  • Provide investors tax-deductible contributions
  • Through careful replanting, return the ecosystem to its natural pre-logging state
  • At end of term, put the land into permanent conservation through a land trust

Cary Wingfield Raditz, CFA

is it time to invest
Is it Time to Invest?
  • Opportunities for creative, sustainable solutions
  • New SRI listings in capital markets
  • Select opportunities in emerging markets
  • Environment awareness will increase value of certified wood
  • New international protocols will increase demand and price of carbon and other PES

Cary Wingfield Raditz, CFA

sources of information
Sources of Information
  • www.forest-trends.org
  • Private placement memorandum
  • Initial public offering prospectus
  • Hancock Timber Resource Group www.hnrg.com
  • Rights and Resources www.rightsandresources.org

Cary Wingfield Raditz, CFA

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