Forestry investors and ESG

Forestry investors are exposed to a range of environmental, social and governance (ESG) factors. How those factors impact investments – ultimately, whether they materialise as risks or opportunities for value creation – depends largely on an investor’s responsible investment approach.

There are many frameworks and tools available to help forestry investors consider ESG factors, which must be integrated at each stage of the investment process – and throughout the long lifecycle of a forestry investment. Central to much of this work is certification, which has helped to define and audit many forestry industry players’ environmental and social performance, while driving improved standards.

However, certification does not fully address all ESG elements, notably governance. Implementation of certification can also fall short of expectations. A holistic approach to responsible forestry investing includes certification as well as the use of other tools that address specific issues in more depth, such as land rights and usage.

Meanwhile, forestry is becoming a key element of the discussion around reducing global carbon emissions in order to limit global warming to 1.5°C. The 2015 Paris Climate Agreement and subsequent studies on the role that forests can play in mitigating climate change, as well as the EU’s Action Plan on sustainable finance, could spur the flow of more institutional capital into forestry. As a result, more forestry investment products and strategies, which deliver market returns and environmental and social benefits, are likely to become available.

Such products and strategies include developing carbon offset programmes as part of emissions trading schemes, such as California’s cap-and-trade programme, conservation easements, and biomass production for generating renewable energy. But for these to grow at scale, certain issues must be addressed. These include the debate over land use, which often pits forestry against agriculture, the price placed on carbon, and the concept of natural capital to place a floor under the value of forests as a means of supporting greater institutional investment.

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