Not for distribution SUSTAINABLE FORESTRY INVESTMENT Cary Wingfield Raditz, CFA
Jan 11, 2016
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07-Jun-07 Cary Wingfield Raditz, CFA p2
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
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07-Jun-07 Cary Wingfield Raditz, CFA p3
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
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07-Jun-07 Cary Wingfield Raditz, CFA p4
Returns & Risk 1973-2002
Asset Class Returns Risk*Sharpe
ratio
Timberland 14.54% 14.80% 53.79%
Small Cap Equities 14.20% 22.37% 34.06%
S&P 500 10.66% 17.99% 22.68%
Commercial Real Estate 9.53% 5.70% 51.75%
International Equities 9.35% 22.24% 12.46%
Long term Corporate Bonds
9.28% 11.52% 23.44%
US Treasury Bills 6.58% 2.73% 0.00%
*Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation]
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07-Jun-07 Cary Wingfield Raditz, CFA p5
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
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07-Jun-07 Cary Wingfield Raditz, CFA p7
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
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07-Jun-07 Cary Wingfield Raditz, CFA p8
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
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07-Jun-07 Cary Wingfield Raditz, CFA p9
Environmental Issues
Climate change Soil and freshwater
conservation Loss of biodiversity Forest systems play a critical
role in managing environmental problems
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07-Jun-07 Cary Wingfield Raditz, CFA p10
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
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07-Jun-07 Cary Wingfield Raditz, CFA p11
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)
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07-Jun-07 Cary Wingfield Raditz, CFA p12
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)
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07-Jun-07 Cary Wingfield Raditz, CFA p13
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
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07-Jun-07 Cary Wingfield Raditz, CFA p14
Timber Conservation Strategies
1. Pure Conservation
2. Sustainable Harvesting
3. Creative Structured Solutions
4. Example: Selling Easements
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07-Jun-07 Cary Wingfield Raditz, CFA p15
1. 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
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07-Jun-07 Cary Wingfield Raditz, CFA p16
2. 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
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07-Jun-07 Cary Wingfield Raditz, CFA p17
3. Structured Solutions
Incorporate PES Tax sensitive strategies--
Easements Partner with non-profit govt and
NGOs (Sierra Club) Structure for socially
responsible investment market
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07-Jun-07 Cary Wingfield Raditz, CFA p18
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
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07-Jun-07 Cary Wingfield Raditz, CFA p19
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
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07-Jun-07 Cary Wingfield Raditz, CFA p20
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