Last updated on October 1, 2020
Forests are an important carbon sink to counter the climate crisis. Sustainably managed, they can be a haven for biodiversity. On top of that, they offer important health benefits and a renewable plant-based material that can be used for anything from building skyscrapers to making plastics.
In short: the world needs more trees and more forests. Donating to tree-planting organisations and searching the internet with a tree-planting search engine are easy ways you can get more trees in the ground.
But does investing in trees also make sense from a financial point of view?
In short: yes, you can get more trees planted and earn a decent return on your money. As we’ll demonstrate below. trees do offer a market-rate return at a low risk. The downside is that due to the big numbers usually involved, forests are a difficult asset class to access for small individual investors.
However, in the past few years, a number of options have cropped up that let retail investors take part in an opportunity previously only available to large institutional investors.
How can individuals invest in forests?
Historically, investing in forestry was reserved for institutional investors. To earn money from a forest, you need scale. On top of that, you also need time; it takes decades for a tree to grow to a size where it can be harvested.
So up until very recently, investing in forests was the preserve of large institutional investors: pension funds, universities, religious endowments, family fortunes, …
In recent times, initiatives have cropped up to allow individuals to invest in forests. Here are the ones we know of so far, please leave a comment if you know of any others:
These companies have made some great innovations in finance, allowing small investors to align their money with their values and make a profit along the way. If you want to invest in trees, do check them out. Ecotree has the lowest barrier to entry at 20 euro, whereas at Forest Finance and Sharewood, you still need to pony up at least several thousands before you can buy in.
However, there is still 1 main issue: you have to wait a long time before you can cash in (from 6 years with Forest Finance’s Oasis project to 30-40 years for Ecotree).
A new company aims to solve these problems by letting you invest in forests through tradeable tokens on a blockchain ledger. Ekofolio is just starting out, but it seems promising for people looking to invest on a smaller timeline.
Finally, you can also sometimes find forestry projects on impact crowdlending platforms.
Are ETFs or REITs also an option?
No, that’s a bad idea. Timberland ETF and REIT stocks
- do not amount to more trees being planted
- are more susceptible to market swings (in other words, more risky)
- have historically given lower returns than a direct investment
For the uninitiated, a REIT (Real Estate Investment Trust) is a company that owns and operates real estate. Most REITs are publicly traded like stocks. An ETF (Exchange Traded Fund) is a collection of stocks or other securities that often tracks an underlying index. They are also listed on exchanges and publicly traded like stocks.
You can buy shares in REITs that invest in timberland. Does that mean you are planting trees? No, you are just buying stocks on the stock market, betting that the company does well, but it does not influence the amount of trees that go in the ground. For a full discussion, see Is buying stocks on the stock market considered impact investing?
In addition, the performance of public REITs tends to be influenced by market trends and other factors apart from the underlying timber investment. That means REITs do not give a natural hedge against inflation and the swings of the stock market like a direct investment in forests.
If all of that was not enough reason already: the returns on these investments has also been consistently lower than the NCREIF timberland index.
Why invest in forests?
We guess that if you made it this far, we don’t have to convince you of the enormous benefits forests have for climate, human health and biodiversity. Trees are hugely important.
So let’s focus on the financial side.
Investing in forestry in a modern, market-based context is a relatively new phenomenon. In the past, forests were owned by the organisations who needed the wood: paper mills, construction companies, churches and universities, …
Forest ownership as an investment began in the USA in the 1980s, when corporate pension plans had to diversify their investments to minimize the risk of large losses and started investing in real estate and timberland.
To help these new investors, NCREIF started to maintain an index of US timberland investments.
As the above graphic shows, the forests included in the NCREIF Timberland index gave an annual return on investment of 8,36% in the period 1993-2017. In other words, historically, investing in woodland gave returns close to that of the stock market (for less risk, as we will see later) according to this index.
However, it should be noted that the NCREIF Timberland Index is a fairly limited indicator of timberland returns. It reports only US timberland investments that are mostly fee-owned. The Index does not include all of the timberland held by institutional investors in the US, nor the 17 million acres of timberland held by the five publicly-traded timber REITs, nor the nearly 270 million acres held by families. It also does not included timberland investments made up of leased lands and timber rights, and of course, all timberland outside of the United States.
Another thing that makes the NCREIF Timberland Index a less-than-perfect benchmark is that most of its return is based on appraisals, not transactions. While the S&P 500 returns are based on transactions that involve hundreds or thousands of shares of each company in the index each day, there are simply not enough transactions on average in a given year to have a transactions-based timberland index.
But, for the moment, it’s all we have, and the results of the NCREIF are in line with the financial results of the big TIMO’s (Timberland Investment Management Organisations), so consider it a decent proxy for the actual profits made from woodland investment.
The history of investment in forests in the rest of the world is even shorter, and there are no composite indexes out there to give you an idea of historical returns in those places.
Future demand for forest products
The strong push for decarbonization of the economy will almost certainly lead to a higher demand for forest-based products. Recent technological breakthroughs have made trees much more versatile as well; you can now find components of trees in everything from textiles to LCD screens.
ÅF Pöyry, for instance, estimates the markets for European forest-based products to grow by 200 billion euros in the decade from 2020 to 2030 alone, translating into a growth rate of 2.3% per year.
Low risk, and a hedge against volatility and inflation
Investing in forestry is considered as an investment that is immune to the business cycle. Trees don’t watch the stock market. Forests keep growing even when inflation surges or the market swoons.
Timberland investors have enjoyed low volatility compared to other asset classes. From 1987 through 2012, annual returns for the NCREIF South Timberland Index were subject to a standard deviation of 7,29 percent. During the same period, the standard deviation for the S&P 500 index was 17,56 percent. More importantly, the worst annual loss for the NCREIF index was -4,31 percent, compared to the S&P 500’s worst year of -37 percent. In other words, the relative stability of timberland prices and returns is a very effective tool to diversify a portfolio of financial assets.
In addition, virtually no correlation exists between timberland returns and returns from other financial assets. Another way to enhance returns while simultaneously lowering the risk profile of an investment portfolio.
Recent years have seen unprecedented levels of accommodative policy from central banks around the world. Historic levels of government debt combined with trillions of new money printed could cause serious inflation in the near future. Timberland returns have shown a positive correlation with inflation over time.
Downsides and risks
Timber asset managers interviewed for this GIIN study nearly universally indicated that perceived risks among potential investors are consistently higher
than actual risks facing forestry investments.
Nonetheless, some did put a high-risk label on certain aspects of timberland investing, as you can see below. For a more comprehensive look at the risks involved, see this interview with Klaus Biskup.
To avoid risk, diversify. Make sure trees are just one type of asset within a varied portfolio. And diversify even further, by investing in forests in different countries, different tree species and different ages of trees.