Forestry has the potential to become a megatrend

With an investment in forests, investors are sustainably protected against inflation and are making great strides towards the goals of reducing CO2 emissions. What are the risks and how can you safely invest?

Every year, ca. 35 billion tonnes of carbon dioxide are emitted worldwide. Forests make a valuable contribution to neutralising these emissions. They are appreciated by investors not only because they retain their value, but also because of their ability to absorb carbon dioxide. Another characteristic that makes investing in forestry particularly interesting at the moment: its increase in value has continuously outstripped the rate of inflation for every ten-year period for the last 60 years.

Tying up capital for 10 to 15 years might seem a deterrent at first. In an environment of increased inflation, however, it pays off in the long run. However, the direct acquisition of forest land is not feasible for most investors, and an equity portfolio consisting of stocks from the wood processing or packaging industry offers too little risk dispersion for diversifying a portfolio.

For private as well as institutional investors, an investment in a globally diversified fund, which in turn acquires direct holdings, may be more feasible. Outsourcing forest management to experts reduces the risk of value losses from fire or pest damage. Where forest is managed as an investment, significantly less damage occurs than in public forests. Firebreaks and dedicated firefighting teams protect the value of the trees. Planting pest and drought-resistant species helps survival in periods of low rainfall.

“Forest as an asset class has a significantly better Sharpe ratio than the world’s largest and most developed corporate market”

Financially, investors are rewarded with an attractive risk-return ratio. The American NCREIF Timberland Property Index is the benchmark for forest property performance used worldwide. Over thirty years, the index recorded an average annual increase in value of almost nine percent with an average fluctuation of also almost nine percent. In comparison, an investment in US equities yielded a return of 10.5 percent per year. The average fluctuation, however, was 17 percent annually. Forest as an asset class thus has a significantly better Sharpe ratio than the world’s largest and most developed corporate market.

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