5 Sustainability Reasons your Forest Fund is Not Closing 

It is an interesting time for forest investment. The opportunity has never been greater – with a rise in demand for nature-based climate solutions, global concern over biodiversity loss, and a shift in consumer preferences to renewable and circular products. Also, with the financial regulatory sector requiring financial institutions to disclose impacts on issues like climate, nature and circularity – forests have never been in a better position to attract capital for the contributions they can make to all of these objectives, financial regulatory compliance – all while showcasing attractive market-rate returns. 

Then why is it taking so long to close new forest investment strategies? 

There are the obvious reasons why an investment strategy doesn’t succeed in raising capital, and they largely relate to the following: 

1. Does the strategy make sense? – does it provide a market solution, are the structure and return expectations suited to the investors you are trying to attract, is it within the wheelhouse of the investment manager launching it, does it appropriately consider and address various risks and opportunities? 

2. Track record – does the manager have the expertise to evaluate, invest, manage, and divest forest assets for the appropriate markets and in the strategy’s jurisdictions? 

3. Pipeline – are there suitable forest assets on the market aligned with the investment strategy? 

But what investment managers may not be aware of are the sustainability reasons behind why their strategy is not closing. In this article, I’m going to dig into the 5 main sustainability reasons why your investment strategy may not be landing with investors. 

1. Your Sustainability Ethos is Weak  

This is a challenge for timberland investment managers, making a shift from a model based on timber maximization to one that integrates climate, nature or some other values not associated with generating profit. You can equate this challenge to your track record in sustainability. You may have an excellent track record as a TIMO, with high performing timberland assets, even achieving 100% sustainable forest management certification across your portfolio – but you might not have any other performance data on the sustainability objectives you are looking to achieve. 

Your business development team may be well versed in raising capital for your timberland strategies, but when it comes to the tough questions investors are asking relating to sustainability disclosures, how you will balance financial and impact objectives, what metrics you will base your sustainability performance on, and which standards for best practice will you apply? Can the person or team selling your strategy answer these questions? 

Finally, and I see this as a big, though subtle one – is that your leadership and executive team don’t reflect the sustainability ambitions of your new strategy. What I mean is that your board does not have sustainability representation, there is no C-Suite sustainability expertise, and there is no sustainability representation on your investment committee. If sustainability is merely overseen by middle management in your organization, there is a risk that investors will see this as a lack in commitment to sustainability objectives and a lack in capacity to attain them.  

SOLUTIONS: 

• Get some organizational training on sustainability – it is important that everyone is on the same page – from the executive leadership team, through to the business development department, finances, risk and compliance, and the eventual team who will be overseeing the strategy. It’s important that everyone is on the same page. This was illuminated by the Harvard Business Review, summarizing a recent study on the uptake of ESG by boards.  

• Have the difficult discussions – perhaps in an offsite, where management works through conflicting opinions about what sustainability is/isn’t and perceived impacts on financial performance.  

• Bring sustainability expertise into your executive leadership, investment committees and risk functions. 

2. Your Strategy’s Sustainability Objectives are not Meaningfully Different than your Peers’ 

As mentioned, it’s a small universe – relatively speaking, there are a small number of investment strategies on the market, all touting the benefits of their strategy’s ability to solve the climate and nature crisis, while accessing ecosystem services markets on top of timber markets. The pool of investors interested in placing natural capital investments into forest assets want something that speaks to them, and one that stands out from the rest. It doesn’t need to be overly complicated, in fact simple is probably better – but it should be different and unique to your abilities as a Fund manager. 

SOLUTIONS: 

• Evaluate the sustainability benefits you have mastered (even if they have not been objectives in the past, but by-products of sustainable forest management) and identify which are unique to your organization – these will be the low-hanging sustainability fruit for your new strategy. 

• Think hard about your pipeline. Think outside the box – rather than thinking about how you can dress up your timberland pipeline to look like something else, explore opportunities that are in the periphery of your usual areas of operation.  

3. Article 8? Article 9? EU Taxonomy Aligned? 

To be fair, financial sustainability regulations are largely uncharted waters for investors, investment managers and portfolio companies alike. However, lack of clarity on which sustainability “box” your Fund and its investment activities can be slotted into can confuse investors. They may have a mandate to invest in a certain number of Article 8 or 9 Funds and have certain expectations around EU taxonomy alignment. For a brief overview – Article 8 Funds are those that promote environmental or social (E or S) characteristics, but don’t have a primary objective of creating positive E or S impact. Article 9 Funds on the other hand, have a clear objective to generate positive E or S impacts, while also not creating any significant harm on E and S elements that might not be captured in the goals (Sustainable Capital Group, 2023). EU Taxonomy classes the investment activities as sustainable or not, based on environmental objectives. These are summarized for the forestry sector here (European Commission). If there is no clear thread between your labelling of a Fund as Article 8 or 9, or EU taxonomy aligned, the investment framework (your sustainability objectives, how you evaluate alignment, manage, monitor, and report on it), investors might walk away – or keep on you until you get it right. 

SOLUTIONS: 

• Seek legal counsel – this is a legal matter at the end of the day. Start with your own proposal and interpretation of the SFDR and EU taxonomy and the plans for your strategy – and run it by a lawyer who is familiar with these new laws. 

• Be realistic. If you have a pipeline of solid deals that are more attuned to Article 8, but you want an Article 9 Fund – you may need a new pipeline, or need to perform a risk analysis of how attractive your pipeline will be if you layer Article 9 requirements on it. 

• Build your sustainability commitments into your investment framework in a clear and logical way. 

4. Your Sustainability Track Record is Weak 

Though it starts with your sustainability ethos (see reason 1), it doesn’t end there. You may have a very solid sustainability ethos within your organization, yet still have no track record in the focus of your new strategy. For example, your existing and past forest investment mandates might be in sustainable timberland, but now you want to develop a native forest restoration strategy. What is the direct link between your experience in timberland evaluation, silviculture planning, timber market knowledge, etc. in executing this new strategy? Investors will surely want to know how you will overcome this challenge. 

SOLUTIONS: 

• Get data on your existing mandates. It’s never to late to start collecting sustainability data, this will help familiarize you with the impact of your traditional forest operations on your sustainability objectives. You can experiment with different technologies for data collection – such as remote sensing for measuring carbon stock change or camera trapping for biodiversity data. This will help build your proof – that you do have a track record in E and S outcomes. It will also assist you in fine-tuning the sustainability objectives, targets and activities for your new strategy. 

• Establish partnerships with like-minded NGOs or project developers operating in the space of your impact objectives. 

• Bring under-represented expertise in-house by hiring experts that come from organizations that manage for similar sustainability objectives as you are creating and who have generated results. 

5. You’re Speaking to the Wrong Investors 

If you’re only speaking to the usual suspects – those who have been investing in timberland for years, you may be missing the mark. You need to find, educate and convert investors that are new to the asset class – these may be corporations looking for net-zero or nature-positive impacts, mission-aligned family offices, real asset investors, like infrastructure or real estate looking to make a shift into natural capital. 

SOLUTIONS: 

• Have discussions – before you’ve even developed your strategy, or if it is developed – but before you’re trying to raise capital for it, have conversations with new investors. Understand their expectations and hesitancy for investing in the asset class. 

• Get out of your comfort zone and out of the timberland investment circle and meet some new investors. Try participating in sustainable or responsible finance conferences. Instead of the usual branch of the pension fund you speak to, talk to their impact investing arm. 

• Support education of investors new to forest investment. I don’t mean giving them your white paper or position statement on the asset class – but point them to independent resources so you don’t come across as biased. 

• Take them to the woods. Organize a study tour to some of your assets and walk investors new to the space through a managed forest. You’d be surprised how eye-opening this can be for a London or New York banker who has never stepped foot in the woods. 

Improve your Sustainability Credentials 

If you want to be a leader in the evolution of the timberland asset class, but you don’t know how to credibly make this transition while remaining true to your production forestry investment thesis, please reach out. I support timberland investment managers to make this transition efficiently – so you can capture more climate and nature value in the assets you manage and attract the investors who are looking for it. Learn more about my Timberland Upgrade service and set up a call to see if its right for you.