How Risk = Trust in Forest Investment 

Why transparency in how you explain risk builds trust with your stakeholders 

Investments are inherently built on trust.  

• Trust that an investment manager is going to deliver on investor expectations 

• Trust that an investee is going to deliver on the business plan 

• Trust that an investor is going to deliver committed investment capital 

• And so on… 

But no matter what side of the table you sit on, there is a risk that the other parties needed to make the whole thing work won’t deliver. This is why how we address risk is so important in building trust. In this week’s article, I’m going to dig into what you can do from your vantage point to be forthcoming with the risks that are your responsibility to manage. 

Internal Stakeholders and Forest Investment Risk 

I’ve hammered on about this before, but your first task with a new forest investment strategy is gaining buy-in from your internal stakeholders. This may be your executive management or board, investment committee (IC), risk and compliance committee, sustainability department, and so on. These stakeholders need to ensure that shareholders, regulators, and public opinion about the activities of this strategy are aligned to objectives and adequately account for risk. 

Investors and Forest Investment Risk 

There’s a reason why one of the key distinguishing features of an investor is their risk-return profile. The returns an investor seeks are higher when they accept more risk and vice versa. A high risk-return investor, though accepting higher risk – needs the confidence that risks are understood and that there are systems in place to avoid or mitigate them. A low risk-return investor refuses to take higher risk – ensuring that an investment strategy is tried and tested and the (low) returns that they seek are almost guaranteed. 

Investment Managers and Forest Investment Risk 

Investment Managers need to meet the expectations of their organization and that of the investors. This means having a solid risk management process that is consistently applied throughout the investment process and on through investment oversight and exit. 

Gaining Trust through Risk Transparency 

One of the easiest ways to gain trust among your stakeholders is not to sugar-coat an opportunity or strategy, but to be transparent about the risks. I once heard an asset manager state that one of the best ways a prospective investee can get the attention of an investor is to be forthcoming about the risk. The more an investor or investment manager needs to dig to uncover the risks, the more diluted is the trust and the less likely an investor is to have confidence in the deal and the partner. 

Here are some ways to build trust through risk – whether you’re an investor, investment manager, or investee. 

1. Assess risks at the strategy and asset level 

More a risk for a new Fund or portfolio level strategy, if you are developing one – you need to consider not only the asset level risk, but also the risk to the strategy itself. At the asset level – you will look at execution risks, biological risks, climate risks, ESG risks, etc. At the strategy level – you will need to consider timing risk, ability to secure capital and deal flow, etc. Being forthcoming with both of these is important to build trust among internal stakeholders and investors. 

2. Consistently applied risk assessment framework 

Before you even raise or deploy $1, you should have a risk assessment framework that outlines how risks will be identified, ranked, managed, evaluated and then how management will be adapted as needed based on results. Clearly communicating how you identify, assess and manage risks to your stakeholders will build confidence in your ability to flag risks and avoid or minimize them. 

3. Communicate risks transparently, don’t sugar coat them 

Part of the framework mentioned above should have a system for reporting or communicating risks appropriately and to the right stakeholders. In the very early days before you’re even assessing deals, you’ll want to share your system with your stakeholders, when you start evaluating deals or business opportunities – you’ll want to show your IC and risk and compliance team what risks you’ve identified and how these will be mitigated. When you’ve invested or commenced your new business model, you’ll have a system to extract the risks and mitigation activities from your implementing team (which they should also be communicating with their stakeholders) and communicate as needed to your investors and internal stakeholders. Risks ALWAYS exist, and they should be clearly communicated so that your stakeholders have confidence that you’ve got them under control.  

4. Prevent and respond to risk events appropriately 

Your risk framework should clarify how you will prevent and respond to risk events of various severity. Not every risk warrants internal resources, a budget and a management plan to avoid or mitigate. But some risk events could break your investment, and these require more attention. Your risk identification and assessment process should evaluate severity (likelihood and consequence) of a risk event and have a standard approach for the level of resources that will be applied. Of course, each risk event will need unique consideration – but streamlining how you respond in advance of a risk assessment can serve as a backstop – for you to see if the risk mitigation you have in mind is suitable for the severity of the risk.  

5. Systems for objectivity 

Acknowledge that the individuals or teams originating a deal or business plan will often have risk blinders on. They tend to see all the merits of the deal, build the relationships with the investment partner, and consequently – can ignore or underestimate risks. Having a system in place that brings objectivity into an investment decision can help remove this bias.  

6. Turn away opportunities 

If I was looking at your hit rate for the deals you initially bring forward to your IC and those that are ultimately invested in – I wouldn’t congratulate your ability to originate only the best opportunities – I would question your ability to scrutinize a deal’s alignment to your strategy and of course the risks. This last point is more an outcome of your system than a recommendation per se. You need to consistently apply your risk identification and assessment process and not be afraid to decline an investment if it has too many red flags – even if these aren’t uncovered until late in the due diligence process, where you may have already invested hundreds of thousands of dollars to evaluate an opportunity. This also goes for forest businesses considering a revised business model. You need to demonstrate to your shareholders that you have a system for scrutinizing an opportunity and show that you can say “no” after applying your risk assessment and not follow every business opportunity that comes your way.   

Forest Impact Investment Strategy Development 

Establishing robust risk management frameworks for forest investment strategies is something I do a lot with my clients. If you find yourself either in need to improve your risk management within an existing strategy, or to build it up from the beginning with a new strategy, reach out and let’s have a chat and see if I can help.