4 Steps to Building a Winning Investment Pipeline

Integrating ESG and Impact into forest investment deal origination 

An investment strategy is only as good as its assets. And if you’re embarking on a new strategy that integrates ESG and impact as core features – then your eventual portfolio needs to reflect this. 

Often, asset managers experienced in timberland investing reverse engineer an investment strategy to fit an established pipeline. This works if the strategy truly reflects the pipeline. However, a word of caution – don’t try and fit a square peg into a round hole. 

An example of this could be that a timberland investment manager has a number of deals lined up from its years building network in the business. These assets may reflect previous strategies of sustainable forest management for timber maximization. However, if said manager is looking to embark on an impact strategy – that perhaps aims to be nature or climate positive, the existing pipeline might not be suitable to meet both financial and impact objectives. 

In this week’s article, I’m going to share four steps for pipeline development if you’re embarking on an ESG and impact integrated forest investment strategy, so that all objectives can be achieved.  

1. Know what you’re looking for 

This may sound obvious, but the first thing you need to get right is knowing what you’re looking for (revert to my example on reverse engineering your strategy). What this means is defining clearly in your strategy, what are your financial and impact objectives. I always urge my clients to develop a Theory of Change early in the process, that includes both financial and impact objectives. The next step will be to get specific with your targets. On the financial side, this traditionally involves developing a financial model for your portfolio and extracting the IRR over a specific time period. With impact objectives, this is not standardized. However, this is critical to evaluate impact alignment to the strategy and portfolio fit of any given assets. For example, if your overarching impact objective is to have a nature-positive portfolio, you might have targets of increasing the protected area by 10%, or increasing the diversity in fauna habitat characteristics by 10%, and so on. Without these targets – you won’t be able to assess a deal’s ability to meet your nature-positive objectives. 

Complement this desk-top exercise with a reconnaissance or fact-finding site visit. This can be going on-site to your existing pipeline and assessing the ability of these assets to meet your dual objectives, or reaching out to your network to see if they know of any similar invested assets or those on the market that you could visit. If your strategy is really different from what you’ve done in the past – engage a reputable expert with experience in your strategy’s main elements and the jurisdiction in question to perform this for you, or lead you through a visit. Keep in mind if you fall into the traditional TIMO camp, that you will want more than just an experienced timberland professional to execute this – you’ll also want someone experienced in your impact focus.  

2. Build the systems 

I’m amazed at how many investment due diligence processes are still relatively unstructured, and at the end of the day –invest or don’t invest decisions are based to a large part on gut feel. Don’t get me wrong – human intuition is a powerful thing, especially when based on years of experience, but without adequate systems in place to help you both build a suitable pipeline and evaluate it – things can get missed. This is especially important if you don’t have the years of topical experience I mentioned. 

One of the best and underestimated time and money saving systems you need to have in place is a solid screening tool. Likely some form of checklist – the screening tool is like a preliminary due diligence checklist. It takes your strategy and converts it into must-haves (or investment criteria or requirements) and no-goes (or investment restrictions). The screening phase is not about looking under every rock, it is about understanding in as black and white an outcome as possible, whether a deal aligns to your strategy. Sure, it will uncover aspects of the deal that you’ll need to dig into further in due diligence, and will even help you establish your due diligence timeline, budget and other resource requirements – but the objective here is to establish if you want to spend more time on the deal. For ESG and impact integration – your screening checklist will include things like alignment to the standards for best practice you will be applying – such as forest management certification, carbon certification, your impact targets, and so on. There are many other systems you will need to get in place to build the right pipeline, but a screening tool is a great place to start. 

If you’ve reverse engineered your strategy – check your pipeline to make sure it ticks the boxes of your screening checklist. Another low hanging fruit sanity check you can perform is to review the marketing material you’ve developed to raise capital for your new strategy and assess if your existing pipeline reflects the message in your strategy and vice versa.  

3. Originate deals 

Deal origination can be split into 3 main camps: 

1. You are already aware of the deal, 

2. You have a solid network you can access to become aware of more deals or they drip into your inbox consistently, 

3. You need to invest more (time, money, expertise) to identify opportunities. 

Let’s look at some ways you can originate deals within the later two areas.  

• Ask your investment partners in the new strategy if they know of any deals, 

• Explore if there are any deals in the vicinity of any existing assets, 

• Explore if there any service providers you’re working with that know of any deals. This can be especially helpful if your strategy focuses on a new impact domain or if forest investment is new to you – for example, if you’ve hired a biodiversity expert to help you define your KPIs for biodiversity improvement – they might also have access to deals with these biodiversity elements you seek, 

• Attend industry events, and move beyond the traditional conferences you go to, and look tangentially into parallel-themed events, but where you might be exposed to new deals. Present your strategy at such events as well, so that the deals come to you, 

• Fact-finding visits like introduced in step 1, 

• Join industry associations to gain visibility and awareness of new deals, 

• Use social media, 

• Consider hosting your own event in your target investment jurisdictions. 

4. Refine your Strategy 

I’ll remind you that you not to waste your efforts on fitting a square peg into a round hole. You might find through your deal origination process that you are having difficulty finding assets to suit your strategy. Consider that maybe, instead of it meaning that there are no good deals, it might mean that your strategy needs some tweaking. Depending on how far along you are in the process, this may be more or less difficult. If you’ve already closed, or have committed investors thanks to certain investment criteria and restrictions that are built-in to your strategy, or perhaps it is the investor’s criteria itself that forms the foundation of your strategy – these things will be harder to change. But if its not yet written in stone, you are free to adjust. Go back to understanding the critical wishes and concerns of your key stakeholders, your impact and financial objectives, and your originally set investment characteristics – and compare this to what you see on the ground – what in your strategy can change, such that you have a robust pipeline that can fulfill your overarching objectives. 

Build a Winning ESG and Impact Integrated Pipeline 

If your organization is in the process of pipeline development for your new forest impact investment strategy and you need some support, I can help you fill the gaps. Whether you need support further upstream, in strategy design or building the systems to evaluate deals, or if you need help in sourcing and evaluating deals themselves. I have worked on several diverse forest impact investment strategies, asset managers link a great strategy to a great portfolio. Reach out if you’d like to learn more. I’d be happy to set up a call and learn more about your strategy and see if I can help!