What is Enough Sustainability in Forest Investment? 

Systematically assessing how to manage sustainability risk in forest investment to achieve your desired investment outcomes 

I’ve been working on risk a lot lately in my client engagements. I tend to be very structured in my approach to risk management, because I know that when a risk event takes place, $hi& hits the fan. Everyone scrambles to solve the emergency – likely not in the best way, and expensive and damaging spill-on consequences often surface. But by preemptively anticipating a risk and assessing its consequences, you can avoid the risk all together, or diffuse it, so that its impact is minimal. But how do you realistically determine the likelihood or gravity of a risk event occurring? How do you move it from a tick-box exercise (which let’s face it, it often is) to an invaluable management tool? 

Well, I have an example for you, where we look at just this. I was recently in a client meeting, where we were discussing environmental risk and mitigation. Here are the facts you need to know: 

• My client is in the early stages of developing a new project, 

• The margins of this project are tight – there’s no room for ‘nice to haves’, 

• Technically, the project is sound with very little risk of environmental damage, but, 

• There are stakeholder concerns with the project’s environmental sustainability, that might teeter the scales of social license to operate and reputational impacts in the wrong direction, despite the low risk of an environmental damaging event taking place. 

Their question – is it enough to manage the project’s environmental sustainability to the level of legislation, or do we need to go beyond that? What is enough when it comes to applying sustainability principles. 

In this article, I discuss sustainability enoughness in the context of risk assessment and share the advice I gave to my client. 

1. What are your Forest Investment Sustainability Principles? 

There’s a reason why when I’m advising on a new impact forestry investment strategy, the first thing I aim to understand is the set of sustainability principles held by the organization. There needs to be a sustainability through-line in all the investment products that an asset manager offers. If not, it confuses investors, your management team, the operators on the ground and your local stakeholders. You are at risk of not meeting expectations and losing trust and credibility. It’s not to say that you can’t have diverse strategies that emphasize one sustainability element more than another – but you need a foundation, a line in the sand that says Everything we do will… [fill in your sustainability principles here]. 

After reviewing their relevant sustainability commitments, I observed that there was nothing contradicting that following legislation was enough. However, they still had concerned stakeholders. We needed to dig deeper. 

2. What are your Forest Investment Sustainability Objectives for the Strategy? 

The next phase of my engagement involves looking at the sustainability or impact objectives of the strategy, and align these with financial objectives. Siloed sustainability and commercial viability thinking is setting you up for failure. When looking at their sustainability objectives for this particular strategy – my client goes beyond “do no harm”, with their environmental AND social objectives falling more into the “make better” camp, or going beyond the status quo. Now let’s align with the commercial objectives – this is where I started getting some juicy information that makes things more complicated. They had established what commercial viability means for this project and determined that the margins of the strategy are tight. There’s no room for ‘nice to haves’, but that’s not to say they still can’t “make better”. It’s more – what does better look like within their commercial limitations. Next step – identify risks and evaluate the likelihood of it occurring and the negative impact it will have on their objectives (and other unintended consequences). 

3. Assess the Risk in your Forest Investment Strategy 

In the third piece of my forest investment strategy development process, we look at risks. Now often, when forest asset managers get to the asset level, the risk assessment again is siloed where 1. Technical and financial risk, and 2. ESG risk are assessed in isolation. I take a combined approach, where risk events are categorized according to the nature of the event, but the consequences are considered across a range of interconnected factors. In the case of my client’s concern the abbreviated version of this risk assessment is this: 

Risk event: Environmental damage occurs as a consequence of their activities, even though they are operating in compliance with legislation. 

Consequence 1: Loss of Social License to Operate, as stakeholder concerns eventuated. 

Consequence 2: Reputational damage, if the environmental damage becomes more widely known and my client is seen as operating out of integrity with their make better policies, by only following legislation and disregarding stakeholder concerns. 

Consequence 3: Financial costs associated with remediation of the environmental damage, and losses resulting from loss of social license to operate and/or reputational damage. 

Now, to be clear – I had been given the evidence of my client’s risk assessment of the technical likelihood that the environmental risk event would take place, and it was extremely low. They were confident that following legislation was enough. But my concern was related to them operating in integrity with their make better policies, which explicitly referred to the environmental and social issues on the table. 

Recommendation to my Client 

I don’t want to dig into the weeds too deep here with our discussion – but at the end of the day, what I recommended was that they perform a financial analysis on the cost of various environmental safeguards they could apply, that would go beyond legislation to meet the needs of their stakeholders. If we break down this risk, the technical risk of environmental damage here is low, but the social risk of losing license to operate (even if the environmental risk event doesn’t happen) is high. So, the question that needs to be addressed through their financial analysis is:  

“What can be done to gain the social license to operate without breaking the commercial viability of the project?”   

They left the meeting with the various make better options we discussed and a clear idea of what financial analysis to perform.  

What is your Sustainability Enoughness? 

If you are an Asset Manager wondering if you’re adequately addressing sustainability risk in your forest investment strategies, reach out and we can talk about how to ensure you are operating in accordance with your sustainability principles. We want to make sure that you’re operating in that sweet spot of integrity alignment (doing what you say you’re going to do), and pragmatism (no nice-to-haves), just smart sustainability practices.  

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