This article first appeared in Wealth, The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024

Back when investment firm New Forests Advisory Pty Ltd was established, sustainably grown timber was not common, and the focus on sustainability and environmental, social and governance factors was not as intense as it is now.

Founded by David Brand in Australia in 2005, the firm offered institutional investors exposure to investment returns from sustainable timber production and the growing market demand for carbon, biodiversity and water strategies. Interest was emerging but nearly two decades later, the firm’s investment strategy has become the centre of global attention.

New Forests now has over US$7 billion (RM33.44 billion) in assets under management, with over 1.3 million ha of sustainably managed forests and agricultural land. It has six offices in Australia, New Zealand, the US, Singapore and Kenya.

Part of the burgeoning interest in New Forests’ assets comes from the maturing carbon markets around the world. This has become an additional source of revenue for New Forests, aside from income from the sale of sustainably grown timber, forest-related goods and services, land value appreciation and improved agricultural land management.

“If you look at our business in the US, we were one of the largest issuers of carbon offsets in California [for its compliance market]. We were also the first issuer of an Australian carbon unit [for its compliance market], and we’re regular issuers of carbon credits for New Zealand’s emissions trading scheme (ETS),” says Geoffrey Seeto, managing director at New Forests Asia.

Briefly, compliance carbon markets are countries where the governments put a cap on the amount of greenhouse gas an entity can emit. To go beyond that limit, the entity has to purchase carbon credit allowances via the ETS.

For many Asian and emerging markets where carbon compliance markets do not exist, New Forests is looking at generating carbon credits for voluntary carbon markets (VCM). VCMs allow entities to voluntarily offset their emissions by purchasing carbon credits instead of being compelled to do so by the government.

VCMs’ carbon credits are generated from activities that reduce, remove or avoid carbon emissions. This could be from nature-based solutions such as reforestation or tech-based solutions like the generation of renewable energy.

Many companies and countries have pledged to achieve net-zero emissions by 2050. As the deadline approaches, the demand for carbon credits, especially from the VCM, is expected to increase.

“We already have projects underway across Asia through our second fund to generate positive climate outcomes and VCM units for our clients. This presents another source of revenue, in addition to everything else that we invest in around [sustainably grown] timber,” says Seeto.

In March 2022, it announced the first close of its Tropical Asia Forest Fund 2 (TAFF2) with US$120 million of capital commitment from investors including sovereign wealth funds, corporate, philanthropic and development finance sources. TAFF2 is expected to develop sustainable forest plantation assets in Southeast Asia (SEA), including Malaysia, for end markets such as timber, rubber and carbon. The first investment — into a peatland conservation and restoration project in Thailand — was made in February 2024.

The demand for sustainably sourced products, especially commodities that have been associated with deforestation, is another driving factor for the firm’s investment strategy. This is further supported by the European Union Deforestation Regulation, which bans the import of commodities like timber, rubber and oil palm that have resulted in deforestation or degradation of forests.

New Forests published an outlook for forestry investments in December 2022, in which the firm highlighted a few positive factors for the asset class: Rising demand for forest products like wood from Asia; the use of forests for carbon storage and removal; and substitution of critical minerals with biomass-based materials.

“What we’re seeing is a circular bio-economy that’s starting to emerge around timber and timber products, climate change mitigation and other benefits. Forestry also provides biodiversity and community livelihoods, so there’s a lot that this asset class can offer. Because of where the markets are, it can be done in a profitable way,” says Seeto.

Asia, especially China, has the fastest-growing demand for wood products including hardwood and softwood logs, wood chips and plywood. India is the world’s largest market for teak, and Malaysia and Vietnam have substantial export-oriented furniture manufacturing industries, according to New Forests’ region profile for SEA.

The demand for timber products is positively correlated with gross domestic growth and economic activity, and has a low correlation with other asset classes, says the firm.

Despite this growing demand, the development of commercial tree plantations for high-value uses has lagged in SEA compared with other regions like South America. The firm expects SEA’s share of timber production to rise from 39% in 2013 to 62% of world plantation production by 2050.

“Forestry as an asset class has all the benefits of things like infrastructure and real estate. The returns are comparable. You’re looking at the mid-to-high teens (roughly 16% to 19%) type of returns [in emerging markets]. There are also benefits to forestry as a diversifier and long-term hedge against inflation,” says Seeto.

“What the other asset classes don’t have is the carbon optionality and other things we can provide in the future that may be monetisable. That is our ability to generate alpha over and above your core forestry return.”

A big difference is that New Forests intends to meet the rising demand for forestry products while ensuring that they are sustainable.

“We have now introduced forest certification throughout all our assets, and we’re one of the first institutions still doing that. We’ve also taken assets and [set up] joint ventures with local parties to help them make that transition into a sustainable investment,” says Seeto.

For instance, the firm helps local forestry companies obtain the Forest Stewardship Council (FSC) Certification, which bars deforestation and requires sustainability practices as well as respect for indigenous, community and workers’ rights.

“But it’s beyond FSC. We also incorporate the International Finance Corp Performance Standards and we have our own policies that include zero deforestation, sustainable supply chains, [protect] life on land and so on,” he says.

Is there a premium paid for sustainably produced timber? Western markets like Europe and the US generally prefer FSC-certified timber products, Seeto observes.

The growing demand for wood, however, comes from Asia. But he believes that it is getting harder to exploit natural forests, and there is growing sustainability awareness in these markets. The companies that purchase these raw materials for manufacturing also want them to be sustainably grown.

Sustainably managed forest plantations can also generate positive outcomes for biodiversity, ecosystem restoration and support for rural livelihoods, through which carbon credits can be generated and sold.

Seeto gives an example of an investment it has made in Asia using the mixed landscape approach. Part of the land is reserved to be an industrial tree plantation that provides timber.

“Other parts are conservation and biodiversity areas, which can generate carbon [credits]. Another part of the land could include a processing mill, where we can provide local employment and capacity building,” he says.

“In Laos, we’ve got a piece of land where we’ve got community programmes where [the locals] grow trees, we buy it and we build a processing mill that employs 200 people. That provides some community benefit and they are able to be employed. Our environmental and social manager [there] is a local [community member]. Generation of impact is part of our investment thesis.”

But one thing to note is that carbon credit generating projects have come under much scrutiny for greenwashing, which has dampened interest in VCMs.

For this, Seeto emphasises that the firm has a Carbon Credits Integrity Policy, which governs how it creates carbon credits and the protocols — such as the Gold Standard and Verified Carbon Standard by Verra — that it follows.

On the demand side, it will assess potential carbon credit buyers on whether they are taking credible climate action before completing the sale.

“We use a risk-based approach. Ideally, the carbon that we sell to offtakers will be used for their own purposes; they would have a credible climate action policy that incorporates the climate mitigation hierarchy,” he says.

“We have zero tolerance for any type of reputational risk. You will see us making sure that we don’t do any greenwashing or deforestation. [For instance] in our first fund, we had a timber plantation in Sabah and we applied those principles. It is an FSC-approved timber plantation.”

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