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Forests to Flourish in Era of Inflation

Wednesday, 22 December 2021 19:27

Ecoforests Asset Management

TORONTO, ON / ACCESSWIRE / December 23, 2021 / The recent COP26 conference marked a significant turning point in the fight against climate change, as countries representing 85% of the world's forests made a historic promise to end deforestation. Forests, which act as carbon sinks and house vital ecosystems, will be key to achieving net zero emissions by 2050.

However, the pledge - which is underpinned by $19bn in public and private funds - is only the latest tailwind for the forestry industry. This emerging asset class is already witnessing heightened demand from environmentally conscious younger generations, while the recent step change in inflation is further accelerating investor interest.

This confluence of favourable factors will enable forestry assets to flourish in 2022 and beyond.

The search for uncorrelated returns

In recent years, investor portfolios have principally been constructed on the conviction that dominant market conditions - low inflation, dampened volatility, and sluggish economic growth - will persist indefinitely.

However, we appear set to be embarking on a new era of higher inflation, driven by altered attitudes towards monetary and fiscal intervention. While most developed market authorities preferred to keep involvements in the economy to a minimum at the beginning of the century, largescale interventions were launched to speed up the rebound from the global financial crisis and the European sovereign debt crisis - which have since been compounded by Covid-19 recovery schemes.

The enormity of these actions, combined with recent pandemic-related disruptions to supply chains and soaring energy costs, will likely result in structurally higher inflation in the period ahead. This will require fundamentally different portfolio construction compared to what has been successful in recent times.

Conventional bonds, for example, are already very expensive and are at risk of a sell-off in the event of persistently higher inflation. Many parts of the equity market are also likely to be impacted. Diversification benefits also suffer, as elevated inflation often results in a positive stock-bond correlation. As a result, investors will have to revisit the traditional 60/40 portfolio mix of equities and bonds and consider alternative sources of return.

Forestry will become increasingly attractive to investors looking for portfolio diversification, as it is uncorrelated to other asset classes. Returns are primarily driven by the biological growth of the trees, which can deliver upwards of 8% growth annually - irrespective of external economic conditions. Being a commodity, timber also has an in-built inflation hedge - meaning when inflation increases, the price of timber also rises. In addition, its resilience is unparalleled - timber has outperformed all other commodities in three of the last major market downturns.

Green flows set to accelerate

Investors are also undoubtedly becoming more environmentally aware. With an intergenerational wealth transfer of $15trn expected to occur by 2030, the influence of the millennial generation will be profound in the years ahead.

While previous generations were motivated solely by profits, younger investors want to make a difference. Family offices are already shifting priorities and adapting allocations to meet the demands of environmentally conscious investment. In fact, according to the UBS 2020 Global Family Office Report, almost 40% of family offices intend to allocate most of their portfolios to sustainable investments in just five years' time.

Forestry is proving popular with new generations of family offices as it satisfies environmental considerations, as well as offers the highest risk-adjusted return of any asset class over the past 30 years.

In addition to supporting the environment, forestry investments are proving incredibly positive at a societal level, enriching the lives of numerous deprived communities across the world. EcoForests' operations provide quality employment in rural parts of Costa Rica, Panama, Argentina and Honduras - areas often neglected by national economic efforts. We currently employ 100 workers in these regions and pay salaries above the national standard. As a result, EcoForests injects a substantial amount annually into communities within the vicinity of our plantations, many of which are marked by a high percentage of native people.

Global action in this area is encouraging, with the UK and 11 other countries pledging at COP26 to contribute more than £8bn to support activities in developing countries - such as restoring degraded land, tackling wildfires and supporting the rights of indigenous communities.

Forestry has long forged a reputation as an appealing destination for investors seeking allocations to uncorrelated asset classes. With the fight against climate change firmly in focus after COP26, the additional tailwind of elevated inflation is poised to drive forestry flows to unprecedented levels in the years ahead.

About EcoForests Asset Management

EcoForests is a boutique forestry investment management company that manages high-end tropical timber species on behalf of their global private and institutional investors, maximizing returns through a commitment to quality, technique, sustainability and security. Headquartered in Toronto, EcoForests has forestry operations in Central and South America with regional offices in Hong Kong, USA, Israel and Northern Ireland.

EcoForests combines unique Carbon Capture methodologies to offer competitive pricing and full-service reporting to ensure corporations can meet their sustainability goals and audit requirements by purchasing EcoForests Carbon Capture offerings. As timber prices reach record highs3 and forest valuations continue to rise, this new vertical presents opportunities for growth to the already multi-faceted forestry management investment category.

For media inquiries, please contact:

Rachel Naiman
[email protected]

For investment inquiries, please contact:

Matthew Edwards
[email protected]

SOURCE: Ecoforests Asset Management

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