Foresight Sustainable Forestry 25 July 2022

Foresight Sustainable Forestry (FSF) has a long-term strategy aimed at capitalising on the value of existing forested land and the value that can be generated by converting land to forestry. The majority of total returns are expected to come from capital growth, although timber sales and carbon credits are expected to generate some income. Dividends are expected to be irregular and are not expected to be a selling point of the trust. FSF has clear sustainability and ESG credentials, especially via the afforestation process which sequesters additional carbon in a natural process.

FSF’s portfolio is split between mature forests (63%) and afforestation projects (37%), and the aim is to increase the latter to more than 40%. As we discuss under Portfolio, the two types of property have different return profiles. Afforestation sites offer the potential for substantial gains as they are converted from lower value land uses (see Performance section), while mature forests offer exposure to the timber price. The managers argue there is a global lack of supply of timber which is exacerbated in the UK, and this could drive strong growth in the prices paid for forestry in the future.

FSF was launched in November 2021, raising £130m. In June 2022, it completed an equity raise and £45m is now available for the managers to invest. Robert Guest and Richard Kelly head up the team at Foresight which conceived the trust; they had compiled the seed portfolio for the Foresight Inheritance Tax Fund from 2019 onwards and FSF has a pipeline of c. £77m of sites the trust has an exclusive right to or an option over.

Aside from the return potential, a second key attraction of the trust is the sustainability and ESG credentials. The managers estimate that their afforestation schemes could take 4m tonnes of additional carbon out of the atmosphere in the first 100 years after planting, equivalent to the annual emissions of c. 500,000 people. The associated voluntary carbon credits FSF will produce may be sold over time (planned from 2030), generating an additional source of revenue to timber income.

We think FSF is likely to appeal to investors keen to add to the ESG impact of their portfolio. There is a clear carbon sequestration angle which is aligned with national and international net zero goals. The sustainability theme could contribute to returns in a number of ways. The value of forestry could rise as corporates increasingly purchase timber, a net carbon negative material and a more sustainable alternative to fossil fuel-intensive materials. Moreover, there is the potential to sell carbon credits to a rapidly expanding universe of corporates which have made Net Zero pledges.

Additionally, Robert and Richard believe supply and demand dynamics favour forestry in the coming years. They point to increasing timber demand due to urbanisation. In the UK, there is increasing reliance on foreign inventories which could come into question in a world of onshoring, reducing supply chains and high energy costs. In our view, FSF’s returns may be highest in the early years. The gains on converting land into forestry are expected to be much higher than those from mature forestry. The managers intend to sell afforested land and recycle that capital into unforested land which should ensure this growth engine is kept stoked. However, we think it likely that the exceptional gains available currently will attract other investors, and thus the returns that can be achieved may fall. Over the long-run then, the managers’ thesis on the under-supply of timber is likely to become more important to the level of returns.

We note that there will need to be some careful cash flow management in the early years, given that timber revenues and grants will be lumpy. It is likely to take some time for FSF to have generated positive operational cash flow since launch. Ultimately, significant cash flow generation will depend on the development of the carbon credit market.