Results analysis: Foresight Sustainable Forestry

• Foresight Sustainable Forestry (FSF) has reported its results for the period ending 30/09/2022. In a tough year for markets, FSF’s positive performance stands out. From its initial public offering (IPO) on 24/11/2022 until the period end, the trust saw a total NAV return of 5.0% and a share price total return of 8.2%.
• The trust raised £130m at IPO and a further £45m from equity issuance in June. The managers deployed capital ahead of schedule and had fully invested the IPO proceeds by the time of June’s equity issuance. They also achieved their target of having at least 40% of the portfolio invested in afforestation sites by August. These are plots of land which can be turned into new forest and woodland, as opposed to existing forests.
• The increase in NAV was primarily driven by revaluations of afforestation sites, as planting began on sites that were acquired after IPO. Revaluations to forestry, mixed afforestation and forestry sites and carbon credits also delivered an uplift to the trust’s NAV.
• Sustainable timber in the UK continues to benefit from several tailwinds. Sanctions on Russia and Belarus (both major exporters), a cheaper pound boosting domestic demand and growing demand for sustainable forestry products all remain in play.
• Carbon credits are increasingly in demand due to decarbonization goals, set by companies and governments across the globe. FSF’s afforestation investments generate voluntary carbon credits, which can either be sold or paid as a dividend to shareholders. Voluntary carbon credits are a core part of FSF’s investment strategy and the uplift in valuations that they have led to in the period may be an early validation of this strategy.
• FSF Chairman Richard Davidson said: “FSF is well placed to benefit from a future increase in timber and voluntary carbon credit prices and remains focused on a significant amount of new forestry planting. We will continue to deploy our capital advantageously.”

Kepler View

Foresight Sustainable Forestry (FSF) is the only investment company listed in the UK to focus solely on forestry and is the first fund to be accredited with the London Stock Exchange’s Voluntary Carbon Market (VCM) designation. The managers invest in existing forestry sites, afforestation sites, and other sites that are a mixture of the two. The trust’s investments should theoretically not be correlated with equity or bond markets and have generated positive returns this year. Returns for the trust have three main drivers – revaluations to land, sales of timber and the creation of voluntary carbon credits.

The first of these is likely to be the primary driver of the trust’s total returns, particularly in afforestation sites. Indeed, one of the main arguments the managers had made prior to IPO was that repurposing land for forestry was likely to substantially increase its value. This has been illustrated by the period under review. In cash terms, the increase in NAV totalled £11.5m. Of that amount, £7.5m was due to revaluations of afforestation sites.

Several tailwinds are currently working in the UK timber market’s favour as well. The UK typically imports approximately 80% of its timber but a devalued pound has made domestic timber more attractive to UK buyers. Growing demand for sustainable timber, as well as the desire to ‘onshore’ supply chains, is also likely to make the timber FSF’s sites produce more appealing to buyers. At the same time, Russia, Ukraine and Belarus are now effectively off limits due to sanctions imposed following the former’s invasion of Ukraine. According to Investment Monitor, those three countries accounted for 25% of global timber trade prior to the war, a figure which is certain to drop in 2022.

Another key objective of FSF is to generate voluntary carbon credits and the trust became the first investment company to receive the London Stock Exchange’s VCM designation in December. Carbon credits are generated by projects that help reduce carbon or equivalent greenhouse gas emissions, either by removing them from the atmosphere or preventing their emission in the first place. FSF’s capital is on track to produce 1 million carbon credits in its current investment cycle. Credits that FSF produces can be paid out as dividends to shareholders (i.e. share of credits delivered in place of their cash value) or sold with any related dividend paid in cash.

It’s possible that carbon credits will increase in value in the years ahead due to growing governmental pressure and corporate pledges to reduce carbon emissions. Globally, there has been a 17x increase in the number of pledges made over the past three years and more than 80% of FTSE 100 firms have committed to being net zero by 2050. To successfully meet net zero pledges, companies will need to combine decarbonisation of their activities with offsets used only for their residual unavoidable emissions. The number of carbon credits is not markedly increasing though, suggesting there could be increasing demand for a static number of credits, with that growing demand resulting in higher prices.

Taking all of this into account, we think FSF remains an interesting option for investors looking improve the sustainability and ESG impact of their portfolio, as well as gaining exposure to an asset class that is not correlated with equity or bond markets. Growing demand for carbon credits and sustainably produced timber may also help the trust to increase its cash flow in the years ahead.

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