Australian super funds have been slow to embrace forestry as an asset class, despite promising investment returns and its consistency with many funds’ ESG goals.
Fiona Mann, head of listed equities and ESG at LGIAsuper, told AsianInvestor that the fund did not currently have any investments in the sector and that other renewable, climate-aligned investments may currently provide a better risk-return profile.
"The inclusion of forestry assets in the fund requires all aspects of the particular investment to align, such as product specifications, capital structures, great topography, accredited carbon offsets, alignment in liquidity, fee structures, as well as taking into consideration benchmark risk,” she said.
Mann stressed that the sector was challenging to categorise, providing a range of diverse investment opportunities and risks to consider across product, geography, environmental impact, and capital structure. “Is it a pure credit/equity play; is it an agriculture investment, sitting in a private equity or venture capital portfolio; or does it sit in a responsible investment portfolio?” she said, noting that APRA’s benchmarking performance framework set different return benchmarks for asset classes that must be considered in each case.
A spokesperson for First Super told AsianInvestor that the fund does not currently own significant forestry or agriculture assets, despite being formed in 2008 from the merger of three schemes including those representing the timber industry workers and pulp and paper workers.
NICE AND SLOW
“Australian super funds have been slower to invest,” said Sarah Clawson, head of investor relations at New Forests Asset Management, an Australian manager of forestry and other nature-based investments, with A$8.7 billion ($5.9 billion) in assets under management (AUM) across 1.1 million hectares in Australia, New Zealand, Southeast Asia, Africa, and the US.
The company currently has two Australian super fund investors in their Australia and New Zealand forestry funds, which collectively comprise roughly A$6.9 billion in AUM. The funds invested in 2010 and 2017 respectively, and have not added to their investments since then.
Clawson said that while the company was receiving many more enquiries from Australian super investors, who often asked about the sustainability or impact of these investments, most remained reluctant to invest.
“A lot of them are guarded by consultants who haven’t explored the timber asset class until recently. Due to the size of their in-house investment teams, they may be more interested than many other investors in going directly into the asset class or working with [us] as a manager on separate accounts,” she said.
A DIFFERENT APPROACH
The reluctance contrasts with a large allocation to the sector by the New Zealand Superannuation Fund (NZ Super).
“We see good opportunities in forestry to deliver positive environmental outcomes, including promoting reforestation, biodiversity improvements, and carbon sequestration benefits, at the same time as providing us an attractive financial return,” NZ Super spokesperson Conor Roberts told AsianInvestor.
Roughly 0.5% of the fund’s NZ$58 billion ($4.1 billion) AUM is invested in Global Forest Partners, a US-based forestry manager with $3.3 billion in AUM across nine funds. “[This gives] exposure to other timber assets in New Zealand, Australia, Asia, Africa, and South America,” said Roberts.
NZ Super’s largest direct forestry investment is Kaingaroa Timberlands, in which it has a 42% stake. One of the world’s premier softwood plantations and covering 178,000 hectares of planted forest, Kaingaroa is a major supplier of logs to the domestic and export markets.
“Our investment partners in Kaingaroa include PSP Investments and Kakano Investments, a collective of iwi who are also part-owners of the underlying land,” he said. Iwi is a Maori word meaning “people” or “nation”.
“We have a very strong approach to managing ESG risk in these investments and retain high confidence in the opportunity, which has delivered positive risk-adjusted value-add returns,” he said.
The sector is proving increasingly popular with Asian investors.
In March, New Forests closed its latest Asia fund, the Tropical Asia Forest Fund 2, with $120 million of commitments from investors including Temasek, the Australian government, the Asian Development Bank (ADB), and Japanese asset manager Sumitomo Trust Bank (SMTB).
“We have seen a sharp increase in conversations with Japanese and Singaporean investors in the last two years,” Clawson said, noting that Asian investors had made investments in the firm’s other funds in Australia, New Zealand, and the US, although she declined to give further details.