Barron's Finds a Modern Day Money Tree


Impact investors like to grumble that there aren’t enough investable deals available, so we were encouraged to read an article recently in Barron’s about EcoTrust, a forestry fund generating returns while managing for environmental impact.

Ecotrust, operating in the Pacific Northwest, plants mixed-species, polyculture stands rather than just one species. While their peers focus on cultivating douglas fir monocultures, Ecotrust  purposefully thins their stands to encourage growth of red cedar, redwood, and spruce. We’re similar in our approach in that we plant 4-5 native tropical woods along with non-native teak.

Ecotrust is also taking advantage of ecosystem services payments such as conservation easements and some carbon credit sales. While the US has a significantly more advanced carbon market than Panama, we think in the next 20 years those markets will develop, enabling us to increase the return to our investors.

Finally, Ecotrust is focused on properties in economically distressed areas and high value conservation forests, and they receive certain tax credits and incentives for making investments in these areas. The Choco-Darien rainforest, where we work, is designated by Conservation International as a biodiversity hotspot. At the moment there are no incentives that recognize sustainable forestry in the area, but we are positioned better than our monoculture peers to access that “soft capital” if it becomes available.

It heartens us to see a pioneering forestry fund in the US receiving recognition in the mainstream financial media such as Barrons, and we hope that it leads more impact investors to see the financial and environmental potential of sustainable forestry.

Must-Reads For Tropical Forestry Investing

Photo of women sorting native species saplings in Darien PanamaWomen sort native species saplings in Darien PanamaTwo recently published reports examine the roles of private capital in forestry, and increasing investment flows to locally controlled forestry.  

The Guide to Investing in Locally Controlled Forestry, released in December, is the product of a series of meetings called the Growing Forest Partnerships Initiative. The initiative, managed by the Yale School of Forestry’s Forests Dialogue, brought together investors, forest rights-holders, policy makers, and donors for a series of meetings to develop a set of recommendations to increase investment flows into locally controlled forestry. We contributed a case study about the challenges and benefits of building a local focus into our business model.   

In January, The European Tropical Forest Research Network (ETFRN) and Tropenbos released their News 54 publication entitled Good Business: Making Private Investments Work for Tropical Forests. The ETFRN/Tropenbos piece looks more broadly at the role private finance plays in the restoration and sustainable management of tropical forests. With an estimated investment of $15 billion per year, the private sector represents the largest investor in sustainable forestry. We contributed a case study to this report as well, a more in-depth look at how the Equitable Forestry model increase benefits to local communities and reduces investment risk.

All the case studies featured in the Guide to Investing in Locally Controlled Forestry and the ETFRN News 54 are inspiring examples of how organizations are attracting private investment to sustainable forestry models and increasing local control of tropical forests. We consider them must-reads for anyone interested in investing responsibly in forestry, and feel honored to be included.

ITTO is Back!

In January 2012, the International Tropical Timber Organization (ITTO) discontinued their biweekly market report because they lost their budget. This was disappointing for us because we used it to track market prices for some of the tropical woods we grow in our projects, and distribute key findings to our shareholders.

But, after a year of going without, we’re happy to see the ITTO biweekly market report is being published again. The report does an excellent job of reporting on country-specific tropical timber news and publishing prices for different species and products in different markets. We encourage you to check it out.

Investing in Locally Controlled Forestry

A group of workers in Nuevo Paraiso after a day of workA group of workers in Nuevo Paraiso after a day of workAs the global demand for forest resources continues to grow, small forest communities are gradually losing control over those resources. But over the past several years, investing in locally controlled forestry (LCF) has gained support as a way to empower these communities to regain ownership.

LCF is formally defined as

“The local right for forest owner families and communities to make decisions on commercial forest management and land use, with secure tenure rights, freedom of association and access to markets and technology.”

Between 2009 and 2012, The Forests Dialogue, Growing Forest Partnerships and the government of Sweden convened a series of meetings between small forest owners, investors, bankers, philanthropists and indigenous communities to explore ways to increase investment into LCF.

Based on those meetings, The Forests Dialogue produced a report called Investing In Locally Controlled Forestry that presents ways to catalyze investment for community forestry enterprises.

One of the key findings of the report is the need for two distinct types of investment capital: enabling investment and more traditional asset investment.

Enabling Investment

In a recent post on the Guardian’s website, one of the lead authors of the report Duncan MacQueen gave an overview of these types of financing.

Enabling investment describes the kind of early stage, foundational support that small forest enterprises need just to be able to operate. They are

“investment in rights, organisation and capacity, from which a tangible financial return is not expected”

Funding the “ground work” usually requires philanthropic support, but we wouldn’t say that enabling investments necessarily don’t produce a return (we see our shareholders as enabling investors in some ways; more on that below). But because they catalyze traditional asset investment, enabling investments may generate just as much, if not more positive impact. The report goes on to describe the four types of enabling investments that are increasing support for locally controlled forestry investments:

“Dialogue participants identified four types of enabling investment—commercial forest rights, business capacity, organisation-building and fair and balanced asset investment deals—that have been critical to successful investments in LCF worldwide.”

For Planting Empowerment, an example of an enabling investment would be investing in an NGO that advocates on behalf of indigenous land rights.

Asset investment

The report defines asset investing as an investing “from which a tangible financial return is expected.” This type of investment is more familiar to traditional forestry investors used to dealing with clear land ownership and a well organized managing partner. Gaining this type of investment is usually out of reach of community forest enterprises because they lack the basic organization and operating securities that traditional asset investors look for. Asset investing can take a variety of shapes, from socially responsible investors to institutional endowments and could be debt or equity.

Where do we fall?

Some of our shareholders reading this might be wondering how we would characterize their investment--enabling or asset. The answer is somewhere in between, but probably closer to asset investment.

In some ways, enabling investment describes the type of fundraising we’ve been doing for the past six years. By providing the “seed capital” for Planting Empowerment, our shareholders enable us to develop agroforestry projects, train our workforce and partners on how to manage them, and support our community forestry partner Arimae’s struggle to defend its reservation from illegal logging. Our shareholders understand that theirs is a long term investment, but one that will produce returns once we begin to sell timber and crop harvests.

But we and our investors can only do so much. In order to increase the number of smallholders developing forestry projects, our partner communities need access to credit for those kinds of projects, more access to education, and in the case of Arimae, the assurance that the Panamanian government will enforce their communal land rights. One example of an enabling investment in our partner community of Arimae is the UNDP-GEF Small Grants award that enabled the community to develop a native species tree nursery and assess the carbon storage in its rainforest reservation. Both of those activities represent potential income for the community.

Without compromising our mission, Planting Empowerment is also aiming to bring on more traditional asset investors who represent larger amounts of money. Larger investments mean we can partner with more communities and thereby expand our impact to a larger group of beneficiaries. As a startup with an unconventional model, we don’t perfectly fit the risk profile of the average asset investor, but over the next five years, we envision becoming a self-sustaining forestry business that attracts more of those investors based on sales of our tropical hardwoods, cash crops and possibly carbon credits.

Expanding sustainable forestry as an alternative to cattle ranching and slash and burn agriculture--and doing it profitably--will take both enabling investment and asset investment. We want to equip our community forestry partners to develop their own profitable forestry projects, and that will take investing in commercial forest rights, developing their business capacity, and organization-building within communities. Over the next several years as we demonstrate that sustainable forestry can be both profitable and beneficial, we think that more asset-type investors will get interested.

Forestry Investment Options

Investors interested in adding alternative investments to their portfolio have a range of options when it comes to forestry investments. Each comes with its own characteristic risks, management style, and type of returns. The website Investing Alternatively does a good job of explaining the types of forestry investments available to retail investors.

Forestry technician stands with a teak tree in PanamaForestry technician stands with a teak tree in PanamaThe site and its descriptions provide an opportunity to describe how our investments are evolving as Planting Empowerment grows. The Forest Investment would be classified as “Tree Certificates” in the site’s definition, i.e. investors own all or a portion of the trees planted in specific timber plantation with a certain “vintage”. While the Tree certificates approach enables smaller investors to access forestry investing, the opportunities tend to be riskier because there is minimal liquidity, meaning the investor can’t exit the investment easily.

Planting Empowerment is in the process of consolidating our funds to operate more like the “Tropical Timber Company” described on the site. This means that we will merge our two original plantations and investors into a single entity. This consolidated company will have a larger capital base and multiple vintages of timber to smooth revenue streams.

We decided to take this route to give our investors more liquidity and regular revenues, and to decrease our administrative expenses from running multiple independent timber funds. Instead of gaining large dividends, investors will benefit from share appreciation and smaller dividends as we reinvest profits into planting more trees and crops.

Over the long term, we believe that operating as a private timber investment company makes sense for our investors and the growth of the company.

As always, before choosing any investment, investors should understand how to choose forestry investments and consider how they fit into their broader financial plans.