Feb 16, 2018
Investing in forestry: for the cash flow, but also the violins and the poetry
The Sitka spruce is one of the largest species of evergreens in the world. It can grow to nearly 100 meters tall, at an astonishing pace of 1.5 meters per year, and have a trunk diameter of 5 meters. The largest one currently known has an estimated trunk volume of 337 cubic meters — surely enough to produce more than enough paper to print all the copies of Ulysses sold during James Joyce’s lifetime just from a single tree.
The Sitka spruce is one of the largest species of evergreens in the world. It can grow to nearly 100 meters tall, at an astonishing pace of 1.5 meters per year, and have a trunk diameter of 5 meters. The largest one currently known has an estimated trunk volume of 337 cubic meters — surely enough to produce more than enough paper to print all the copies of Ulysses sold during James Joyce’s lifetime just from a single tree.
So no wonder the Irish are fond of it. In fact, too fond of it, says Jane Feehan, investment officer with the European Investment Bank’s environmental and climate finance policy unit. “Ireland’s monoculture plantations of Sitka spruce are a mixed blessing — they are fantastically productive, but make for a monotonous landscape with little habitat value to offer to native flora and fauna. When the trees reach harvesting age and it’s time to chop it down, clearfelling can be ecologically disruptive and can contribute to soil erosion,” she notes. Yet, it is widely recognized that in order to preserve natural forests, plantations are very much needed to sustainably produce the bio-materials we consume.
For the rural areas of Ireland, the entry of professional sustainable forestry funds could provide an opportunity to engage with professionals to manage the small parcels of forestland to, in line with the government regulation enacted by Ireland to safeguard biodiversity, carry out the necessary thinnings and require replanting following final harvest.
Ireland has been remarkably successful in increasing its forest area from about 2–3% of the total area to 11–12% today. This was achieved, in part, by launching an EU-financed subsidy scheme for farmers to convert farmland to forest. “Many in the rural areas saw the opportunity to plan for retirement, switching to something requiring less hands-on management, and visible demand for timber promising extra income beyond the grants and subsidies,” Feehan accounts. Many planted Sitka spruce — a resilient, fast-growing species highly valued for a range of purposes, particularly in construction, fencing and pallet manufacture. It weighs comparatively little for its strength, so can also be useful, for example in the manufacturing of guitars, violins, harps and pianos, but also for masts of yachts and even, in the older days, aircraft wings — the Wright brothers’ Flyer was built with it, and even during World War II spruce was used for aircraft when aluminium was scarce.
As a result of the subsidy scheme, Ireland now has 19 500 private forest owners, many being elderly farmers with small forests plantations. The fragmented ownership is now creating problems — to properly manage forests, you need to invest in equipment, and build roads to access the forests, for example, where economies of scale perform much better. “Regulations and best practice exists and forest owners are aware that timely thinning is important, but there is the human tendency for the small-scale owner to say — ah, I’ll look at doing the maintenance next year, after all, what’s going to happen to a forest? But in fact the value of the final harvest depends on it,” Feehan says.
Which is why the European Investment Bank has recently invested approximately EUR 30 million with Dasos Capital Oy, an experienced forest investment manager to consolidate a portfolio of around 12 000 hectares of productive forest area in Ireland and ensure its sustainable management. The investment has been included in the Investment Plan for Europe portfolio, partially guaranteed by the European Commission, intending to trigger EUR 315 billion in additional investment in Europe over three years.
“What is great is that over the decades we have been able to cover almost the entire forestry value chain in Ireland,” Feehan says. “The EIB supported successive government plantation programmes. Then in the 90’s we helped finance timber processing with a loan to the Medite MDF (Medium Density Fibreboard) factory. We recently financed the state-owned forestry company Coillte, contribution to the improved management of their standing forest resources, including for recreational and amenity purposes. And now, with Dasos, we are investing in the private sector, helping to realise the potential of the privately-owned forest plantations. We hope that this Fund will attract attention from large institutional investors in Ireland, helping to develop this asset class in Europe.”
Johannes Äärilä of Dasos Capital sees great potential in Ireland in particular, and in forest as investment in general. “Forest has low or even no correlation with other traditional asset classes — trees grow every year, despite what the economy is doing,” he says. “Forest investment can provide both capital appreciation and cash flow, depending on asset maturity, and diversification opportunities within the asset class are ample in terms of geography, species, end product and maturity.”
“Dasos will employ the full range of harvesting options ranging from continuous cover to value creating thinnings as well as end-of rotation fellings to allow investment in the next tree generation and the use of more adapted seed material,” he added.
With the increased investment, Ireland, currently the country with the lowest forest area of all the countries in the EU, expects to be able to increase that 11% a bit closer to the EU average of 42%. History teaches us, benefits can extend beyond the economic and the environmental. “I made some of these poems walking about among the Seven Woods, before the big wind of nineteen hundred and three blew down so many trees, & troubled the wild creatures, & changed the look of things,” great Irish poet and Nobel Prize winner William Butler Yeats once recalled. So here is hoping there will be plenty of forest to inspire Ireland’s next Yeats, Joyce or Wilde, and that they’ll have plenty of paper to write on.
Originally published at www.eib.org.
