Investing in timber

Whether it's teak plantations in Cosa Rica, mahogany farms in the Dominican Republic or eucalyptus estates in South Africa, investors around the world looking to make money with timber investments, have a wide variety of options.

Financial companies are going all out, trying to woo customers with rainforest yields and tree-saving investments. With glossy brochures and websites prophesying “green returns,” “one hundred percent security” and an “active contribution to protecting the environment,” photographs of exotic animals such as jaguars and toucan and lush vegetation, the suggestion is that you can make money while helping to keep the environment intact. Many companies advertize green investments by promising investors that they can support reforestation and rainforest protection projects in an economically viable manner.

In recent years, green investments have grown in popularity with investments in reforestation and forestry management topping the list. It's a development that picked up speed during the global financial crisis. Green, sustainable, considered low-risk and not susceptible to market fluctuations, timber is an investor's dream come true. At the same time, the global demand for wood is rising at a time when natural forestry resources are shrinking.

Those wanting to invest in forestry can choose between different models. There are direct investments such as buying trees or investors can participate in the market by investing in a collective scheme such as a fund which trades in timber-related stocks. A few companies buy land to plant trees from where the wood is later harvested and sold. At times, carbon-offsetting certificates are also promoted.

Some companies buy existing swaths of forest in order to preserve and administer them. Depending on the offer, the investor can buy part of the land including the trees or just the saplings without any legal rights to the land.

Monoculture hugely damaging

One thing, however ,that all timberland investments have in common is that investors need to lock up their money for a long time. It usually takes about 20 years before the investment pays off. That means investors have to wait decades for trees to mature if they want to enjoy the full benefit of their investment.

With many tree plantations only planted in recent years, there are few insights about the success or failure of such projects. Forestry scientist, Thomas Knoke from the Technical University of Munich said some companies advertize huge two-digit returns. “But that's just pure speculation,” Knoke said, adding that the calculations are often based on an overly optimistic outlook that at times forecasts extremely steep rises in timber prices.

In addition, a part of the profits can be traced not to the trees but the rising value of the land on which they are planted. And there are considerable risks involved too – from storms and insects to tree pests. “If that happens, the investment is wiped out,” Jörge Schweinle from the Thünen Institute of International Forestry and Forest Economics said.

In addition to lucrative returns, companies also push the ecological benefits of timber investments. But, some experts warn that sustainable practices aren't a given with such investments.

László Maráz from the Forum for Environment and Development says “forestry investment” is a misleading term because it often refers to huge monoculture plantations. “All they have in common with a forest is that they create shadows,” Maráz said. Large areas of monoculture bring high yields, he said, without fulfilling the many functions that forests serve such as protecting biodiversity, soil and water levels. What's worse, monoculture can kill off species and lead to soil degradation.

Certain plant species are more problematic than others – eucalyptus, for instance, needs a lot of water and if it's planted on large surfaces it can deplete the ground water level and suck the ground dry. That's what eucalyptus plantations in Brazil and South Africa have shown.
Experts say a more sensible alternative is to plant mixed forests instead of monoculture and create a more intricate ecological structure with bushes and different tree species.

Certified plantations no guarantee for sustainability 


In the end, how sustainable a timberland investment really is depends on the way the land is used. If forests are cleared to make way for agricultural crops – because the trees are planted as an investment – that is hardly ethical. But it's different if a plantation was previously only used as grazing land or if degraded land is managed for forestry. The social impact of the investment also pays a role if it is to be ethical. So, for instance, whether people were displaced from their land or whether a plantation creates jobs.

But the fact remains that it's difficult to bring ecology and economics under one roof. “Only about 10 to 12 percent of the returns can be achieved sustainably,” Thomas Knoke said.

Investors need to carefully check the offers to see if they meet certain sustainability criteria. That includes the transparency of the company pushing the investment, whether it points to the risks involved and if insurance covers certain losses.

Certification such as the Forest Stewardship Council (FSC) and the PEFC seal, the most common ones, can also testify to a plantation's sustainability standards.

But forest certifications can't guarantee sustainable forestry and land use, László Maráz warned. “Both good and really bad plantations are certified,” Maráz pointed out.