Given the indirect nature of many of our investments, careful selection of fund managers is critical in ensuring that assets are managed in accordance with best practices. Over 17 years Stafford has developed a close working relationship with 13 of the largest TIMOs (Timberland Investment Management Organisations) and regularly engages with these both proactively and reactively on ESG topics. The annual ESG manager survey and the bi-annual certification survey are two examples of such engagement. Below we discuss the 2021 results of the two surveys.

Fund managers’ responses to the annual ESG survey are being assessed and translated into scores which we summarize in the figure to the right. We are using the PRI’s 2021 assessment methodology for this purpose.[1] Managers are being assessed on multiple indicators that are related to their responsible investment policy, strategy, governance, stewardship, climate change and transparency. The resulting ISP score ranges between 0% to 100%.

Overall, timberland managers show solid scores for their responsible investment policies and stewardship, except for one manager. At the same time, ISP scores of the four managers with the lowest scores also suggest that there is room for improvement. We will discuss assessment results with the managers and indicate the areas for progression in the future. The maximum score reflects the current industry best practices and managers will be encouraged to adopt these practices (where applicable) in the future.

As an investor committed to following sound ESG principles, Stafford strives to place a high emphasis on forest certification as a means to ensure that these principles are diligently applied across our portfolio. Forest certification refers to an independent, third-party evaluation of the management of a particular forest against a certain standard. It originated in the early 1990s and was mainly intended as a means to protect tropical forests from deforestation and degradation. Forest certification has since been widely adopted across all types of forest and in virtually all the world’s major timber producing regions.

There are several forest certification systems in existence, with the major ones being the Forest Stewardship Council (FSC), Programme for the Endorsement of Forest Certification (PEFC) and Sustainable Forestry Initiative (SFI). These systems involve a rigorous third-party auditing process and provide a good indicator of adherence to legal requirements and best practice in all aspects of sustainable forest management.

At present, some 96% of Stafford’s timberland portfolio is certified,[1] with the remainder consisting largely of young timberland assets that are planned to be certified within the near future. The main certification standard in use across the portfolio is Sustainable Forestry Initiative - SFI (53%), followed by Forest Stewardship Council - FSC (27%) and American Tree Farm - ATF (9%). A significant proportion (8%) are certified under more than one standard.

Timberland has always been exposed to a certain level of risk from physical factors such as fire, wind/storms, pest & disease, etc. The varying presence and severity of these risks are therefore relatively well known across the regions where Stafford focuses its investments, and it is routine practice to consider these as part of our investment process.

Annual losses from these causes are typically very small compared to the overall NAV. During the 14 years from 2006 to 2019 net losses across Stafford’s entire timberland portfolio have averaged just 0.06% of NAV per year.[1] Whilst this is net of salvage and insurance, it does highlight a very low baseline from which one would view future risks resulting from climate change. Broadly speaking a warmer climate is expected to increase the frequency and intensity of drought periods and extend the length of fire seasons. Changing climates could result in certain pests and disease spreading to areas where they were not present before, and particularly if trees are under stress due to factors such as drought, could present an increased threat. Weather events such as storms or hurricanes could also become more extreme and potentially damaging.

However, to complicate matters, some aspects of climate change are having a positive impact on timberland. One example is the so-called carbon fertilization effect. This refers to the increased rate of photosynthesis in plants that results from elevated levels of CO2 in the atmosphere and is expected to have a material impact on tree growth rates.

Going forward the forest industry will almost certainly have to adapt to changing climatic conditions, through species selection and management practices (such as site selection, site preparation, planting densities, thinning regimes, etc). However, we do not expect a very sudden and/or unmanageable change in climate-related risk, particularly for a well-diversified timberland portfolio.

Forests occupy a key role when it comes to addressing climate change. As trees grow, they capture CO2 from the atmosphere and transform it into biomass via the process of photosynthesis. This happens on a vast scale, so much so that a third of the CO2 released by burning fossil fuels is sequestered by the world’s forests each year.

The magnitude of this sequestration highlights the critical role of forests in mitigating climate change risks, and the urgent need to prevent further deforestation, to restore degraded natural forests, and to expand planted forests so that future wood demand can be met without further damaging these resources.

The carbon benefit of trees does not necessarily stop once they are harvested. When converted into wood products (one cubic meter of wood capable of storing nearly a metric ton of CO2) and used to build houses or furniture, the carbon contained in the wood can remain “locked up” for long periods of time. Wood-based building materials such as lumber, wood-based panels and other engineered products like cross-laminated timber (CLT) also take far less energy to produce than concrete, bricks, steel or aluminium.

The embodied energy in 1 m3 of softwood, kiln-dried lumber is around 880 MJ, compared to 5,170 MJ in the same volume of bricks. That is almost one sixth of the energy required and is one of the reasons why increasing the usage of wood materials in construction is becoming an area of growing attention for governments and regulators.