Ecological investment: How to invest in wood

• Forestry is the archetype of sustainability
• Wood stocks offer reliable dividends
• The investment period should be 10 to 20 years

Since the term sustainability has a forestry origin, according to which no more wood may be felled than can be regrown, an investment in this area should represent a sustainable capital investment par excellence. However, so that investors no longer see the forest for the trees, one should deal with the individual investment opportunities and the associated opportunities and risks in advance of a capital investment.

Wood – the new trend raw material?

Along with oil and gas, wood is one of the most important raw materials in the world. Wood serves as a basic product for paper and furniture and is also one of the most popular fuels. Accordingly, the demand for timber and precious wood is increasing synchronously with the growth of the world population. As the world’s population is expected to increase by a further two billion over the next ten years, the demand for wood is likely to continue to rise. In this context, the Food and Agriculture Organization of the United Nations even estimates that the demand for wood alone in China could increase by more than 50 percent by 2050.

In addition, global demand for unprocessed logs is expected to increase to around 800 million cubic meters by 2030, which would double current demand. In accordance with this long-term trend, aristocratic families and large landowners, as well as the endowment funds of Harvard and Yale Universities, have been investing generously in this investment class for more than 20 years.

High-growth wood stocks

Investors who want to expand their existing portfolio with an investment in wood can do so in a variety of ways. In addition to a direct investment or via open and closed investment funds, as a private investor you can also invest in wood certificates or wood shares or forest companies and groups from the pulp and paper industry. There are also a large number of listed companies that own large forests and actively manage them. In the US, these companies are even managed like real estate companies and organized as tax-privileged REITs (Real Estate Investment Trusts). One of the largest in the industry is the American real estate group Rayonier from Jacksonville in the US state of Florida. As one of the largest private landowners in the United States and New Zealand, the group primarily produces lumber, paper and pulp. With an area of ​​around 10,000 square kilometers of forest, the group owns an area that is half the size of the federal state of Hesse.

With a total managed area of ​​13.9 million hectares of forest, the US company Weyerhaeuser manages an even larger area than Rayonier. However, most of this land is not in the USA, but in Canada, where it is leased by the Canadian government. Weyerhaeuser is also organized as a REIT and thus enjoys a number of tax advantages.

The largest private forest owner in Europe

However, trees do not only grow in North America, but of course also in Europe. In Sweden, for example, forest management has a centuries-old tradition. Because with a forest area that makes up 57 percent of the entire country, pine, spruce and deciduous trees are part of the classic appearance in Sweden. The country in the north also plays a global pioneering role in terms of sustainability. According to the Swedish Ministry of Forestry, at least three new trees are planted for every tree that is felled. According to this guiding principle, the largest private forest owner in all of Europe, Svenska Cellulosa, operates the world’s largest tree nursery.

The group, founded in 1929, manages around six percent of the Swedish forest with an area of ​​2.6 million hectares, which roughly corresponds to an area of ​​Mecklenburg-Western Pomerania. Since Svenska Celllulosa covers a large part of its energy requirements with a total of 324 of its own wind turbines, the group can also show an excellent CO2 balance. Since June 15, 2017, however, the main business areas of the group have been represented by two separate companies on the stock exchange. While the management of forest areas is still part of Svenska Cellulosa’s business area, the hygiene products business area now operates under the name Essity. Zewa and Tempo are among the most popular brands of the hygienic paper manufacturer in German-speaking countries.

The oldest stock in the world

With the oldest stock corporation in the world still in existence today, Stora Enso, investors can rely on a veteran of forestry. The beginnings of the Finnish-Swedish group go back to the year 1288. Another big player in wood processing is the Finnish company UPM-Kymmene Oyi. The group operates production facilities in 14 countries and is the largest paper group in Europe. The company specializes in newsprint, fine and special paper, labels and stickers, as well as finishing and wood products for indoor and outdoor use.

Closed wood funds – a long-term investment

Since individual stocks in particular are susceptible to significant fluctuations in value, conservative investors can also fall back on open and closed funds. As an investor, for example, you can participate in a larger tree plot via a closed fund. The money in a closed fund is then firmly invested, whereby the invested capital cannot be accessed for a long time. Since trees only generate a return after they have been sold, i.e. after at least 20 years, investors in closed-end timber funds also need a lot of staying power.

Open-ended timber funds offer quick liquidation

Unlike a closed-end fund, investors in an open-end fund have the option to get their money back and exit their investment at any time. However, this higher liquidity goes hand in hand with higher volatility, since the fund can be permanently traded by market participants.

In contrast to a closed fund, an open fund not only invests in one large project, but often in many smaller projects. Accordingly, investors can benefit from greater diversification and risk spreading in an open-ended timber fund.

The dream of your own forest

In addition to timber shares and timber funds, investors who have a larger investment amount can of course also directly participate in a selected piece of forest or acquire their own forest. After a purchase, the management of the forest can then be commissioned from a local forest service provider, who then takes full care of the well-being of the trees. However, a return can only be achieved with the trees from your own forest if they are felled. Accordingly, such an investment requires not only the necessary change, but also a very long term.

Easy participation through wood certificates

Investors who do not necessarily want to wait 15 or 25 years for a high return can also participate in the developments in the industry for a short time via various wood certificates. These certificates often replicate an index composed of various stocks from the sector. It is not uncommon for such indices to depict the entire value chain in forestry. In contrast to a fund, however, investing in a certificate involves a higher potential loss due to the issuer risk.

The time factor is crucial

The extremely versatile raw material wood offers investors different possibilities for a worthwhile investment. However, the time factor plays the most important role. For this reason, investors who do not have an investment horizon of at least 10 to 20 years should invest in other commodities.

Pierre Bonnet / Editor finanzen.net

Image credits: Maikid/iStockphoto