Timberland
Stafford regards itself as an opportunistic investor and has focused largely on indirect investments via underlying funds. We believe that our philosophy is very much “Core” when it comes to the type of timberland assets we invest into. This is because they are mostly mature forests, in regions with established wood markets, and are therefore producing regular cash yields from the sale of logs. They are typically also planted forests as opposed to natural forests. Stafford considers planted forests as having significantly lower levels of ESG and reputational risk. Focusing on planted forests in developed countries potentially provides for greater security of land tenure, reduced risk associated with corrupt practices, and the opportunity to participate in well-regulated log markets.
Stafford Timberland in a nutshell*
22 years
of timberland investment experience
USD 2.9bn
Timberland AUM
181
underlying assets
676,000 ha
Net timberland area*
* On a look-through basis representing the actual share of ownership in underlying assets by Stafford funds
Source: Stafford Capital Partners, data as of December 31, 2021
Forest certification
As an investor committed to following sound ESG principles, Stafford places 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.
Stafford undertakes a biennial survey of the certification status across its timberland portfolio. This was last carried out during 2021 and reported on in our previous responsible investment report. It indicated that 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.
Forest certification in Stafford’s timberland portfolio
Source: Stafford Capital Partners, data as of December 31, 2021.
[1] Based on the responses by timberland managers to Stafford’s 2021 Certification Survey.
Engagement with timberland managers
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 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.
Highlights from 2021 ESG manager survey
91%
PRI signatory
100%
ESG policy in place
82%
Reports ESG data to investors
100%
ESG incorporated in investment decisions
Source: Timberland managers, PRI, Stafford; data as of December 31, 2020.
Stafford’s last ESG survey was conducted in 2021 through the updated PRI reporting tool. Note that ten out of eleven managers that responded to the 2021 survey were signatory to the UN PRI. Fund managers’ responses were assessed and scored, and the scores then translated into star ratings.1 The distribution of ratings for the timberland managers who responded to our 2021 ESG survey is shown in the figure below.2 A five-star rating reflects the current best practices in the investment management industry while one star suggests the lack of ESG policies and practises and early stage ESG integration.
Though not always reflected in the assessment results, timberland managers show solid responsible investment and stewardship policies. We have engaged with the managers with the lowest ratings to discuss their current policies and practices, and potential areas for future improvement.
Distribution of timberland fund managers’ star ratings for responsible investment and stewardship policy
Source: fund managers, PRI, Stafford Capital Partners; scores as of 03/08/2022, based on December 31, 2020, data.
[1] The star ratings are assigned based on the percentage scores across managers of all sectors as follows:
Percentage thresholds Number of stars
0 ≤ 25% 1
> 25 ≤ 40% 2
> 40 ≤ 65% 3
> 65 ≤ 90% 4
> 90 ≤ 100% 5
[2] Stafford used the PRI’s 2021 survey and assessment methodology. 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%. Details on the PRI’s 2021 assessment methodology can be found here: https://dwtyzx6upklss.cloudfront.net/Uploads/v/g/y/2021_assessmentmethodology_jan_2021_403875.pdf
Climate change risk considerations
* Note: Net loss after salvage operations and insurance. Loss expressed as a percentage of NAV, and is the average experienced across Stafford’s portfolio from 2006 to 2019.
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 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.
[1] This number presents net loss after salvage operations and insurance. Loss is expressed as a percentage of NAV and is the average experienced across Stafford’s portfolio from 2006 to 2019.
Carbon sequestration by Stafford’s timberland portfolio
Carbon statistics* for Stafford’s timberland portfolio for 2021
* Note: Based on above-ground live biomass (e.g. stems, branches and foliage)
Source: Stafford Capital Partners, carbon statistical data as of December 31, 2021.
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 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.
In 2020, Stafford developed an in-house tool for estimating the total carbon stocks contained in its timberland portfolio, as well as the amount that is sequestered each year. This tool continued to be refined during 2021, and an estimated 14.6 million tonnes of CO2 were sequestered across our timberland portfolio in that year. To put this number into perspective: this is equivalent to the emissions of 3.2 million passenger vehicles driven for one year.1 Other carbon indicators are summarized below.
[1] The calculation was performed using the information here: https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator
Carbon strategy
Number of companies joining Science Based Targets initiative, 2015-2021
Source: www.sciencebasedtargets.org
Stafford has recently broadened its investment approach to include a timber strategy focused on carbon removal. The objective for this strategy is to provide investors with carbon offsets from afforestation, improved forest management, and natural forest restoration projects. Investors will be able to utilise these offsets towards their own climate targets or sell them to others looking to do the same.
The number of organisations establishing voluntary emissions reduction targets is rising exponentially – as illustrated by the number signing up to the Science Based Targets Initiative (SBTi).
This trend is underpinning a similar increase in demand for carbon offsets. Demand is expected to rise by an average of 22% per year, reaching over 1 billion tCO2e by 2030.1 Meeting this demand is expected to be challenging given the timeframes required to develop and start issuing offsets from new carbon projects.
We believe that our carbon strategy will therefore play an important role in improving the supply of high-quality offsets. The majority of new forest resources created as part of this strategy will be managed on a sustainable basis for wood production. This has important benefits in establishing both a renewable supply of low-carbon materials, as well as reducing pressure on existing natural forests to meet
the world’s growing wood demand.
[1] See Taskforce on Scaling Voluntary Carbon Market's Final Report released in January 2021 (https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf) - and on the Taskforce survey outlook detailed on page 55.