Seeing the forest for the trees: Why pension funds should take another look at forestry as an asset class

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Eucalyptus plantation grown for Tea Industry in Kenya. Eucalyptus saligna, a fast growing, high altitude tree, is used for timber, firewood and conserving environment. Eucalyptus plantation grown for Tea Industry in Kenya. Eucalyptus saligna, a fast growing, high altitude tree, is used for timber, firewood and conserving environment.

Pension funds invest our savings over decades, so it is not surprising that they have a long history of investing in forestry assets. Swedish investors can trace the ‘roots’ of forestry investment back to the 13th century. In the modern era, pension funds began investing in forestry about 50 years ago, in the Southern United States. Since then, this modality of investment has expanded across the U.S. and Canada, as well as in Oceania, Europe, Latin America, Asia, and some parts of Africa. 

Yet this class of investment—which includes both planted and natural forests—is still surprisingly limited in scope. Despite its long history, the total institutional investment globally is likely less than $100 billion. This figure is tiny compared to the $4 trillion investment in private equity, for example.  

Equally surprising is that almost all of this investment has come from institutions in OECD countries. In countries such as New Zealand, large public pension funds have experts dedicated to forestry investments. In contrast, pension funds in Latin America—particularly in countries such as Uruguay, which enjoys favorable environmental conditions for forestry growth—invest exclusively via private equity instruments, often known as Timber Investment Management Organizations (TIMOs). 

A new World Bank report, Pension Fund Investment in Forestry (co-authored by Clark Binkley of International Forestry Investment Advisors), aims to address a lack of knowledge about forestry as an asset class—a major limiting factor to investments. The report details the nature of forestry investments, exploring the case for investing in the area, explaining the mechanics of forestry investments, and highlighting some of the challenges. Pension fund trustees, managers, and regulators should find it particularly useful. 

Addressing challenges, increasing returns 

The advantages of investing in forests are multiple. Forestry investment can offer financial as well as environmental, social, and governance (ESG) benefits.  Historically, risk-adjusted returns have been favorable—although they have declined over time and data outside the U.S. is limited. Investments in forestry can provide diversification within a portfolio and an inflation hedge. And because they are long term, they offer both cashflow- and duration-matching.

The sector uses internationally accepted, longstanding third-party certification standards, which have largely been effective at mitigating negative social and environmental impacts of projects. As payments for ecosystem services (PES) markets develop, particularly for carbon, they offer the potential for new income streams for forestry investments. Beyond certification, several TIMOs consider land use planning and ecosystem services in their management approaches, which can generate significant biodiversity benefits. 

However, challenges to investing in forestry are significant—particularly in emerging markets, where reforestation, afforestation, and sustainable forest management are most needed. Forestry is a complex, specialist asset class that requires expert management to navigate. The lack of data, stemming partly from valuation uncertainty, deepens investors’ concerns around natural disasters such as fires, as well as reputational risks resulting from negative social and environmental impacts. Despite the potential opportunities, challenges remain to investing in emerging markets where enabling conditions, including land rights and infrastructure allowing access to markets, are frequently lacking. 

Figure 1. Map of Select Countries Scored According to Attractiveness for Investment 
Figure 1.?Map of?Select Countries Scored According to Attractiveness for Investment
Heatmap based on an average of scores in the following areas: size of Bonn Challenge Pledge (forest landscape restoration pledge), domestic pension assets as a percentage of GDP, Doing Business 2020 score, and Worldwide Governance Indicators scores (of political stability, government effectiveness, regulatory quality, rule of law, and control of corruption).


The report recommends steps that can be taken to encourage more investment in forestry. Some of these, such as infrastructure and supply chain investments, can be seen as ‘foundational’ issues or enabling conditions. They are beyond the specific scope of the forestry sector but need to be addressed for a market for timber—or for rural products in general—to develop. Other recommendations are specific to the pension sector, such as the need for a supportive regulatory framework and capacity for pension funds to take advantage of forest investment opportunities. 

The development of PES markets is particularly important for the scaling up of forest-based natural climate solutions. Several global and national studies suggest that forestry investments on a large scale could play an important role in keeping the global temperature increase to less than 1.5 degrees Celsius. Evidence suggests that payments for carbon sequestration in the range of $10 to $100 a tonne of CO2 would dramatically improve the economics of forestry investments, and the resulting management practices of forestry investors. Such investments could offer the triple benefits of attractive returns for pension plans, climate change mitigation, and positive outcomes for rural development and local environmental quality enhancement. 

As Mark Carney, UN Special Envoy on Climate Action and Finance, has pointed out: “Amazon is one of the world’s most valuable companies, yet the Amazon region appears on no ledger until it is stripped of its foliage, and converted to farmland. The price of everything is becoming the value of everything.” Pension funds can take steps to value the current and potential ecosystem services of their forestry investments. They can then implement sustainable forestry practices to maximize the value of these ecosystem services, alongside returns—helping to scale PES markets and close the gap between current market prices of ecosystems and their true value to people.  

With pension funds increasingly looking at the impact of their investments, as well as the financial returns needed to pay our pensions, the time is right to take another look at forestry as an asset class. While challenges remain, shortcomings could be addressed through capacity-building and partnerships between experienced, international pension funds and their domestic counterparts in emerging markets. Based on sufficiently supportive country and market enabling conditions, forest restoration pledges, and the size of domestic pension assets, our report suggests several countries as offering potential investment opportunities for international and domestic investors to explore. 


Fiona Stewart

Lead Financial Sector Specialist

Samantha Power

Sustainable Finance Consultant

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