Investing in Forestry Stocks

Investing in Forestry

At first, investors might not be able to see the investing forest for the trees, so here is what is important to know.

Part art and part science, forestry itself is the management of forests, from timber and wildlife habitat to clean water, biodiversity, and recreation. As an industry, forestry includes harvesting, transporting, refining, and distributing forest products. As an investment—forestry stocks or mutual funds or ETFs—it includes planted and natural forests, the companies that manage and harvest timber, and sustainable forestry (1).

Forests are vital to us—and need caretakers.

Forests provide countless, critical ecosystem services, including storing and purifying water, stabilizing soil and preventing erosion, capturing carbon dioxide from the atmosphere, and fostering biodiversity. Forests also provide significant economic benefits, including timber for construction, wood pulp for paper, and firewood for heating and cooking. Most importantly, forests take decades to grow and mature and only moments to destroy. Properly managing a forest involves meeting the economic necessities of the present while laying the groundwork for ecological health and economic potential into the future.

Modern forest management is rooted in sustainability.

Professionals in the forestry industry work to achieve a sustainable balance between the environmental and economic demands placed on forests. Though the management of forests is a very old profession, the forestry industry is rapidly modernizing. Business and environmental interests are implementing tech innovations that increase profitability and improve ecological health.

Historically, the ecosystem and economic benefits of forests have often been in conflict with each other, with people placing short-term economic benefits above long-term ecosystem health, ultimately at the cost of both. Look no further than the 2019 Amazon rainforest wildfires. Millions of acres of burned rainforest may have provided ranch owners with a temporary economic boom in terms of a larger cattle-grazing area, but the long-term effects of haphazardly clearing forests resulted in dire ecological and economic costs.

The forestry industry uses innovation for efficiency and sustainability.

The machinery and technology that make modern forestry possible have moved far beyond felling trees with axes or saws and transporting the timber to a sawmill via mule train. With cut-to-length (CTL) harvesting, specialized equipment cuts, cleans, and loads logs for transport in a matter of seconds, while operators are safely inside the machine cabs and away from falling branches and dangerous terrain. Precision forestry is another cutting-edge management approach. When combined with drones, soil sensors, and IoT-integrated devices throughout the harvesting and reforesting process, precision forestry is set to unlock significant value across the forestry industry. Because of the role forests play in fighting climate change, forestry professionals are looking to innovation to help them do more with less.

The forestry industry correlates with the housing market.

A robust housing market usually means more new homes and increased demand for wood products. However, demand for construction lumber can surge or ebb according to interest rates and other economic pressures as well as competition from foreign lumber firms. But even if sales stall, the accelerated adoption of advanced technologies is likely to improve cost-efficiency across the forestry industry in the coming years.

The forestry industry is looking greener than ever.

Forests once primarily provided us with fuel and then wood for housing, as well as paper for packaging and magazine and newspapers. Then the pandemic turned everything upside down; the demand for paper products like facemasks and e-commerce packaging surged even as both a shortage of timber and protectionism closed paper mills and sawmills. The disruption had a high cost, but the future of the forestry industry looks green—from sustainable building materials and packaging to ESG-focused resource management and conservation and Industry 4.0 (2).

Why Invest in Forestry?

Forest fires and other environmental risks aside, a planned or natural forest is a vital resource that will keep growing despite weak housing markets and construction downturns—and potentially prove an opportunity to diversify and a hedge against inflation (3).

Investors can search for the big forestry companies like Weyerhaeuser. However, as an industry, forestry tends to be a legacy industry dominated by a few major players. That means investors have relatively few choices when investing directly, which can put them at risk in the case of an industry-wide downturn. There are a few ways to invest in forestry, beyond stocks of single companies, even beyond mutual funds and ETFs focused on the forestry industry.

To Invest in Sustainability

The most critical reason to invest in forestry is to support the health of our planet, with large-scale sustainable forestry key to mitigating global warming. Investing in trees’ carbon sequestration superpower (their ability to absorb carbon dioxide) supports sustainable forestry management around the world, as well as rural and local environments and communities. Researching companies for their adherence to environmental, social, and governance (ESG) standards or searching for “sustainable forestry” are two ways for investors to direct their money to companies that share the same values.

Support sustainable forestry. Sustainable forestry is simply in our best short- and long-term interests. Every year we lose 15 billion trees, impacting animal habitat and valuable resources, the absorption of carbon dioxide from the atmosphere, and potentially losing more than half of the world’s annual GDP, or $44 trillion (4).

Offset carbon emissions. A full 15 percent of global carbon emissions come from the loss of trees and their carbon-absorbing capabilities. Investing only $1,000 in sustainable forestry has the potential to eliminate more than 100 tons of carbon dioxide from the atmosphere (5).

Strengthen local economies. Sustainable forestry means stronger, more resilient local communities, with sustainable management of acres of forests contributing to jobs and local economies—long-term investing that can be more meaningful than short-sighted, short-term harvesting (6).

To Invest in Innovation

Precision forestry is an approach to managing forests that utilizes improved information gathering and operational controls to unlock greater economic and environmental value. For instance, lidar is a surveying technology that uses lasers to generate extremely detailed maps. After mapping a forested area using lidar, forestry professionals are able to accurately estimate the quantity of standing timber, as well as where the access road should be built and which machinery should be brought in to do the job. Better information through technologies like lidar means that forest managers are able to make decisions that improve cost-efficiency and minimize environmental damage. Big data and forestry is an investment that could grow into the future.

To Invest in Land

Investors interested in land as an investment need to do their legwork, because when it comes to land investment, things aren’t always as they seem on the surface. Investors research soil reports and do title searches to check if mineral rights, water rights, zoning, access, and more could impact an investment in the land.

For investors looking for a less direct, less expensive, and much less time-intensive way to diversify into land investing, ETFs offer a range of opportunities. These include real estate ETFs or Real Estate Investment Trusts (REITS) and agricultural ETFs.

• REITs typically invest in securities related to the mortgage financing of real estate and may focus on property type, such as residential, retail, healthcare, self-storage, industrial, office, hotel, data center, or timber REITs.
• REITs allow investors to get involved in real estate with smaller amounts of money than required to buy properties, in groupings of diverse properties with each share costing as low as $100.

How to Invest in Forestry

Investing in forestry can start with your passion. Are you interested in the environment and sustainability? Sustainable forestry ETFs could be an option for you. Want to be part of the next big thing in the lumber industry? Forestry stocks and funds are focused on innovation to remain a competitive industry. A search on Magnifi brings up a number of ways to climb this tree:

• invest in forestry
• invest in sustainable forestry
• invest in forestry REITs

References:

1. Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
2. “Perspectives on paper and forest products in 2022: How can CEOs navigate today’s era of transformational change?,” April 4, 2022, McKinsey & Co., https://www.mckinsey.com/industries/paper-forest-products-and-packaging/our-insights/perspectives-on-paper-and-forest-products-in-2022-how-can-ceos-navigate-todays-era-of-transformational-change.
3. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
4. “Investing in trees: global companies are protecting and restoring forests,” accessed January 17, 2023, World Economic Forum, https://www.weforum.org/impact/investing-in-trees-global-companies-protecting-restoring-forests-davos2023/.
5. Delgado, Mildred, “3 Reasons, to Invest in Sustainable Forestry,” June 23, 2020, Millennium Alliance for Humanity and the Biosphere (MAHB), https://mahb.stanford.edu/blog/3-reasons-to-invest-in-sustainable-forestry/.
6. Delgado, Mildred, “3 Reasons, to Invest in Sustainable Forestry.”