United States, Intermediary
Change
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Stewardship investing case study
Context
Twin trends create tailwinds for timber industry
The stewardship investment team sees twin trends shaping the trajectory for the timber industry: first, structural deficit in US residential-housing supply, and second, a shift within the construction industry away from carbon-intensive materials like concrete to more sustainable alternatives such as timber.
Some industry estimates put the US housing shortage at more than 6.5 million units, with household formation rapidly outpacing new-home construction.1 At the same time, passage of the 2022 Inflation Reduction Act has incentivized investment in low-carbon infrastructure and accelerated the push toward economic decarbonization. Healthy forests are natural carbon sinks that absorb more CO2 from the atmosphere than they release, making sustainable forestry and silviculture cheap carbon-sequestration approaches. These trends may provide revenue tailwinds for sustainable timber companies.
Research focus
Sustainability as a competitive advantage
We researched a large timberland owner that earns 80% of its revenue from the sale of wood products to the US residential-construction market. The team determined that the company is also an industry standout from an environmental stewardship perspective. Its mission is to produce forest-derived products in ways that perpetually sustain those same forests and sequester carbon along the way. The company harvests 2% of its timberland annually. It then reforests 100% of its cut acreage, planting an average of two trees for each one harvested — for a total of 130 to 150 million new plantings annually. Its entire timberland portfolio is eco-certified by the Sustainable Forestry Initiative, a distinction earned by just 13% of the world’s forests as of 2021.2 In addition, the company has set science-based emissions-reduction targets — approved by the Science Based Targets initiative — at 1.5°C. In effect, this enterprise is already carbon negative, given the amount of CO2 stored in its forests and end products.
In the stewardship investment team’s view, the company has a solid financial fundamental profile. A strong competitive moat has helped it sustain healthy returns over the past 15 years, despite exposure to the housing cycle and fluctuating lumber prices. It actively manages its dividend yields and seeks to optimize its forests’ carbon-sequestration potential. The investment team also sees an optionality that the company could benefit from carbon mitigation through the carbon-offset market. The company has already demonstrated an ambitious approach to supplemental carbon-capture initiatives. For example, the stewardship investment team believes this company could explore selling carbon credits, using its acreage for underground carbon storage and leasing land for solar- and wind-farm operations.
Outcome
Greater conviction and portfolio inclusion
This mosaic of inputs helped the team better understand the structural underpinning of the forestry products industry, as well as company-specific considerations such as its earnings volatility, future asset value, ESG profile, and long-term business strategy. After extensive fundamental analysis and collaboration with a cross-set of colleagues with insights on the company, including analysts on our real estate, construction, commodities, credit, and ESG research teams, the stewardship investment team determined that this enterprise merited inclusion in its portfolio.
1 Jones, Hannah. "US Housing Supply Continues to Lag Household Formations; Multifamily Construction Offers Alternatives,” Realtor.com, 8 March 2023.
2 “In the struggle to make forests sustainable, how effective are verification systems?” Agence Française de Développement, 26 July 2021.
This is provided is for illustrative purposes only and should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer or solicitation to buy or sell securities. All investing involves risk. Past performance is not a reliable indicator of future results and investments can lose value. Investment markets are subject to economic, regulatory, market sentiment, and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. If the strategies do not perform as expected, if opportunities to implement them do not arise, or if the team does not implement its investment strategies successfully; then a strategy may underperform or experience losses.
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