The most important facts of the Forestry and Timber industry and how you can link them to your investment
Have you had your breakfast? Travelled to work in a bus or car? Sat on a chair? Made a shopping list? Got a parking ticket? Blown your nose into a tissue?
Then it’s close to certainty you already made use of forest products. Forest products are a vital part of our lives as they provide us with shelter, livelihoods, water, food and fuel security. All these activities directly or indirectly involve forests. Some are easy to figure out - such as paper and wood from trees. Others are less obvious, such as by-products that go into everyday items like medicines, cosmetics and detergents.
And even though we depend upon and understand the importance of forests, we continue to destroy them, mostly through deforestation.
What consequences are there for us? Could we technically live without forests? And how can we protect them? And, last but not least, how can investing in forestry help?
Read on to find out! 🤓
The Speed Read:
Currently, the world has a total forest area of about 4 billion hectares (a hectare is equal to 10,000 square meters, or 2½ football pitches), making up 31% of total land area. But this is heavily endangered. In fact, every second, a forest the size of a football field is lost. Another way to think about this number: The world lost enough trees in 2020 to more than cover the United Kingdom - that’s 26 million hectares—or 65 million football fields.
And that’s not even it. From 2002 to 2020, there was a total of 65 Mha (mega hectare or million hectare) of primary forest lost globally, making up 16% of the world’s total tree cover loss in the same time period. The total area of primary forest decreased globally by 6% in this time period. Good news: the rate of loss more than halved in 2010–2020 compared with the previous decade. But still, we have to remember: when we take away the forest, it is not just the trees that go. For instance, with regard to the Amazon, the world's largest rainforest, research has found that climate change and deforestation impacts could reduce the Amazon to a size of 53% of the original forest. And this is only one example. The entire ecosystem begins to fall apart, with serious consequences for all of us. For example, deforestation represents 15% of global greenhouse gas emissions and, therefore, contributes heavily to climate change. This results from the fact that after oceans, forests are the world’s largest natural storehouse of carbon and provide ecosystem services that are critical to human welfare. In the process of photosynthesis, trees absorb harmful greenhouse gases and produce much needed oxygen for us to breathe. However, when forests are degraded, carbon which was captured in the trees is released again as CO2, adding to the share of greenhouse gases in our atmosphere.
And the importance of forests doesn’t just stop here. Forests are not only crucial for photosynthesis and preserving biodiversity, but their value chain is an essential contribution to our entire economy - especially when we want it to become circular. Let’s dive a bit deeper into that.
Obviously, forests provide wood. And this can then be turned into renewable products that are able to replace fossil-based ones! While the products are processed, forests continue to grow, sequester carbon dioxide and deliver even more wood products.
But for wood to be used effectively, forests need to be well managed for the long term. This means avoiding over-harvesting while maintaining a good growth rate. Long and diverse value chains are integrated and deliver a variety of wood-based products. Recycling of forest products, often several times, is a fundamental part of the circular economy that reduces demand for new raw material. Bioenergy from residues and waste from forest and the forest industry as well as from end-use of products, must be used efficiently. Finally, the carbon is recycled through the atmosphere back to the growing forest.
When forests are managed sustainably, they do offer a lot of benefits to our society and economy. Wood can be used as a carbon-neutral and green building material for living spaces and much more. Wood is generally lighter than steel or concrete and allows for a faster and way healthier building process. In addition, wood can be used for sustainable packaging as it is recyclable and compostable as compared to plastic which pollutes the environment for decades, if not centuries, to come. Wood can also be used for clothes, dishes and many other everyday materials. By nature, it contributes to a circular economy.
Compared to fossil fuels, such as coal, oil or natural gas, wood-based products and energy tell a whole different story. When processing wood, carbon dioxide is not added to the already existing share in our atmosphere because wood based products include recycled carbon that has been captured by trees. When we use fossil fuels in production processes instead, additional carbon dioxide is released into the atmosphere contributing to global warming.
And yet, despite all the reasons why forests are indispensable, they shrink more and more every second. But what exactly are the factors driving the steady decline in forest?
Much of the world’s forest loss is driven by the demand for other land uses such as pulp, palm oil and soy plantations, for which the forest is forced to give away. More explicitly, about half of all global forest loss (or 72 million hectares of forests), that can be associated with agriculture between 2001 to 2015, was due to the production and consumption of just seven commodities: cattle products, palm oil, soy, timber products, natural rubber, cocoa and coffee. Next to this, illegal logging, poor forest management and growing demand for products contribute further to the destruction of natural forests.
And what follows after deforestation? 😰
It’s not only the increase in GHG mentioned above but also a loss in biodiversity, soil erosion and a diminished ability to replenish underground water aquifers that arise from deforestation. When trees are cut, birds and other animals can lose their shelter and food sources. In fact, research has found nearly 58% of Amazon tree species richness could be endangered by 2050, of which 49% would even have some degree of risk of extinction. This sounds extremely threatening when you consider that about 80% of the world's animal species can be found in the Amazon, hence, deforestation threatens a majority of diverse species currently living among us. And also conflicts between us people and wildlife such as hunting and poaching increase as the habitat shrinks and new logging roads extend into previously unlogged areas.
As you can see the deforestation problem is quite severe. But let’s now take a step back and investigate why we depend so much on forestry in the first place. Or, let’s ask ourselves: Can we live without forests?
There’s one single and short answer to this question: No, we can’t. As you can see, forests have an important role in buffering temperature increase, avoiding biodiversity loss as well as sources of natural capital. In short, they are essential for life on earth.
And if the reasons mentioned above were not enough for you yet, let’s consider one more important fact: More than 13 million employees worldwide depend on the forestry sector - from conventional work with the natural resource to the medical use of plants, there are plenty of jobs involved.
As forests are vital for life on our blue planet, we obviously want to see forestry continue to develop for many decades to come. But this does not come from nothing. Instead, investments in long term sustainable forest management are essential to support the development of healthy and stable forests that keep growing. In addition, capital is needed to maximise the efficiency of value chains, the use of raw materials as well as the advances of research and development towards new and smart forest products. Over the long term, investments into a healthy forest sector can then lead to significant developments and climate benefits.
So far so good. But how can you actually invest in the forestry value chain?
The most common investments in forests are either direct investments or closed-end funds. With direct investments, investors usually invest directly into several trees, which are located in specific areas and managed by a certain service provider. On the other hand, you can choose to invest indirectly into closed end forestry funds. As forests take time to grow, forestry investments are usually seen as a long-term investment. With forestry funds you, as an investor, can allocate your money to companies that e.g. acquire and reforest land in order to produce wood. Therefore, investments into forestry count as a classic commodity investment. As an investor, you may then benefit from proceeds from timber sales and a rise in timber prices.
We at Cooler Future are often asking ourselves the following question: Which products and companies can drive positive outcomes for the planet and society while meeting our quality requirements and avoiding unintended harm?
Therefore, it’s time to highlight the sustainable nature of forest investments. In general, sustainably managed forests are a reservoir of biodiversity. This is due to the fact that, by investing into the right companies, and therefore supporting the production and processing of wood in well-defined, managed areas, natural forests as well as biodiversity’s facets remain untouched. Sustainably managed forests can also, as previously mentioned, store carbon and, in addition, act as water filters and purify water resources. Wood is biodegradable and when used for manufacturing, wood based products can replace non-biodegradable materials such as plastic or steel.
Deforestation is one major driver of climate change and stopping it is therefore critical to achieving the Paris Agreement as well as achieving the UN Sustainable Development Goals (SDGs) focusing on promoting sustainably managed forests (SDG15), and taking action to combat climate change (SDG13). The Intergovernmental Panel on Climate Change (IPCC) assumes that a halt in deforestation is essential to be in line with a 1.5 degrees celsius climate goal and no further deforestation can occur from 2030 onwards for this to become reality. With forests providing society and businesses with benefits such as livelihoods, a clean water supply, protection from pollution and reduction in soil erosion, they contribute to climate change mitigation and are crucial for economic development. No surprise that insights from previous research clearly aligned forestry with SDGs 6, 8, 13 and 15 with respect to the sector’s they contribute to,
When it comes to the forestry value chain (and everything else), we have to make sure to invest in the right companies. Forest 500, a project by Global Canopy, annually identifies and assesses the 350 companies and 150 financial institutions with the greatest exposure to tropical deforestation risk and on the strength and implementation of their deforestation related commitments. According to their latest report, one-third of companies have no deforestation commitments at all. Unbelievable, right? And that’s not all! Financial institutions identified in Forest 500 provided more than US$5.5 trillion to companies in forest-risk supply chains, and are still doing very little to ensure they are not driving deforestation.
As you can see, there are a lot of issues that still need to be solved with regard to forestry. With half of the world’s GDP depending on nature, it simply cannot be the case that millions of species are threatened with extinction just because of human activity.
In the end, we need to rely on mandatory action and reporting to drive change when it comes to the protection and sustainable management of forests. Cooperation between nations and conferences such as COP26 have the power to drive this kind of change. In the European Union, some steps have already been taken and proposals have been made. However, it has to be made sure that in the future, these proposals are also met and enforced. We need more accountability and reporting here. And most importantly, we have to support the right companies with our investments.
At Cooler Future, you will soon be able invest into a fund that invests in equities of companies operating in the forestry value chain like, for instance, forest planting and management, or production or distribution of products derived from wood.
Even with small amounts, you can already support the sustainable management of forests through your investments. Doing good and doing something for your private wealth once again comes hand in hand.