Carbon potential gives forestry renewed momentum

The news last week that US-based Eastwood Forests, an asset manager backed by Sumitomo Forestry, has established its first investment vehicle with approximately ¥60 billion ($435 million; €388 million) of capital, neatly highlights two trends in the timberland investment space.

First, Japanese investors are still very keen on the asset class. They never went away, of course, and several are long-standing investors in the space.

But GPs who have travelled to the Land of the Rising Sun to meet with the country’s vast pool of pension capital will know that it is a slow burn, with funds acting very deliberately and assessing the options thoroughly before writing a check.

So for 10 Japanese investors (including Sumitomo Forestry itself) to commit to Eastwood Climate Smart Forestry Fund I is noteworthy, as this not just a case of Japanese investors launching a mandate with an established international GP, but rather taking the bull by the horns themselves and creating an opportunity from scratch.

It’s not dissimilar in thematic terms from the purchase of New Forests by Mitsui & Co and Nomura, announced in 2022, as those two investors wanted to take a more direct stake in forestry.

The second trend is, inevitably, carbon, which is a stated part of the motivation behind the establishment of Eastwood and the launch of its first fund.

Sumitomo Forestry said the fund would seek to generate and sell carbon credits, and that part of the rationale for its backing of Eastwood is its desire to help decarbonise society by 2030 in line with the UN’s Sustainable Development Goals. The firm has said that this fund is the first in a planned series of global forestry funds, with future vehicles likely to focus on southeast Asia and Australasia.

This was also part of the rationale behind the aforementioned New Forests deal, with Mitsui and Nomura keen to gain exposure to a sector that offers huge carbon sequestration opportunities.

All the major forestry asset managers have said similar things to affiliate title Agri Investor in conversations over recent months, with one telling us just last week that a light bulb appears to have gone off with certain groups of LPs over the past 12-18 months, as they realise how potent a contribution an investment in a forestry fund can be in helping them achieve net-zero portfolio targets.

The same asset manager also told us that fundraising for their latest vehicles has been strong, bucking the trend seen in other unlisted asset classes such as private equity, real estate and infrastructure, where fundraising has slowed considerably in 2023.

Timber has been a good investment over decades for many, of course. But increased recognition about the value of carbon, coupled with its defensive characteristics in a higher-inflation environment, is giving it renewed momentum.