Gresham House DEF0057
Written evidence submitted by Gresham House
Gresham House has been managing commercial forestry assets in the UK, Ireland, the Baltics, Australia and New Zealand on behalf of a range of investors, including institutions, family offices, private clients, and funds for over 40 years and globally currently manages forestry assets worth £3.4bn (as at 31 December 2022)
Our team of 30 dedicated forestry professionals have unparalleled experience and depth of resource in all areas of international forestry investing and carbon markets, including Acquisition, Fund & Client Management, and Asset Management (silvicultural experts).
About Gresham House
Gresham House is a specialist alternative asset management group, dedicated to sustainable investments across a range of strategies, with expertise across forestry, real estate, infrastructure, renewable energy and battery storage, public and private equity.
Founded in 1857, Gresham House is one of the oldest companies in London, while our focus is on the future and the long term. Quoted on the London Stock Exchange (GHE:LN) we actively manage £7.8bn of assets (audited as at 31 December 2022) on behalf of institutions, family offices, charities and endowments, private individuals, and their advisers. We act responsibly within a culture of empowerment that encourages individual flair and entrepreneurial thinking.
As a signatory to the UN-supported Principles for Responsible Investment (PRI), our vision is to always make a positive social or environmental impact, while delivering on our commitments to shareholders, employees, and investors.
The concepts and needs for an increased sustainable timber supply are well versed and numerous. This written evidence while referring to various of these needs in the response will not directly address those concepts and needs, rather it will look at this through the prism of how an increase in planting can be financed, how private capital is critical in delivering even the basic need of keeping the national supplies static and how additional and new capital can be incentivised to increase planting to keep up with increased demand for timber, timber fibre and more timber derivatives over time.
The UK currently imports 82% of its timber demand. Under current and proposed UK Forestry Standards historic timber standing stock levels will diminish as they are harvested and replanted under current single species limits which currently stand at 75% and are proposed to drop to 65% under the current consultation.
There is a lack of understanding, both at a governmental and a national strategic level of the outlook for timber volumes over the next 30 years and as far as we are aware, policy makers are uncertain of current future timber volume forecasts of production. The assumption that new planting will add additional volume to the national stock is erroneous and it is not taking into account the erosion of existing stock levels under replanting requirements.
For the avoidance of doubt, we fully support the current UK Forestry Standard and planting guidelines, they have changed the face of productive forestry for the better, but there must be an acknowledgement that there needs to be significant extra land planted for productive forestry to even stand still, let alone increase national stock levels.
Put simply, while aspirations to plant 30,000 ha are good, unless we reach these levels of planting at a minimum in a diverse array of planting schemes including productive commercial planting, our reliance on imported timber will increase.
This is a very high-level view, more pertinent to our response however, is the financial implication of who will pay for additional planting. To put this into perspective, to hit current planting levels of 30,000 ha a year, under current cost estimates (based on averages across the UK) this will require circa:
Over a five-year period this will require an equivalent capital contribution of at least £4bn if this is to be supported by public funds entirely.
While there remains strong commitment from all the devolved governments of the UK, we find it very unlikely that there is political or budgetary commitment for this level of capital support, irrespective of the financial outcomes.
The summary of this is that if the UK is to deliver at least its current planting targets and at least maintain current stocks and future supplies of home-grown wood fibre, private investment must be incentivised to provide capital to deliver this alongside government support.
Historically Gresham House has managed discretionary productive forestry funds which have had a unique focus on the UK productive forest sector. These have delivered annual returns of in excess of 10% over the last decade. These returns have been driven by three core factors namely, timber price increases, yield compressions (lowering return expectations) and an increase in the universe of investors wishing to invest in UK forestry which has led to an increase in competition for the acquisition of a limited resource.
Looking ahead, Gresham House still predicts healthy long-term real increases in timber price, but expects that yield compression (which was principally driven by excess liquidity in the monetary systems due to quantitative easing) to abate.
Competition will depend on how accessible the government makes the opportunity to invest in productive forestry.
Currently, Gresham House predicts that returns derived from forestry investment, both existing and new planting will be circa 6% - 7%.
When compared to alternative investment opportunities this now makes forestry investment a much less attractive opportunity.
The 6% - 7% expected return is, however, solely based on sustainable timber production and land value appreciation. This does not include additional potential natural capital revenue, including, carbon sequestration, biodiversity net gain opportunities etc.
Subject to the caveats outlined below, Gresham House remains confident that there will continue to be a very active private investment appetite for forestry.
While private individuals will continue to be attracted by some of the beneficial tax incentives there is an increasing appetite from the institutional investor sector (pension funds, insurance and endowments). They are attracted by the stable long-term returns, the positive environmental and social opportunities and the natural capital benefits. However, this will require clear direction, stability and long-term planning and commitment to that planning.
At the current time there are a number of factors that present barriers to investing in tree planting in the UK, these include:
While individually each of these factors is manageable – when combined they make development and investment in tree planting a daunting prospect and of higher risk than it should be.
While the last point is the responsibility of the wider industry to advocate around forestry better. The first issues must be dealt with at a policy level with clear government, policy and deployment focus.
The motivation for investment into forestry in the UK has evolved. In the 1970’s and 1980’s the core drivers of forestry and tree planting were rooted in tax incentives.
However, this has now changed, and the core drivers of forestry investment have become more focused on financial and environmental based returns.
A wider array of investors is now investing in forestry for the following reasons:
The opportunities are clear, but how is the longer-term sustainable supply of timber investment catalysed.
Historically, government incentives have proven key in catalysing the planting of trees in the UK. Forestry and tree planting required long-term patient capital that delivered certain outcomes from both a financial and environmental perspective.
While there is still the necessity for patient capital, the investor base has changed and productive forestry can now be seen as a vibrant and economically positive investment opportunity over and above the tax implications.
However, current government incentives are blunt tools that are very focused towards controlling the development of the national forest stock.
They have potential ‘intended’ and ‘unintended’ consequences of directing where, what and how trees are planted and while this can be viewed as important, this does lead to subjectivity in the development of forests around the UK.
In our opinion, government incentives need to be more nuanced to forest type, region, recipient, and government plan. For example, it should be presumed that for land that has already been identified as ‘suitable’ or ‘very suitable’ by the Forestry Commission Bulletin 124, planting approval will be granted and will only be blocked in exceptional circumstances. This is not the case at the moment.
There will always be a risk that government support simply gets reflected in land value i.e. there is a simple direct transfer of the government support into the net present value that investors will pay for land, the ultimate arbiter is the certainty of outcome and the return expectation.
For productive forestry incentives are less important and what becomes more important is the certainty of outcome and the time frame for development. One size may not fit all and variation in support could deliver a wider outcome for the sector as a whole.
In more specific terms, there is an opportunity to focus very high ‘cost’ public money in the form of grants and government support on less commercially focused tree planting and leave private capital to support productive tree planting.
Productive tree planting if supported by a clear and objective development process and a wider more supportive ‘emitter pay’ carbon sequestration scheme, could lower government support.
In addition to carbon, there are other environmental and social benefits that are delivered through modern forestry practices, and these are ultimately being paid for by the owner of the forest. If these were to be given better regulatory recognition and value, this would also lower the stress put on the proportionality of productive timber and carbon within the forest plan.
Enhancing the economic value of the environmental benefits of productive forestry already delivered in the form of carbon and natural capital value could leave high-cost public funding to focus on more environmental based tree and land development and would encourage more planting of productive forestry for long term timber production at the same time as ensuring carbon and environmental benefits are realised.
Gresham House has a clear philosophy that at the heart of all our forestry investments, the core purpose must be to deliver long-term sustainable timber supplies. These should never be at the cost of the environment, biodiversity or community and, through our Forest Charter, we are confident that such an outcome can be achieved.
However, there are now new financial opportunities evolving and while they are still nascent and volatile they will become increasingly important factors in the long-term financial viability of tree planting.
These, obviously, include but are not limited to carbon sequestration, biodiversity, conservation, flood and water management and local community benefit and access.
However, looking forward, for these factors to become relevant to an investor, they need to have clear and transparent regulatory oversight and mandate and they also need to be set in the context of a wider national plan for what is required and expected of the forestry and timber sectors.
There needs to be a clear setting of objectives:
After these are established, the levels or support and value can be fine-tuned and relied upon.
Ultimately investors will look for both a certainty of financial outcome and the maximisation of natural capital outcomes. The balance of these will depend on the certainty and reliability of each of the particular revenues.
June 2023