SUSTAINABLE FORESTRY INVESTMENT

1. SUSTAINABLE FORESTRY INVESTMENT Cary Wingfield Raditz, CFA

2. Total Global Forestry Investment • Total investable and leasable global forestlands estimated > 870 million ha • Value > US$480 billion • Forestry investment growing 20% p.a. for 20 years • US$35 billion invested mainly in US • US$20 billion held by institutional investors Cary Wingfield Raditz, CFA

3. Timber: the Investment Class • Predictable biological growth • Asset growth= forest growth • Inventory=stored on the stump • Strong historical returns • Moderate risk • High returns on risk* • Portfolio diversification characteristics * Sharpe ratio Cary Wingfield Raditz, CFA

4. Returns & Risk 1973-2002 *Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation] Cary Wingfield Raditz, CFA

5. Attributes of Return • Biological tree growth • Timber price changes • Changes in the value of the underlying land asset • Non-timber forest products and services—ancillary cash flows Cary Wingfield Raditz, CFA

6. Timber Reduces Portfolio Risk Cary Wingfield Raditz, CFA

7. Investment Suitability of Timber • > 10 years = illiquid • Long-term institutional portfolios • Endowments, foundations, pension funds, insurance companies, high-net worth • Matches maturity of longterm assets to maturity of longterm liabilities • Low correlation to equities and fixed income provides diversification • Certified forestland suitable for socially responsible investors Cary Wingfield Raditz, CFA

8. Investment Vehicles • Purchase forestland—manage timber assets • Forestry product equities • Forestry product bonds • REITS—real estate investment trusts • TIMOS—Timber Investment Management Organizations • Private equity partnerships Cary Wingfield Raditz, CFA

9. Environmental Issues • Climate change • Soil and freshwater conservation • Loss of biodiversity • Forest systems play a critical role in managing environmental problems Cary Wingfield Raditz, CFA

10. Forestland Management Methods • Clear cutting (controversial) • Pure conservation—tax deductible gifts of forestland • Sustainable forestry management—”pure play” • Forestry operations includes processing • Certified forests (FSC)—biodiversity • Non-timber forest products (NTFPs) • Capturing PES cash flows--e.g., CERs • Structured methods—e.g. easements Cary Wingfield Raditz, CFA

11. Tropical Forestry Investments • Fast growing in tropics (short rotation) • High discount for Emerging Markets risk • Controversial (Equator Principles) • Lessons learned: Mitigate country risk (management, rigorous internal controls, portfolio diversification) • :Factor costs of poor infrastructural • :Neutralize corruption risk • :Coop local community participation in forest management • :Certify forests • :Manage non-timber forest products • :Monitize tradable carbon emissions rights (CERs) Cary Wingfield Raditz, CFA

12. Payments for Eco-services • Carbon sequestration--CERs • Water use rights—local (New York City) • Biodiversity—FSC certified (Precious Woods) • Eco-tourism (Texas Inland—hunting rights) • Conservation easements (USA e.g., Forest Legacy Trust) • Tradable development rights (USA locally regulated) Cary Wingfield Raditz, CFA

13. Implications for Investment Valuation • Value = Σ of discounted future cashflows • NTFPs and PES are real options • When exercised: PES provide ancillary cash flows • “Value enhancements” • Reduce illiquidity in afforestation • PES converge private good and public good agenda Cary Wingfield Raditz, CFA

14. Timber Conservation Strategies • Pure Conservation • Sustainable Harvesting • Creative Structured Solutions • Example: Selling Easements Cary Wingfield Raditz, CFA

15. Pure Conservation • No return of principal or income • Forestland gift is tax deductible • Appropriate for land having special value or unsuitable for logging • Example: green belts near urban centers, old-growth riparian forests Cary Wingfield Raditz, CFA

16. Sustainable Harvesting • Land harvested sustainably (< 6% of board ft/year) • Sub-optimal timber returns, but is still solid investment • Short-term positive impact on environment • Either requires very long investment horizon or sale of most of land to capture principal and return on capital Cary Wingfield Raditz, CFA

17. Structured Solutions • Incorporate PES • Tax sensitive strategies--Easements • Partner with non-profit govt and NGOs (Sierra Club) • Structure for socially responsible investment market Cary Wingfield Raditz, CFA

18. Selling Easements • Conservation easements • Development easements • Optimal or near optimal investment returns • Fair short term/Good • long term environmental impact • Requires foundation and non-profit funds Cary Wingfield Raditz, CFA

19. Easement Return and Impact • Benefits: Conserve wildlife habitat, clean watersheds, prevent urban sprawl, preserve valuable forestland • Purchase land with merchantable timber • Agree to environmental easement on the property at beginning • Satisfy the environmental guideline test • Provide investors tax-deductible contributions • Through careful replanting, return the ecosystem to its natural pre-logging state • At end of term, put the land into permanent conservation through a land trust Cary Wingfield Raditz, CFA

20. Is it Time to Invest? • Opportunities for creative, sustainable solutions • New SRI listings in capital markets • Select opportunities in emerging markets • Environment awareness will increase value of certified wood • New international protocols will increase demand and price of carbon and other PES Cary Wingfield Raditz, CFA

21. Sources of Information • www.forest-trends.org • Private placement memorandum • Initial public offering prospectus • Hancock Timber Resource Group www.hnrg.com • Rights and Resources www.rightsandresources.org Cary Wingfield Raditz, CFA