Why pension funds should bet on forestry as an asset class

Investments in sustainably managed forests can support rural livelihoods and create attractive risk-adjusted returns. [Courtesy]

I was honoured to share my thoughts on climate action at last year’s annual Devolution Conference, which sought to unlock the potential of climate action at a national level on the back of the COP 26.

As a delegate, I highlighted how pension funds can help in combating climate change - by providing the much-needed long-term investment to combat this challenge.

According to the Organisation for Economic Co-operation and Development (OECD), globally, $47 trillion (Sh4,900 trillion) is invested by the world’s pension funds.

This is about 50 per cent of all the money invested in the global financial system.

Pension funds have enormous leverage though there has been limited participation by retirement funds in inclusive green investments to date.

According to the International Finance Corporation’s Aligning Kenya’s Financial System with Inclusive Green Investment Report, the Retirement Benefits Authority’s investment policy guidelines allow for broad asset allocation and diversification, including investment in alternative asset classes such as private equity, asset-backed securities, real estate investment trusts, collective investment schemes and green bonds. These investments are incentivised through capital market guidelines and tax breaks.

There are many advantages of investing in forests. Forestry investment can offer financial as well as environmental, social and governance benefits. 

Investments in sustainably managed forests can support rural livelihoods, create jobs, produce multiple environmental benefits, and create attractive risk-adjusted returns for investors.

According to a 2019 study by TimberLink, institutional investment in forestry investments totaled $48 billion (Sh5 trillion, of which public pension plans held $23 billion Sh2.6 trillion) and sovereign wealth funds another $3 billion (Sh300 million).

According to the Kenya Forestry Research Institute, forestry contributes 3.6 per cent of Kenya’s GDP, excluding charcoal and direct subsistence uses.

Wood deficit in Kenya stands at 10.3 million cubic metres and Kenya can only meet 70 per cent of its demand through sustainable supply. 

Additionally, forests have a net carbon absorption of around 7.6 billion tonnes of per year and tree farming could create $230 billion (Sh25 billion) in business opportunities and 16 million jobs worldwide by 2030.

Investing direct equity in conservation can generate carbon credits with monetary value.

As Chairman of the Association of Pension Trustees and Administrators of Kenya, I propose that the government leases huge chunks of its land to pension funds at nominal rates for forest plantations as a long-term investment.