How can net zero asset and impact investors profit from the timber boom and how do they invest wisely? Modern timber investments focus on the climate impact of the industry and on the long-term storage of CO2 in timber buildings.
The growth of sustainable investments continues unabated: Swiss Sustainable Finance writes in its Market Report 2022: “…the volume of sustainable investments increased by 30% to CHF 1,982.7 billion. Sustainable mandates showed the highest growth rate at 109%. Sustainable investment funds increased by 15%, sustainable assets of asset owners by 11%.” However, while investment volumes are increasing, the industry is still relatively struggling with clear sustainability criteria that apply to all.
Parallel to the boom in sustainable investments and the climate debate, a traditional industry is also moving into the focus of investors: the forestry and timber industry. After years of low growth and low timber prices, the industry is currently undergoing transformative changes: Various governments – in Switzerland, Europe and America – are supporting timber construction through relevant regulatory changes, and technical innovations are now allowing the construction of skyscrapers and motorway bridges made of wood.
Modern Timber Investments
But how can impact and net zero asset investors benefit from these developments in the forest and timber industry? What truly sustainable investment models could there be in the future? In the past, direct investments in precious wood plantations with a weak correlation to stock markets were in demand because the performance of the timber industry was modest. Since the timber turnaround in 2020, opportunities with significantly higher added value and returns have opened up. Modern timber investments focus on the sustainable climate impact of the industry, i.e. the long-term storage of CO2 in timber construction products.
“The timber investment universe already offers some opportunities, but most of them are not yet focused on the storage capacity of wood,” says Thomas Fedrizzi, co-founder of the Zurich-based Timber Finance Initiative, the centre of excellence for timber investments. “The first structured products such as the Timber Carbon Capture and Storage Index are emerging and simplify investment decisions for this still little-known thematic asset class.”
Currently, so-called “timber industry timber funds”, timber construction mortgages or even timber construction-specific real estate funds are being developed. A timber fund is a good way for impact investors to invest in solid SMEs from the forestry and timber industry in Switzerland and the DACH region.
Timber construction must become monetisable
When it comes to wood investments, the CO2 certificate market must be mentioned in addition to the “classic” investment products: According to various studies, a market volume of 30 billion USD will be traded on the CO2 market by 2030. The highest prices are achieved by carbon removal certificates, for which carbon must be removed from the atmosphere and permanently stored. In the future, it will also be possible to issue such certificates for timber buildings, which will make the climate performance of timber construction monetisable: due to the long-term storage of CO2, timber construction is a negative emission technology (NET).
Stefan Zöllig, founder of Timbatec Holzbauingenieure and co-founder of the Timber Finance Initiative, explains: “One of the simplest, most scalable and cost-effective solutions for the climate – and the decarbonisation of the construction industry – is timber construction: in Switzerland alone, there is additional potential for around 1 million tonnes m3 of additional wood used per year. Without reducing the forest area and with simultaneous preservation and care of our forests. This means that the additional Swiss climate potential of timber construction is 1 million tonnes of stored CO2 per year. At the same time, this could save climate-damaging concrete. Cement plants in Switzerland alone are responsible for a good 6 percent of national CO₂ emissions.”
Timber construction is the most scalable NET
Engineered timber construction therefore has a great future as a CO2 storage technology: provided it is recognised by climate standards and the relevant political bodies as a negative emission technology. All signs indicate that we are on the right track in this respect: In July this year, the United Nations Climate Council UNFCCC included “Timber in Construction” as a CO2 storage technology in its official nomenclature.
Investing meaningfully and with impact in wood is therefore possible – through direct investments in the industry, through investments in wood indices and through investments via wooden buildings.