Investors should take a responsible approach when doing business. There are various environmental, social and governance (ESG) factors that directly impact investments, and it is an investor’s responsibility to take precaution and steps that create value, rather than risks in these areas. There are ESG factors in every step of the investment process, even throughout the long-term forestry investment’s lifecycle.
Certain tools can be used to consider ESG factors when researching various responsible companies that offer forestry schemes. Certifications often can show a company’s responsibility to the environment and social standards, but this does not cover all ESG factors. These certifications may only sometimes be a label that should be studied more to find out if the governance factors, land rights and usage are taken with a responsible approach.
Forestry Investments and ESG Factors
ESG factors should be considered by investors since they can affect the risks or success of an investment if managed improperly. Efficient ESG risk management can create value when properly considered by taking the right steps.
The main ESG factors include:
- Positive and negative climate change
- Resource management and planting/harvesting techniques
- Waste and pollution
- Protecting ecosystem biodiversity
- Water use
- Land rights (use of land and acquisitions)
- Relationship with local communities
- Health and safety and labour standards
- Employee relations and working conditions
- Quality of management and systems
- Anti-bribery and corruption
- Political lobbying and donations
- Tax strategy
To better understand these ESG factors, each is highlighted by an example below. Although these pertain more so for responsible companies offering investment schemes, as a client, you can see what to look out for when conducting research. A risk is highlighted with an added opportunity to how forestry schemes can be managed to responsibly address such factors.
Environmental: Maintaining Biodiversity
Risk: Legal risks stemming from over-harvesting, which leads to deforestation, or poorly protecting diverse flora/fauna. For example, a large forestry project that does not help protect certain species due to a lack of planning could result in a decrease in clients buying timber-products from that responsible company. Having certificates that are then suspended due to similar examples does not benefit the responsible company.
Opportunities: Investment strategies that follow strong environmental conservation and deliver market returns can enhance timberland value while securing a price premium for timber products. This can be secured by certifications while also supporting long-term forestry cultivation. It is, therefore, crucial to plan and think of how a forestry project may affect the environment so that situations that are creating harm do not also risk harming the overall company reputation.
Social: Relationship with Local Community
Risk: Having poor relationships with local communities or core stakeholders can create financial risks. This can result in protests and poor operations, especially if the local community is directly involved with the forestry project. A large portion of resources might then be used to resolve such issues. For example, a forestry company could plant forests on land obtained by a land grab outside of forest designated areas that locally was used for agriculture purposes, therefore stemming protests and causing harm to the overall forestry project.
Opportunities: Maintaining a strong relationship with communities can create a strong labour force or support opportunities. This can also create stronger land tenure. Finding opportunities that align with the local community objectives can create mutual benefits for the long-term for both the responsible forestry company and the local community. For example, a company that supports a local community with new jobs and helps build housing for them is just one way that can strengthen the relationship with the local community.
Governance: Anti-Bribery Standards
Risk: International reach for anti-corruption has expanded recently with added international cooperation. It is necessary for forestry companies and project schemes to fully comprehend the bribery risks that can occur. When it comes to forestry, this can include land titling, the combination of legal and illegally-sourced timber, or securing operating concessions. Corruption is obviously kept a secret, but if revealed, more harm than good can be brought upon the given “responsible” company.
Opportunities: Following ethical, responsible approaches to anti-corruption can be a great advantage for companies with a solid reputation. These companies will beat competitors who in the long-term may be exposed to corrupted practices. Holding certified landholdings can beat competitors that may have obtained land or concessions illegally.
Forestry Investment Process: Integrating ESG Factors
ESG factors should be integrated into the entire forestry investment process, which will benefit the company in the long-term. A brief overview of how ESG factors can be integrated into company standards are by:
- Using ESG factors to create strategies, policy and manager selections
- Using ESG factors to manage risk and value creation
- Follow ESG factors by continuous monitoring and performance indicators
- Defining protocols for ESG disclosures and creating transparency
This brief overview of ESG factors in responsible forestry investment schemes are important to consider for investors and companies alike. Risks and opportunities should be considered by both parties in order to avoid risks and consider the value creation in the long-term. As an investor, it is good to view and consider the ESG factors integrated by a forestry scheme in order to make responsible choices that benefit the world on a larger scale.
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