By Michael Ackerman, CEO of EcoForests Asset Management
The world’s wealthiest individuals are estimated to collectively transfer more than $15trn to their families by 2030 –a sum greater than China’s GDP. This seismic intergenerational wealth transfer will have a major impact on global asset allocation, as a younger and more sustainability conscious generation takes the reins.
While there is an important difference between generating sustainable income streams – a proven skill of family offices – and investing in sustainability, it is becoming more apparent with each catastrophe linked to climate change the former will soon necessitate the latter.
Patriarchs have traditionally been purely driven by profits, but family offices are now increasingly being led by a different type of thinker – the millennial. Guided by different goals, the millennial generation feels far more responsible for the future of the planet, with increased concerns surrounding environmental, social and governance issues.
Embracing sustainability is also crucial for image. While philanthropy has always been integral to family office operations, high net worth families now have the chance to depart from the carbon-intensive sources of their accumulated wealth – such as oil and autos – and reposition themselves as leaders of the green transition.
According to the UBS 2020 Global Family Office Report, 39% of family offices intend to allocate most of their portfolios to sustainable investments in five years’ time – while many are also adopting net-zero mandates.
Unlocking sustainable alpha
The growing influence of millennials has led the majority of family offices to increase their impact investments from 3-5% of their portfolios to almost a third of their entire portfolio. This is driving significant flows into one of the most direct forms of impact investment – forestry.
Indeed, there are few greener assets – forests go beyond simply cleaning the air, they capture carbon dioxide and protect biodiversity by harbouring entire ecosystems. Elon Musk tweeted in January he would award $100m to the best carbon capture technology. But Musk cannot see the wood for the trees – the cheapest and most proven carbon capture device, which has been around for more than 370 million years, is the humble tree.
When compared to popular renewable energy investments, such as solar panels, forestry is less carbon intensive and requires less maintenance. Solar farms are constructed using components from across the world, incurring a large carbon footprint, and require around-the-clock maintenance to optimise energy capture once built. On the other hand, forest cultivation requires little maintenance after the first four weeks and captures more carbon than it produces.
Trees also benefit from the unique ability to keep growing regardless of market conditions, and aside from being an effective portfolio diversifier with a built-in inflation hedge, forestry offers the highest risk-adjusted returns over 30 years of any asset class – thereby ensuring the next generation is well looked after.
Personalised and purposeful
For high-net worth individuals, forestry assets offer the additional allure of being customisable. Forests can be designed to align with an investor’s budget, return expectations and time horizon. While the time horizon for investing in forestry assets is longer than traditional equity and bond portfolios, this does not deter family offices focused on intergenerational wealth preservation. Moreover, a flexible harvest window allows trees to be felled within 16 to 25 years, and this can be timed to coincide with higher timber prices or to meet specific investor needs, such as estate management of regular cashflow.
The type of tree can also be chosen to meet individual preferences – teak, mahogany and eucalyptus boast different return characteristics, for example. In addition, the investment can be suited to investors’ location preferences, with plantations in Central America being the most common. In return, investors receive a forest named after them. This direct form of investment allows investors to feel connected to the positive impact they are making.
Family offices are also exploring the use of forestry assets for carbon offsetting purposes. By sequestering carbon, forestry assets can be used to offset a group’s emissions or help other businesses do so through the sale of carbon credits – a global market estimated to be worth upward of $50bn by 2030.
By taking advantage of the opportunities presented by forestry investments at this crucial turning point for the planet, family offices are tearing up the idea that money does not grow on trees and positioning themselves as leaders of the net zero movement.
