Korea’s National Pension Service (NPS) is making its first-ever investment into timberland to diversify its portfolio as part of its broader efforts to diversify its large portfolio into overseas and alternative assets and underscore its rising credentials in environmental, social and governance (ESG) considerations.

The world’s third largest pension fund, which had W834 trillion ($752 billion) of assets under management as of December last year, announced in mid-February that it recently invested $150 million into a fund managed by London-based Stafford Capital Partners to gain exposure to timberland in major forestry countries, including the US and Australia, a NPS spokeswoman said. The fund had raised $532 million in its interim close in July of last year. 

Ahn Hyo-Joon, NPS

“[It’s] part of the efforts to diversify our portfolio. Timberland investment not only aligns with NPS's investment philosophy of pursuing stable returns over the long term but is also an attractive investment from a sustainable investing perspective,” chief investment officer Ahn Hyo-Joon said in a statement.

“We consider this new sector as a fairly attractive asset from the viewpoint of sustainable investment which is one of fast-growing global trends,” the spokeswoman added.

She declined to comment directly on whether the state pension fund would make similar investment in the future, only noting that “NPS has put a lot of efforts into developing new sources of income under the investment diversification strategy”.

“We expect this new investment will help improve the overall portfolio risk-adjusted return,” she added, without specifying the expected return.

As an asset class, timberland has shown itself to offer high single-digit returns over long periods. The Timberland Property Index which is compiled by the National Council of Real Estate Investment Fiduciaries (NCREIF), returned 8.36% between 1993 and 2017, while the Standard & Poor’s 500 Index returned 9.69% during the period.

One benefit of timberland investments for asset owners seeking greater portfolio diversification is their low correlation to most financial assets, given that a large portion of returns are derived from biological tree growth. In addition, timberland has a strong positive correlation to inflation so a well-constructed portfolio can serve as an inflation hedge, Lidia Medojevic, co-head of real assets for investments Australia at Willis Towers Watson, told AsianInvestor.

That said, there are several risks and factors to consider when investing in the asset class. Medojevic noted that these can vary, depending on the geographic exposure of the investments, but they include political and regulatory risks, operational risks in managing the forests appropriately, and the physical risks of climate change such as fire and windstorm.

Historically the key timberland markets have been Australia and New Zealand, Nordic countries and northern Europe, the US and Canada, and Brazil and Chile. Each region has different economics, forestry industries and forest management practices. However, increasing investor demand for timberland assets might contribute to modest expected returns, said Medojevic.

ESG FOCUS

Another potential benefit for asset owners looking to polish their ESG credentials is that timberland is very well-regarded from these principles. Its ability to boast carbon capture and to help create employment in rural areas, leads to higher institutional investor interest in the asset class.

Lidia Medojevic

Across the world, as rising numbers of asset owners are thinking about carbon emissions resulting from their portfolios, it is becoming more popular for them to consider how to create carbon budgets and carbon journey plans over multiple years to reduce emissions, Medojevic said.

Timberland, alongside other climate solutions investments, is likely to play a more prominent role in achieving these ambitions, she said. "There is definitely an increasing investor focus on sustainability and climate change, particularly over the course of last year.

“So far, timberland is one of the only proven ways to capture and store carbon economically at scale. We are seeing an increased interest in reforestation projects, which create additional carbon capture capacity,” Medojevic added. 

The desire to reduce carbon exposure has led many large asset owners to seek out greater exposure to timberland. Dutch pension APG Asset Management, which has allied with NPS in alternative asset investing, has globally invested $3 billion in private natural resources. Forty percent of that amount is allocated to Asia Pacific – mostly in tracts of farmland and timberland in Australia and New Zealand.

NPS is not the only major Asian investor taking carbon exposure more seriously. The Covid-19 outbreak has also intensified asset owners engagement with ESG issues, including carbon emissions.

Singapore’s sovereign wealth fund GIC, for example, wants its global operations to become carbon-neutral this year. In a paper published in September last year, Rachel Teo, head of GIC’s futures unit, said GIC was focusing on green thematic opportunities such as renewable energy, green buildings, sustainable food and agriculture, electric mobility and other emerging technologies to help decarbonise the global economy.

Other regional investor pioneers have already sought to build investment allocations for farmland and timberland, both for their resilient returns and in particular to benefit from rising demand for quality crops and livestock, courtesy of a growing global population and the expansion of Asia’s middle classes. 

New Zealand Superannuation Fund is one such pioneer. The sovereign wealth fund has for several years prioritised reducing the carbon exposure of its portfolio, which has included investing into timberland, while also looking to get its hands on permanent crops and gain beef exposure in Australia, as portfolio manager Neil Woods had told AsianInvestor in early 2019.