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Next generation forest plantation investment

Rod Keenan

Institutional investors, superannuation funds and trusts are a likely source of funds for a new venture by universities and industry that aims to establish tree plantations to meet Australia’s growing demand for wood. Philip Hopkins for Timberbiz

The immediate focus is on Gippsland and the Colac region of western Victoria, where rainfall and soil conditions are highly suitable for tree growing. However, if the model is successful it could be applied throughout Australia.

The project, ‘Next Generation Forest Plantation Investment’, is being driven by a team from Melbourne University, Swinburne University, Australian Paper, Hancock Victoria Plantations, Midway, AKD Softwoods and OneFortyOne Plantations.

This is a separate venture to the Victorian Government’s plan, announced in last year’s Budget, to spend $110 million on plantations in the Latrobe Valley.

Given the failure of many government and plantation schemes in the past, a key focus of the project is generating new business models that can put trees in the ground. Investment in new plantations is at a standstill.

Project leader Rod Keenan, Professor of Ecosystems and Forest Science at Melbourne University, summarised the issues: industry needs more wood, the environment needs more trees, investors need sustainable and reliable sources of return on capital, and farmers need new income options that are fully integrated within their agricultural operations.

Professor Keenan said farm forestry had been promoted for some time.

“The missing element has been financial capital. The aim of this study is to come up with models that can link rural landowners with the finance sector and with industry,” he said. “The project presents an opportunity to learn from past experiences.”

Project partner Krzysztof (Chris) Dembek, a lecturer in social investment at Swinburne, said a new breed of investment was entering the market – “impact investment”.

“These investors are tired of looking at just financial returns – they want to see the broader social and environmental impact, in addition to financial returns,” said Dr Dembek, who was previously a research fellow at Melbourne University’s Asia Pacific Social Impact Centre.

A recent research survey pointed to the growing importance of impact investing. The survey covered 123 Australian investors who account for more than $333 billion of Australia’s $2 trillion under management. These investors include trusts and foundations, institutions, individuals and not-for-profit groups.

Dr Dembek said the survey clearly found there was a “massive amount” of money available in the next five years that wanted to move into impact investment.

Forestry was one key area of interest.

“Serious players are looking at that. At the same time, everyone agrees there are not enough deals that can match even the current appetite,” he said.

“One of the problems is that most investment deals are small in size, especially for institutional investors like super funds, a deal size needs to be much larger to enter.”

The rationale for the new project is multiple: adding timber to multi-use farmland has both environmental and economic benefits; the global demand for wood is growing while plantation investment has stalled, which will lead to an increased reliance on imports of timber products.

“There is a large area of farmland in Australia where different types of planted forest could be integrated with existing agricultural uses,” Professor Keenan said.

He said key barriers to plantations on farms considerations were “social licence and reputational issues, farmer antipathy towards forestry and the legacy of the managed investment schemes.”

Other barriers are investment risk and uncertainty, lack of market diversity, a carbon price and value, the cost of resources, the need to share risks between growers and processors and the economic impact of cheaper, non-wood alternatives.

A recent meeting of about 90 stakeholders in Melbourne drew up a draft report and action plan. Features of the draft plan included:

  • Consistent federal, state and local regulations and frameworks to guide plantation investment.
  • Government financial support for an ‘honest broker’ agency to foster trust between capital, industry, landowners and growers.
  • Establish policies to encourage markets for the environmental benefits of trees, including carbon offsets.
  • New forestry models to encourage plantations that complement agriculture.
  • Support for natural capital accounting models that recognise plantations.
  • Promote champion landowners who have successfully integrated trees on farms.
  • Work with government, industry and the finance sector to make tree planting easy and attractive.

By 2030, the program is targeting 300,000 hectares of new industrial plantations and 100,000 hectares of farm forestry in diverse estates.

Professor Keenan said more meetings would be held to further the action plan.

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