How To Reap The Natural Rewards Of Planet Earth

How To Reap The Natural Rewards Of Planet Earth
Reda Farran, CFA

almost 2 years ago4 mins

  • Half of global output depends on natural capital – the stock of natural assets that yields a flow of benefits or ecosystem services over time.

  • Natural capital is benefitting from favorable supply-demand dynamics, and investing in the asset class can offer attractive portfolio benefits, while doing good for the world.

  • Timberland and farmland REITs won't reap you all of the portfolio benefits of investing in the asset class, but for now it's the only way available to retail investors.

Half of global output depends on natural capital – the stock of natural assets that yields a flow of benefits or ecosystem services over time.

Natural capital is benefitting from favorable supply-demand dynamics, and investing in the asset class can offer attractive portfolio benefits, while doing good for the world.

Timberland and farmland REITs won't reap you all of the portfolio benefits of investing in the asset class, but for now it's the only way available to retail investors.

The World Economic Forum has estimated that over half of global economic output – $44 trillion worth – is moderately or highly dependent on what’s known as “natural capital”. Think of natural capital as natural assets – air, land, and water – that provide both amenities (food, water, and timber) and benefits to the ecosystem (like regulating soil health and the climate). And while it might not seem like the most obvious investment, it’s potentially highly lucrative to invest in this massive market – via timberland and farmland – for yourself.

Why invest in natural capital?

1. Natural capital benefits from favorable supply-demand dynamics.

Growing populations will require more food, fiber, and timber. Demand for these crops is also relatively inelastic, remaining consistent through economic cycles. But just as demand for food, fiber, and timber is increasing, both timberland and farmland face supply constraints in some parts of the world. For example, to combat deforestation and unsustainable management, remaining natural forests and grasslands are increasingly protected for biodiversity conservation and climate mitigation. Global farmland, meanwhile, is being lost due to soil degradation.

2. Natural capital offers attractive portfolio benefits.

Because timberland and farmland have low correlations with traditional asset classes like stocks and bonds, they can boost your portfolio’s diversification and improve your risk-adjusted returns. After all, a portion of timberland and farmland investment returns is generated through biological growth, which is independent of market movements. Earning carbon credits and receiving payments for ecosystem services, like carbon sequestration and storage, provide additional sources of uncorrelated returns.

Timberland and farmland have low or negative correlations with traditional asset classes. Source: Nuveen
Timberland and farmland have low or negative correlations with traditional asset classes. Source: Nuveen

Also, timberland and farmland, similar to other real assets, provide a hedge against inflation. Their performance is positively correlated with inflation because of the fact that many commodities – think food and building materials – are components of inflation measures, like the Consumer Price Index (CPI).

Timberland and farmland also provide attractive returns and a strong source of income. What’s more, they tend to hold their value during economic downturns because they’re driven by long-term secular trends – like population growth – and because demand for these crops is relatively inelastic.

Timberland and farmland have outperformed most traditional asset classes since 1992. Source: Nuveen
Timberland and farmland have outperformed most traditional asset classes since 1992. Source: Nuveen

3. You’ll do good for the world.

Investments in natural capital allow people to contribute positively to global sustainability solutions, improve climate resiliency, and restore the Earth’s air, land, and water, and their biodiversity. For example, forests and soils have the natural ability to sequester and store carbon. Globally, land serves as a carbon sink and an important defense against climate change. Approximately 2.6 billion tons of CO2 – one-third of the amount released from burning fossil fuels – is absorbed by forests every year.

What’s the opportunity here?

By one estimate, up to $350 billion of new investment is required each year to achieve sustainable food and land use systems by 2030, including protecting and restoring natural ecosystems. That’s a massive opportunity for investors.

Now, to really reap all of the portfolio benefits from investing in timberland and farmland, you’d have to directly invest in them, or invest in private funds that invest in and manage timberland and farmland. Unfortunately, that’s quite hard for ordinary retail investors. So we have to look at the next best alternative: investing in timberland and farmland REITs.

There are four publicly traded timberland REITs listed in the US: Weyerhaeuser, Rayonier, PotlatchDeltic, and CatchMark Timber Trust. Alternatively, you can invest in the iShares Global Timber & Forestry ETF (ticker: WOOD, expense ratio: 0.43%). This diversified ETF invests across the entire value chain, from timberland REITs to paper and packaging companies.

Farmland REITs typically purchase agricultural land and then lease it to farmers. Two publicly traded ones in the US are Farmland Partners and Gladstone Land. These two stocks have been relatively more volatile than their woodland cousins, and unfortunately there’s no farmland ETF to offer better diversification.

I’ll just end with words of caution and hope. Caution because REITs trade as stocks, meaning they tend to be positively correlated with the stock market. It’s not a perfect correlation, so they do still offer some diversification benefits, but not as much as direct timberland and farmland investments. But here are my words of hope: just like how private equity is slowly being democratized and opening up to retail investors, I believe there'll be some point in the future when direct timberland and farmland investing will also be available to the masses. And now that you know what they and their benefits are, you’ll be in a better position to invest.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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