Foresight branches out with Sustainable Forestry Company IPO plans – Foresight Sustainable Forestry Company, an externally managed investment company that will invest in UK forestry assets, today announces its intention to undertake an initial public offering on the main market of the London Stock Exchange, by way of an initial institutional placing, offer for subscription and intermediaries offer for a fundraising target of up to £200m.
The company’s investment objective is to generate an attractive net total return for shareholders over the longer term, comprising capital growth and aperiodic dividends, targeting sustainable impact through predominantly investing in sustainably managed commercial forestry assets including afforestation assets. It will target a net asset value total return of more than CPI + 5% per annum on a rolling five-year basis once substantially invested.
It also anticipates that the IPO proceeds will directly enable around 4 million tonnes of carbon sequestration from the atmosphere from new afforestation planting. The company will seek to make a direct contribution in the fight against climate change through forestry and afforestation carbon sequestration initiatives and will seek opportunities to preserve and enhance natural capital and biodiversity across its portfolio.
The company is to be managed by Richard Kelly and Robert Guest of Foresight Group, which has been tracking the UK and European forestry sector as an investment target since 2016 with the aim of leveraging its sustainable infrastructure expertise to develop its investment capability in the sector. During the course of 2019, Foresight Group utilised its extensive research to formulate its forestry investment strategy, including developing its investment criteria, acquisition strategy, valuation methodology and by developing key relationships in the sector.
The prospectus for the proposed IPO is due to be released in October 2021 and the close of the initial issue is expected to take place in November 2021. The group expects to apply for admission of its ordinary shares to the premium listing segment of the official list of the Financial Conduct Authority and to trade on the London Stock Exchange’s main market for listed securities.
Richard Davidson, prospective Chairman of Foresight Sustainable Forestry Company PLC, said:
“Foresight Sustainable Forestry Company’s Board of Directors is pleased to be able to bring this significant investment opportunity for both institutional and retail investors to the equity capital markets. Forestry provides a compelling investment opportunity, meeting investor requirements on climate, sustainability and ESG issues, inflation protection properties, and portfolio diversification. Over the long term, managing a portfolio of forestry assets is generally low risk, driven by growth in both volume and value as the trees mature. We expect the significant shortfall in timber in the UK to push up timber prices in the coming years and are delighted to have Richard and Robert to manage the portfolio on behalf of shareholders, overseen by a strong independent Board.”
Bernard Fairman, Executive Chairman and Co-Founder of Foresight Group, said:
“For some years now Foresight, as one of a very few significant players in this sector, has been looking to scale up its forestry investments in an appropriate structure for a wide range of investors to participate in and this LSE Main Market listed sustainable forestry company launch represents the next development in that journey. Forestry is a real asset, and a natural and growing store of value, independent of the economic cycle and if ever there was a time for the world to embrace investment into more trees, this is it. In the UK, we import the vast majority of our sawn timber requirement, a situation which is not sustainable. The UK and global economies are re-opening and demand for timber is pushing significantly ahead of supply. There is an enormous drive for us all to use more sustainable building and other products. With international recognition that sustainable forestry and afforestation can play a vital role in combatting climate change through net C02 emissions reductions, we truly believe that this is very much a fund of its time.”
Further information from Foresight Sustainable Forestry Company
Forestry: Investment Opportunity Highlights
Investors and companies are currently facing an inflection point, with calls for action on climate change becoming more urgent by the day, sustainability and ESG considerations further gaining in importance, and the risk of inflation increasing through deglobalisation, supply chain bottlenecks, and monetary response to COVID-19. In addition, 2020 saw the highest correlation across asset classes and geographies in two decades[1], introducing higher volatility into investment portfolios.
Forestry provides a unique investment opportunity, meeting investor requirements on climate, sustainability and ESG issues, inflation protection properties, and portfolio diversification. Forestry is a real asset and a natural and growing store of value, independent of the economic cycle. The Company’s returns are expected to be more than CPI + 5% per annum on a rolling five-year basis, based on the NAV once substantially invested. The returns are created by the capital appreciation of the underlying asset freeholds and cash yield, which is generated by the sale of timber from the harvesting of mature forest compartments, the value of carbon units, opportunistic leases to renewable energy developers and ecotourism.
Why UK Forestry?
- Exacerbated supply and demand imbalances along with favourable climatic suitability make the UK a highly attractive destination for commercial forestry.
- The UK is one of the least forested countries in Europe (13 per cent. forest cover versus a European average of 46 per cent.) and global demand for timber products is expected to quadruple by 2050.
- Forestry is an asset class with strong inflation-beating characteristics and low correlations to other asset classes, as well as to power prices.
- Long-term macro-economic factors are expected to drive a material capital appreciation opportunity enhanced further by the opportunity to participate in the value investors will receive from owning voluntary carbon credit units afforded by investment in afforestation assets.
- A truly sustainable asset class with exceptional sustainability and ESG credentials.
Why Now?
- Participating in the IPO directly contributes to combatting climate change through the sequestration of over 4 million tonnes of carbon.
- Rapid expansion in corporate net zero pledges with demand for carbon units forecast to increase by up to 100X by 2050 is expected to deliver annualised double-digit growth in the price of voluntary carbon credits until 2030.
- New UK Government grants and support for afforestation drive step change in investment opportunities.
Inflation hedge
Recently bond yields have risen significantly, with the UK’s breakeven yield more than a percentage point ahead of the US, implying strong anticipation of ‘expected’ inflation in the UK. UK money supply has grown by 12% from £2.5 trillion to £2.8 trillion in the year to February 2021, whilst the UK’s real GDP fell by 1.6% in Q1-2021 and is 8.8% lower than pre-pandemic levels[6],[7],[8]. In economic theory, increasing the money supply faster than real output causes inflation as the growing pool of capital acquires goods/services that are not supplied at the same rate, putting upwards pressure on prices.
UK commercial timber prices have historically outstripped inflation, offering an inflation hedge during current times of unprecedented monetary and fiscal policy.
Returns and diversification
UK forestry investment returns were impressive over the decade to the end of 2017, with annualised returns of 11.6%, 13.6% and 15.7% across 3, 5 and 10 year periods[9]. Strong performance in UK forestry assets for the period 2017 to 2020 has also been experienced, with compound annual growth in asset values of 16.9% during that time frame[10].
Compared with renewable energy, forestry offers attractive, risk-adjusted returns that are uncorrelated to power prices and versus real estate, forestry offers uncorrelated returns. These low correlations are driven by average annual biological tree growth of 3% to 4%, regardless of economic cycles.
Carbon sequestration
The Company estimates that the IPO proceeds will directly enable c.4 million tonnes of carbon sequestration from the atmosphere from new afforestation planting to support the fight against climate change[11]. For each tonne of carbon sequestered (net of the buffer), a carbon unit is expected to be generated in accordance with the Woodland Carbon Code (“WCC”). Foresight expects to execute a strategy for WCC units that generates maximum sustainability credentials and value for Company shareholders. Future fundraising by the Company after the IPO proceeds are deployed has the potential to enable material further carbon sequestration via additional afforestation.
ESG benefits
In addition to the contribution to the fight against climate change, properly planned and managed commercial forest properties offer other ESG benefits:
- Protected areas of rich natural habitat and biodiversity;
- Clean water benefits;
- Soil erosion, flood and landslide resilience;
- Supporting rural jobs;
- Supporting the UK economy through trade of timber; and
- Active engagement, enabling educational and health benefits for local communities.
Additionally, proper active management of forestry enables recognition by the Forest Stewardship Council (“FSC”) and Programme for the Endorsement of Forest Certification (“PEFC”). FSC certification indicates compliance with the highest social and environmental standards on the market. PEFC is an international, non-profit, non-governmental organisation which promotes sustainable forest management through independent third-party certification. Both certification programmes aim to protect forests and ensure the timber is responsibly sourced.
The Company expects to achieve and will aim to exceed the requirements of compliance with the EU Green Taxonomy and Article 9 of the Sustainable Finance Disclosure Regulation (“SFDR”).
The Company will directly contribute to five of the United Nations Sustainable Development Goals:
- Goal 3 (Health, Wellbeing);
- Goal 6 (Clean Water, Sanitation);
- Goal 12 (Responsible consumption/production);
- Goal 13 (Climate Action) and;
- Goal 15 (Life on Land).
The Company is expected to qualify for the London Stock Exchange’s Green Economy Mark at Admission, which recognises companies that derive 50% or more of their total annual revenues from products and services that contribute to the global green economy. The underlying methodology incorporates the Green Revenues data model developed by FTSE Russell, which helps investors understand the global industrial transition to a green and low carbon economy with consistent, transparent data and indexes.
Foresight Group will apply its Sustainable Investment Criteria when making investments and in the period of management following investment to ensure that these (and the carbon sequestration) characteristics and attributes within the Company’s forestry portfolio are maximised. In addition, Foresight Group, as investment manager will report on its compliance with sustainability and ESG on an annual basis.
The Seed Assets
The Seed Assets currently comprise 34 assets, diversified in age, project type and geography, currently valued at circa £130 million. The Seed Assets extend across c.11,700 hectares (equivalent to c.29,000 acres), with 86 per cent. by area located in Scotland, 9 per cent. in Wales and 5 per cent. in England.
The Seed Assets comprise both existing standing forestry and afforestation. 52 per cent. of the Seed Assets are mature standing forestry assets (extending across c. 6,100 hectares); and 29 per cent. of the Seed Assets are afforestation projects, that will be planted (extending across c. 3,450 hectares). The remaining 19 per cent. being mixed assets that contain some existing forestry co-located with afforestation projects (extending c. 2,150 hectares). The age profile of the Seed Assets is diversified, including compartments that are being actively felled and a significant amount of unplanted afforestation land. Once all assets are accounted for, the weighted average age of the Seed Forestry Assets is 15 years.
There are over 80 hectares of Sites of Special Scientific Interest designated land in the Seed Assets, most of which is designated as ancient woodland. It is the intention of the Company that this will be retained and treated in accordance with its designation. There are also multiple cases of assets containing Special Areas of Conservation, relating to waterways bisecting or bordering an asset. These include protected habitats for otters and Atlantic salmon and will again be treated in accordance with its designation by the Company. In all cases, the Company will explore methods and activities that will not only preserve but enhance designated areas, through an active asset management approach. The company will explore partnerships with market leading ecological and bio-diversity specialists to support enhancement activities.
All planted assets contain at least the Forestry Commission’s necessary amount (1 per cent.) of Long-Term Retention and Natural Reserves stands. All assets are managed to PEFC and FSC standards and are expected to qualify for certification by both standards. For existing forestry acquisitions, it is anticipated that this will be gained within 12 months of acquisition. For afforestation acquisitions, this will be gained as soon after planting as possible.
The Seed Assets are planted with a variety of species. More than 10 commercial species are used across the sites, and a wide variety of natural broadleaves are selected in each case, dependent on which species best suit the landscape.
Investment pipeline
Foresight Group has identified a number of specific opportunities in line with the Company’s investment policy which are either, (i) under active discussion with the relevant counterparties, or (ii) likely to be available for sale within the 12 months following Initial Admission. This pipeline represents a total potential investment volume for the Company of £125 million.
As such, with the Seed Assets and investment pipeline, it is anticipated that the full maximum proceeds raised at IPO would be deployed well within 12 months.
Foresight branches out with Sustainable Forestry Company IPO plans