Why pension funds should bet on forestry as an asset class

Investments in sustainably managed forests can support rural livelihoods and create attractive risk-adjusted returns. [Courtesy]

I was honored to share my thoughts on climate action at last year’s annual decentralization conference, which aimed to unlock the potential of climate action at the national level under the COP 26.

As a delegate, I highlighted how pension funds can help fight climate change – by providing the much-needed long-term investment to fight this challenge.

According to the Organization for Economic Co-operation and Development (OECD), globally, 47 trillion dollars (4.9 trillion shillings) are invested by global pension funds.

This represents about 50% of all the money invested in the global financial system.

Pension funds have enormous leverage, although the participation of pension funds in inclusive green investments has been limited to date.

According to the International Finance Corporation’s Aligning Kenya’s Financial System with Inclusive Green Investment Report, the Retirement Benefits Authority’s investment policy guidelines allow for broad asset allocation and diversification, including investments in alternative assets such as private equity, asset-backed securities, real estate investment trusts, collective investment schemes and green bonds. These investments are encouraged by capital market guidelines and tax breaks.

There are many benefits to investing in forests. Forest investment can provide financial, environmental, social and governance benefits.

Investments in sustainably managed forests can support rural livelihoods, create jobs, produce multiple environmental benefits and create attractive risk-adjusted returns for investors.

According to a 2019 study by TimberLink, institutional investment in forestry investments totaled $48 billion (5 trillion shillings, of which public pension schemes held 23 billion shillings $2.6 trillion) and sovereign wealth funds Another $3 billion (300 million shillings).

According to the Kenya Forestry Research Institute, forestry contributes 3.6% of Kenya’s GDP, excluding charcoal and direct subsistence uses.

Kenya’s timber deficit stands at 10.3 million cubic meters and Kenya can only meet 70% of its demand through sustainable supply.

Additionally, forests have a net carbon uptake of around 7.6 billion tonnes per year and tree growing could create $230 billion (25 billion shillings) in business opportunities and 16 million jobs in the world. world by 2030.

Investing direct equity in conservation can generate carbon credits with monetary value.

As Chairman of the Association of Pension Trustees and Administrators of Kenya, I propose that the government lease huge chunks of its land to pension funds at nominal rates for plantation forestry as a long term investment .