Q&A with SLM Partners’ McMahon: European forestry is in a strong position as an asset class

From addressing global issues such as climate change and being a haven of biodiversity, to providing timber for construction, paper and packaging, forestry is an important natural global asset. According to the World Economic Forum, investing in forest conservation and restoration can benefit businesses as they become leading actors in the transition to a nature-positive, net-zero economy.

Here, Paul McMahon, managing partner of SLM Partners, discusses how geopolitical unrest is leading to reallocation of capital in the forestry sector, asserting that European forestry is on the cusp of a large increase in investment.

Tell us about your recent research into the European forestry sector. What were you exploring and what were you trying to find out?

We established a successful forestry fund that has invested in Ireland since 2018. This demonstrated the opportunities that exist within European forestry. We spent the last few years researching other European countries with the goal of finding new areas where we could implement a similar strategy. We set ourselves the task of designing an institutional-scale fund that could generate attractive returns while delivering positive environmental outcomes – which is the core of SLM Partners’ mission.

See also: Why we need to be setting forestry targets

How is geopolitical unrest affecting European forestry?

European forestry is in a strong position. There is a large forest resource that is expanding in area and has the potential for increased harvesting rates. Europe has a well-developed timber processing industry that takes this raw material and turns it into valuable products, such as construction timber, wood panels, paper and packaging. Europe has gone from being a net importer to a net exporter of roundwood and other forest products over the last 10 years.

Sanctions imposed after Russia’s invasion of Ukraine in 2022 cut off the supply of logs from Russia and Belarus, which has led European sawmills to source more logs domestically. The impact of US tariffs and potential trade wars is hard to predict. Europe has emerged as the second largest exporter of softwood logs and timber to China, and may be able to take advantage of a US-China trade war. At the same time, Europe is a net exporter of timber products to the USA, which could be subject to tariffs. And Europe could see more imports flow in from Canada if Canadian trade with the US is diverted. The eventual impact of new tariffs – as for so many other sectors – is hard to predict. But, overall, regardless of geopolitics, the main driver of the forest industry in Europe will be domestic demand as Europe continues its transition to a low-carbon economy.

How much investment is going in to forestry, and how exactly is this helping?

Forestry investment is a well-developed asset class in North America and Australia/New Zealand. But relatively little investment has gone into European forestry: it is estimated that less than 1% of global institutional investment in forestry has been directed to Europe. However, this is starting to change as European investors make new allocations to natural capital and show a greater desire to invest at home – partly in response to geopolitical risk. Forestry investment can help consolidate fragmented private forests, fund the establishment of new forests and bring in active management.  

What would you like to see in terms of investment? What do we need to make real progress?

European forestry is under-invested and under-managed. Only two-thirds of the annual growth of forests is harvested each year and many forests are neglected. Investors can back aggregation strategies that build institutional scale portfolios, bring in professional management and achieve economies of scale. This will help to mobilise wood resources for the European economy.

In addition, we need to change how forests are managed in order to deliver social and environmental benefits and to achieve resilience in the face of a changing climate. Conventional, rotational forestry systems produce landscapes with low biodiversity and limited carbon sequestration, while being vulnerable to storms, droughts, pest and diseases. Alternative systems – such as Continuous Cover Forestry – produce more natural and diverse forests that store more carbon, support more biodiversity and provide higher amenity value, while also allowing commercial timber harvests.  

How is the shift to a low carbon economy affecting the European forestry space?

The shift to a low carbon economy will lead to increased demand for wood products, as they have a low carbon footprint and can substitute for materials that rely on fossil fuels. For example, timber can replace concrete and steel in buildings, paper and cardboard can replace plastics, and biomass is an important source of renewable energy. As a result, a study by AFRY estimates that total demand for wood fibre in the EU will grow by 25% between now and 2050.

At the same time, establishing new forests and managing forests in better ways can increase carbon stocks. A larger forest carbon sink can help offset emissions from sectors that are hard to fully abate. Continuous Cover Forestry is especially helpful as it increases carbon stocks. We are seeing the development of carbon markets in Europe that reward forest owners for sequestering more carbon. This will further tip the balance in favour of continuous cover or close-to-nature management approaches.

Where are you seeing opportunities for investors in this space?

As well as what we’ve discussed, the opportunities are for investors to back aggregation strategies and the scale up of Continuous Cover Forestry. This won’t work everywhere, as not all European countries are attractive for forestry investment. But there are large areas that would benefit from this type of investment and offer an attractive return to investors.

How can investors access these opportunities? 

Institutional investors can make allocations to forestry, within the natural capital theme, and partner with asset managers that have the necessary expertise. There is a small but growing pool of managers developing strategies in Europe. For example, SLM Partners plans to establish a €200m fund to invest in multiple European countries, with a focus on aggregation and implementing Continuous Cover Forestry. This will be a Fund 2 to our earlier Irish forestry fund.