Africa’s Untapped Opportunity

Eva Warigia, Associate Director, Investor Relations at New Forests, explains how responsibly-managed plantation forestry in Sub-Saharan Africa is becoming an increasingly attractive asset class.

The African continent hosts 17% of the world’s forests. However, nearly four million hectares of these are lost each year, leading to a 3% loss of gross domestic product associated with soil and nutrient depletion, according to a report by the UN’s Food and Agriculture Organization.

The report points out that although the continent presents the largest restoration opportunity in the world – with more than 700 million hectares of degraded landscapes that can be restored – progress remains slow.

New Forests, a global asset manager of nature-based real assets and natural capital strategies, with A$11.7 billion (US$8 billion) in assets under management, is focused on addressing this issue.

In 2022, together with investment partners British International Investment, Norfund and Finnfund, New Forests launched a US$200 million dedicated African fund, the African Forestry Impact Platform, which it hopes to grow to US$500 million in the next two to three years. The fund focuses on four key areas of impact: climate change mitigation, biodiversity conservation, gender and diversity, and community and livelihoods.

Eva Warigia, Associate Director, Investor Relations at New Forests, focuses on building relationships with investors with the geographical mandate to deploy private capital into forestry in Sub-Saharan Africa (SSA). She joined New Forests a year ago from the East Africa Private Equity and Venture Capital Association, where she spent six years helping crowd private capital into Africa.

“This area of capital allocation looks at industrial production sectors in the land use space, including forestry and agriculture. Being in real assets, we also invest in the forestry industry’s value chain, such as timber processing, storage and haulage, and logistics associated with transportation of agricultural or forestry goods, for example,” she told ESG Investor. “Our intention is to invest towards a sustainable, natural landscape.”

Growing opportunities

Established 19 years ago to address the need to improve the quality of forestry management in Australia, New Forests’ expansion into Africa in 2021 was driven by several reasons.

“At a global level, there’s been a push to increase forestry production in the southern hemisphere where there is more landmass still available for planting. In addition, the southern hemisphere gets more sun than the north, which means trees grow much faster,” said Warigia.

The youthful demographic – Africa has the youngest population in the world, with 70% of SSA under the age of 30 – and the availability of labour to work in plantation forestry also featured in its decision. Plus, it is an emerging market for the consumption of finished goods. New Forests believes that the biggest demand for African forestry products is likely to come from Africa itself as the continent continues to grow.

“Africa’s population has been increasing quickly. As such, there’s growing demand for finished goods as well as real estate. To accommodate the rising population, there will be a need for housing projects, furniture and associated items. With such an evolving market, there is a justification for building industrial processing for timber,” she explained.

However, while the continent may export more forest products than it imports, the value of what it imports averages approximately four times the value of its exports. “In Africa, the timber is harvested, exported to other countries to be processed and then imported as finished goods. This means that people are paying a finished goods premium because someone else has added value, even though the raw materials came from here,” Warigia explained.

Previously, forestry was mainly viewed as part of the natural ecosystem in Africa, unlike in Europe where it is an established asset class, especially in the Scandinavian countries. The few African countries that invested mostly allocated capital to conservation and soil erosion mitigation projects, for example, not for industrial use.

“There was a lot of investment going into biological assets, either by government or development finance institutions, but no one thought about what to do when the forests matured,” she said.

As such, New Forests identified three main opportunities in building the forestry value chain beyond the forest plantation, according to Warigia. First, there is the economic opportunity of the addition of value to the products produced on the continent. Africa can substitute imported forest products with locally produced products, thereby providing access to good quality finished goods at a lower price than imported goods.

The second opportunity is social. African countries can create jobs by developing industries on the ground in local communities, such as wood processing, pulp and paper manufacturing, furniture making, and woodworking.

The third opportunity New Forests identified is that by actively planting for commercial use, it becomes possible to continuously work on the land being used for planting and harvesting, thereby improving the landscape and optimising for carbon sequestration and biodiversity benefits.

Emerging asset class

New Forests’ recently released report, ‘Investing in Africa – An Introduction to the African Forestry Landscape’, has three aims, according to Warigia. First is to create an awareness around the opportunities that investing in African forests present.

“The intention is to showcase where value can be found. This is shared value, not just for investors but also for social and climatic good. For example, there is commercial opportunity in building industries that can contribute to taxation and job creation, such as constructing plantation processing facilities. Then it becomes possible to begin addressing some of the challenges that most people associate with Africa in the context of poverty,” she said.

The second aim is to improve impact metrics, including gender and diversity, such as increasing women’s participation in the forestry industry. “Constructing a processing plant in rural locations will provide more capacity to include women, as they can operate the machinery or drive the trucks,” she explained. “Most people in rural communities are women because the men have left to find jobs in the city. Therefore, these industries are providing jobs for the people who are taking care of livelihoods within a village.”

The report also focuses on the role sustainably managed plantation forestry can play in climate change mitigation. New Forests’ activities expand the landscape of green vegetation with tree plantations, as well as helping restore degraded areas and create the opportunity for increased carbon sequestration and biodiversity conservation.

“It is widely accepted that while Africa has contributed the least to historical carbon emissions, it suffers the most in terms of climate impact – and at COP28 the African states called for compensation,” said Warigia. “However, investors need reassurance as to how these countries will use the funds to counter climate change.”

She argued that by supporting the forestry industry, investors are able to prove that they are working towards sustaining climate-positive change. “It is also the reason why the forestry management industry needs capital – we are helping to green the landscape and provide climate mitigation for the continent,” she added.

However, money is flowing slower into Africa than perhaps expected, especially when it comes to natural capital strategies such as forestry. But this situation is beginning to change. The global policy push towards net zero is driving greater interest, according to Warigia, and has led to companies and institutional investors from developed markets deploying more capital in Africa to offset their own emissions or meet policy targets.

“Many large corporates are investing to offset their carbon footprint. Some corporates are further along than others in terms of their own climate consciousness and sustainability agenda, which means they are able to invest more into natural capital opportunities,” she said.

“Hopefully, as more climate-positive policies come into play, then there will be a bigger push to allocate even more.”

Plus, while many investors and corporates began by allocating funds in sectors familiar to them, Warigia believes that increasingly they will explore natural capital strategies.

“It’s important to acknowledge that nature-based solutions are still the most efficient way of mitigating climate change. Therefore, we need to be more intentional in supporting nature-based strategies to restore ecosystems, whether forest, grassland or marine,” she said. “Until we develop a technology that can remove carbon dioxide from the atmosphere, we will continue to rely on forests and other carbon sinks.”

Policy standardisation

According to the New Forests report, the forestry assets in SSA tend to be nascent, diverse, and require significant process and structural support to help them grow and develop. Warigia believes that standardisation in terms of policy and regulation needs to happen for the asset class to begin to attract large institutional investors like pension funds.

“Africa is made up of 54 countries, with some further advanced in their outlook in terms of climate strategy and climate-positive intentions than others,” she said. “As an investor, we look at where are we going to get the most value – a single country may be too small a market for us to extract that full value. But the continent as a whole offers the right economies of scale that would justify a case for some of the large institutional investors in other parts of the world to come in.”

In addition to standardisation, she believes that local community and governmental policies need to be aligned to attract long-term investors. “Basically, the investor wants to feel protected and equally considered among stakeholders. Therefore, providing some level of comfort around long-term support for investors will be key [to drive future interest],” Warigia explained.

Building out local carbon market exchanges will also help develop greater interest in the continent’s natural capital strategies. “If we can generate our own credits and trade them, then we’ll be able to retain the value,” she added.

In the future, New Forests’ first priority remains the growth in the local forestry landscape and inviting more investors and other participants into the space, which also means continuously building the plantation forest sector. In addition, it plans to explore how it can add more value and capabilities for economic and social impact, as well as contribute more towards nature-based solutions in Africa as it has done in other geographies, such as Australasia, Southeast Asia and the US.

“We need to keep in mind the reasons why we are doing this. It can’t just be to green our own balance sheet or to check a regulatory box,” said Warigia. “As capital allocators, we’re not doing it for the immediate investor but to leave a better world for future generations.”

The post Africa’s Untapped Opportunity appeared first on ESG Investor.