The World Economic Forum has estimated that more than half of global economic output (worth $44 trillion) depends largely on what is known as “natural capital.” Natural capital consists of investing in shares of natural assets (air, land and water) that provide services (food, water and wood) and ecosystem benefits (such as regulating soil health and climate). And while it may not seem like the most obvious investment, it is potentially lucrative to invest in this massive market, across forests and farmland.
Why make an investment in natural capital shares?
1. Investing in natural capital stocks benefits from favorable supply and demand dynamics️
Growing populations will require more food, fiber and wood. Demand for these crops also remains constant throughout economic cycles. But as demand for food, fiber and timber rises, timber and agricultural lands 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 and climate conservation. Agricultural land around the world is being lost due to soil degradation.
2. Investing in natural capital stocks offers good benefits螺
Because timber and agricultural land have low correlations with traditional asset classes, such as investing in stocks and bonos, can boost the diversification of our portfolio and improve its risk-adjusted returns. After all, a portion of the returns on investment in timber and agricultural land is generated through biological growth, which is independent of market movements. Earning carbon credits and receiving payments for ecosystem services, such as carbon capture and storage, provide additional sources of uncorrelated returns.
3. Investing in natural capital stocks resists inflation
Additionally, timber and agricultural land, like other real assets, provides a hedge against inflation. Its performance is positively correlated with inflation because many commodities (food and construction materials) are components of inflation measures, such as the Consumer Price Index (IPC). Timber and agricultural land also provide attractive returns and a solid source of income. Additionally, they tend to maintain their value during economic downturns because they are driven by long-term secular trends, such as population growth, and because demand for these crops is relatively fixed.
4. Investment in natural capital shares collaborates with the environment
Investing in natural capital stocks allows people to positively contribute to global sustainability solutions, improve climate resilience and restore our planet's air, land, water and biodiversity. For example, forests and soils have the natural capacity to collect and store carbon. Globally, land serves as a carbon sink and an important defense against climate change. About 2.600 billion tons of CO2, a third of the amount released by burning fossil fuels, is absorbed by forests each year.
Investing in natural capital shares collaborates with the carbon cycle. Source: Concept
How do we take advantage of this opportunity?
According to one estimate, up to $350 billion of new investmentss each year to achieve sustainable food and land use systems by 2030, including the protection and restoration of natural ecosystems. This is a great investment opportunity in stocks that are crucial to the progress of the planet.
Hidden costs of global food and land use systems. Source: foodandlandusecoalition.org
Now, to get the full portfolio benefits of investing in timberland and farmland stocks, we should either invest directly in them or invest in private funds that invest in and manage forestry and farmland. Unfortunately, it is quite difficult for retail investors (that is, we...). So we have to look for the next best alternative: investing in REIT of timber and agricultural lands. There are four publicly traded timber REITs in the US: Weyerhaeuser (WY), Rayonier (RYN), PotlatchDeltic (PCH) and CatchMark Timber Trust (CTT). Farmland REITs typically purchase agricultural land and then lease it to farmers. Two that are publicly traded in the US are Farmland Partners (REIT) and Gladstone Land (COUNTRY). These two stocks have been relatively more volatile than their forest cousins. Unfortunately, there is no farmland ETF that offers better diversification.
Alternatively, we can invest in the iShares Global Timber & Forestry ETF (WOOD). This diversified ETF invests across the value chain, from timberland REITs to paper and packaging companies.
Caution, because REITs trade like stocks, meaning they tend to be positively correlated to the stock market. It’s not a perfect correlation, so they still offer some diversification benefits. But not as much as investing in farmland and timberland stocks. Just as private equity is slowly becoming democratized and opened up to retail investors, there will be some point in the future when direct investment in timberland and farmland will also be available to the masses. And now that we know what they are and their benefits, we are in a better position to invest.