New Forests: Path clears for ethical investors
Timberland investor New Forests is encouraging Singapore to become Asia’s hub for impact investing, while solving the region’s annual pollution problem.
Haze: it is, dangerously and expensively, south-east Asia’s filthiest four-letter word.
Every dry season from June through to October, the illegal slash-and-burn techniques used in palm oil and pulp plantations in Indonesia and Malaysia envelope the region in toxic smog.
The haze has been a life-threatening constant of the region for years. In 1997, Singapore introduced a Pollutant Standard Index (PSI) to measure air quality after a particularly putrid season: locals immediately dubbed it “Pay Suharto Immediately” because they knew how business was done under the Indonesian dictator, as well as some of the more democratic administrations that followed him.
A decade ago, Malaysia’s national tourism marketing tagline – Malaysia, Truly Asia – was ritually twisted to replace the final word, with variants including Malaysia, truly hazier.
The pollution forces schools and offices to close, grounds flights and puts thousands in medical care. The World Bank estimates the annual haze costs the regional economies it affects – mainly Singapore, Indonesia, Malaysia and Brunei – around $30 billion. Medical studies attributed around 100,000 premature deaths to the haze in 2015, a particularly bad year.
But New Forests, an investment fund manager based between Singapore, Sydney and San Francisco, wants to help put an end to Asia’s suffocating cycle. It aims to convince plantation owners and their investors that it’s possible to make good money from the region’s forests without trashing them. And, by setting up shop in Singapore, it hopes to further the city-state’s credentials as a centre for ethical investing.
New Forests started life in 2005 with $50 million under management after David Brand, a Canadian forestry scientist, led the buyout of a Sydney-based forest-management company that he ran for the world’s largest timberland investor, Boston-based Hancock Timber Resources.
Today, Brand’s outfit boasts around $3 billion under management through a suite of funds invested in timberlands around the world, notably in North America and Australasia. In 2012, it raised $150 million for the world’s first Asia-only forestry fund, the Tropical Asia Forest Fund, which has invested in projects in Indonesia, Malaysia and Laos.
New Forests’ investment pool is mostly raised from European and North American pension funds, endowment and trust funds and insurance companies. Last year, Japanese trading house Mitsui & Co took a 23% stake in New Forests.
“For a fund manager, we are an eclectic bunch, between the finance side, the governance, the risk management, the foresters, the environmental and social side,” says New Forests’ Singapore-based sustainability director MaryKate Bullen.
The presence of unconventional investment funds like New Forests in Singapore points to a growing niche in the city-state to promote ethical and so-called impact investing in Asia. Bullen says it is a common enough investment class in developed Western markets but less well known in the region.
“The challenge for us in Asia is getting the investors comfortable with the asset class in a region where it’s not established,” Bullen says.
Official Singapore sees the attractions of such business and wants to be the regional leader in social entrepreneurship and impact investing. In 2015, the government set up the Centre for Social Enterprise, seeding it with funds from gambling revenues derived from the city-state’s horse-racing industry.
In 2009, Bangladeshi businesswoman Durreen Shahnaz, formerly of microfinance pioneer Grameen Bank in Dhaka, set up the Impact Investment Exchange in Singapore, which she describes as the world’s first social stock exchange. Hong Kong too has set up an official Social Innovation and Entrepreneurship Development Fund from lottery revenues.
In the private sector, impact funds backed by players such as Credit Suisse, Liechtenstein’s LGT Group and the New Zealand billionaire investor Richard Chandler are regionally active from a Singapore base. Another Singapore fund manager, Triple P Capital, run by former AIG and Chandler executive Alex Krefft, is finalizing a $120 million impact fund largely drawn from family offices and private investors. Krefft says the fund will be focused on developing insurance and financial services in lower-income economies such as Vietnam, Indonesia, Philippines, Thailand and Cambodia.
The focus on impact investing follows a greater emphasis by traditional institutional investors, pension funds and family offices on investing in sustainable ventures, often responding to demands from their own investors and clients.
Bullen says her fund “helps them to be able to fulfil that element of their portfolio.” But she baulks at the suggestion that her fund is philanthropic and activist.
“It is mission-aligned but it’s not activist,” she says. ““We can show people that we know how to manage their plantations responsibly but our investments also have got to stack up commercially.”
New Forests’ big idea, she says, “is to realize the value of the benefits we get from ecosystems that’s more than the timber. There’s the clean air, the water quality, amenity values, many things. We aim to get that value back to our investors.”
That all seems very noble but how have the funds performed? New Forests’ Bullen refuses to publicly reveal, claiming jurisdictional restrictions.
“Our marketing restrictions stem primarily from regulation in the EU for alternative investment managers and from the US for private placement offerings,” she says. “Our policy not to disclose returns publicly is in respect of these restrictions.” But Bullen claims, without providing evidence, that New Forests’ funds generate industry-standard “market-rate or better” returns.
Institutional timberland investing is well established in markets such as North America where it has grown into a $100 billion asset class since the 1980s. But it’s relatively unknown in Asia, where Bullen says New Forests is operating the world’s first regionally-directed forestry fund.
“We think you need to be local to understand the markets you are investing in,” she says.
|David Brand's New Forests has $3 billion under management, and is now targeting southeast Asia|
New Forests’ arrival in Singapore also follows a more activist trend by local consumers against the polluting haze, with Singapore retailers responding to the public pressure. In 2015, during the worst haze outbreak to engulf the region, Indonesian-owned plantation group Asia Pulp and Paper – oft-fingered by authorities as a major polluter – had its paper products taken off the shelves by retailers. The Swiss food company Nestlé, a big buyer of south-east Asian palm oil grown in orangutan habitats, has also been periodically targeted by anti-deforestation campaigns.
“The big baddies are in a period of transition,” Bullen says of the polluting plantation owners, “and they are trying to figure out how best to repent or atone for their sins, how to do better from now.”
Part of it is generational change at the helm of polluting companies, as control and management changes, and part is market-driven, where customers influence suppliers to fix methods at the source, lest the impact becomes toxic in the marketplace.
New Forests says a big part of its charter in Asia is better management of de-forested areas, so as to limit the impulse to denude untouched natural forests and ecosystems.
“We work to get more out of existing plantations so as to take the pressure off the rest of the forest,” Bullen says.
She cites a project in Indonesia where New Forests’ fund teamed up with one of the country’s biggest plantation owners, PT Sampoerna Agro, to take a 35% stake in a rubber plantation in West Kalimantan.
The 100,000-hectare property is a mix of untouched forest and plantation forest. The joint venture sees the preservation of 20,000 hectares in its untouched state – the area is an orangutan habitat – while improving practices on the degraded and farmed sites to make them more sustainable and productive.
Bullen says New Forests spends as much on the due diligence of smaller Asian deals as it does on bigger deals in established Western markets.
“We have a very active and intensive due diligence process. You need to know who your partners are, what they’ve done in the past; it’s very important for us to be comfortable when we go into a company.”
Bullen says New Forests has a zero tolerance standard on corruption and bribery. That can narrow the investment universe in countries such as Indonesia, which consistently ranks poorly when measured by corruption monitors such as Transparency International. “It means we have to be very patient with how we work with people, we have to be quite clear that we don’t play that game,” she says.
Bullen says New Forests is constantly aware that its reputation as a sustainability-minded fund could be abused by polluters to greenwash their practices, and that having New Forests as a co-investor in a specific project could be sold by the promoter as an endorsement of generally sound environmental practice.
In Australia and North America, New Forests’ investment model is closer to asset management, buying and managing assets outright. But in Asia, New Forests is following more of a private equity model, investing alongside local players.
“There’s a lot of investor education (to do), as well as landowner education to help them realize the opportunities that are there, that are less conventional,” she says. “Companies are now realizing that their operating environment will change from climate change so you have to be ready to adapt and adopt.”