Environmental Social Governance (ESG) provides various benefits for land asset managers, including lower capital costs and broader social license to operate. In this short guide, we review what ESG is, why it’s important and how you can practice good ESG management.
What Is ESG?
First coined in 2005, the term “Environmental Social Governance” or ESG has come to mean many things, such as stewardship, sustainability and citizenship. Forestry investors use the term to measure an investment’s sustainability, ethical impact and risk over opportunity.
ESG builds on many of the data gathering processes and policies already embedded in forestry businesses, such as:
- Sustainable Forestry Initiative (SFI).
- Forest Stewardship Council (FSC).
- Programme for the Endorsement of Forest Certification (PEFC).
- Chain-of-Custody (CoC) certification.
- Life cycle analysis (LCA).
Now that we know what ESG is, let’s look at why it’s necessary.
For more, follow along with our Campfire Sessions series on this topic.
Why Is ESG Important?
Sustainability used to be a concern for a few “green” investors. Today, it’s widely integrated into investment criteria.
Investor expectations for working forests have expanded beyond the ability of the land to produce wood products sustainably. Now, it’s all about how the owners and management firms are optimizing the land for various purposes, including:
- Wind and solar
- Clear air and water
- Greenspace and wildlife rehabilitation
- Carbon offsets
- Economic and cultural support for local communities
In 2018, a third of investors used ESG assessments in their investment decisions and to decide whether to exclude companies from their portfolios. That trend is likely to accelerate and filter into land investment management as well.
How ESG Benefits Each Type of Land Asset Manager
Land asset managers have many reasons for engaging in ESG management, but perhaps the most significant factor is investor expectations. By practicing ESG management, land asset managers position themselves to receive four main benefits:
- Accessibility and lower cost of capital
- Diversification of offerings
- Improved relationships with investors and the general public
- Broader social license to operate
Let’s look at how each type of land asset business benefits from ESG management.
Public Companies and REITs
Publicly traded companies and real estate investment trusts (REITs) are often rated on ESG issues, including overall greenhouse gas (GHG) emissions, governance matters and employment data. Highly rated companies are more likely to catch the attention of investors, and they have the ability to sell their corporate bonds as “green bonds.”
Investors are also more likely to engage with listed companies to promote better ESG management, resulting in more favorable financial performance.
Private companies that meet ESG benchmarks or are willing to set ESG targets can get better rates and terms from banks and lenders.
Also, private equity investors may target good ESG performers or look for companies where they can improve ESG performance as part of their investment strategy.
The close relationship between forestry investors and the underlying assets has promoted awareness and sensitivity to ESG risks. Therefore, investors are interested in private timberland ownership because they want to claim responsibility or ownership over the goods, services, and ESG benefits created from their investments.
Investors can use forestry as a showcase asset class for environmental action and sustainability initiatives. It also empowers them to realize revenue streams from environmental markets.
But how do land asset businesses practice good ESG management?
How to Practice Good ESG Management
For land asset managers need to know how to practice good ESG management. That includes maintaining a consistent focus on ESG factors when making decisions and actions throughout all phases of the business.
Here are seven areas to focus on for ensuring good ESG management:
- Affiliation with one or more global sustainable forestry standards, such as SFI, FSC or PEFC
- Climate impacts of forestry practices
- Human rights and economic equity approach
- Public land asset efforts for education, scientific research and cultural engagement
- Positive, cooperative relationships with public regulatory and environmental organizations
- Open, regular reporting on business and management teams
- ESG themes as an essential part of business objectives and management, included in investment strategy pitches
By working on these areas, land asset managers better position themselves to generate a positive environmental impact, enticing investors.
Some examples of balancing conservation with sustainable production include:
- Renewable energy production in the form of biomass, like wood pellets
- Conservation easements
- Sustainable farming agreements
- Carbon offsetting and emission trading
The forestry industry is naturally suited to ESG because it offers tangible, real-world outcomes. As a result, there are rapidly increasing expectations for a positive impact on forestry.
Land asset managers are turning to forest information data and systems for managing ESG on their properties. That way, they can determine if their actions are optimal for the environment and investors.
This blog includes a video from Orbis’s second Campfire Sessions webinar series. Register for the upcoming Campfire Sessions to stay current on the forestry and land asset management industry.