Last week we covered the Alquity Africa Fund and honed-in on its "do-gooder credentials" as 25 per cent of the management fee is returned into the community by way of The One Foundation, which use the monies to provide micro-finance projects in Africa.
This week the theme of Social Responsible Investing (SRI), is continued by an unlikely source: Mr Schadenfreude himself, ‘The Poisonous Pen' writing in Mondial Money. The closest Pen had been to ethical or, at least sustainable investment, was covering the opportunities which lay in carbon trading, where someone is paid for saving CO2, and someone else pays the fee for excess consumption. Everyone's a winner (including you and I) in this scenario.
This month, Pen explores the question: Can money grow on trees? And so to the forestry and timber business. For Pen: "There are several arguments for forestry investments: wood in general and hardwood demand in particular has grown at a compound annual growth rate of around 9 per cent per year (Emerald Knight) over the past 40 years. Now that would be a bond that we love to hold."
Now what do you and I get out of the tree business? Amongst the benefits is its sustainability. Trees grow stably and last for decades. The investment element goes into the land purchase and seeding process. The yield is then achieved by selling off the trees and its bounty, to be replenished by more growth.
Further, as Pen says; "Given worldwide deforestation and increasing [wrong] environmental restrictions, timber land cannot be replicated at liberty. We thus have an asset with long-term value. Finally, forests absorb high levels of CO2 and help purify the atmosphere.
"Our timber purchases contribute to combating climate change. Moreover, forestry always provides significant employment to local agricultural workers and slows the urbanisation of countries. That helps many of the poorer people. If we properly invest in forestry, we shall now sleep a lot better provided we also make good money."
So which avenue does Pen recommend? Emerald Knight, an ethical investment specialist and advisor, offers fixed returns of 10-12.5 per cent per year plus bonus with a Brazilian teak project. The investment is for 18 years with an option to exit after three years. "Sounds pretty good to us, although we have to be careful, there are no guarantees," Pen said.
They also developed a bamboo-backed bond that pays returns from South American bamboo plantations. It is a novel way for large scale timber projects to raise money and they actually have something to offer.
Risks to business
What are the risks to the tree business? Pen points to three key areas: "Firstly, natural risks such as weather, diseases and other vagrancies of nature. Secondly, there are operational risks in forestry and in emerging markets in particular such as theft, fraud, ‘mismanagement', lack of transparency, weak reporting and ‘excess' costs/fees just to name a few.
"Legal barriers are important to understand since we are dealing in sensitive sectors with wide-ranging restrictions for foreign investors. Finally, there are special risks with the fund and operations managers since the investment is not fully visible — how does a healthy bamboo or good hardwood tree look and how do I know which are mine — the sick, old [or] crappy ones?" says Pen with a touch of realism.
His conclusion is therefore pertinent: "Prepare yourself for a volatile ride because there are bandits and brigands out there gunning for your money. If you chose well, you may have a really exciting investment that will keep you happy for many years to come."