Planted forests in emerging economies - Best practices for sustainable and responsible investments - CIFOR
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OCCASIONAL PAPER Planted forests in emerging economies Best practices for sustainable and responsible investments Lucio Brotto Davide Pettenella Paolo Cerutti Romain Pirard
OCCASIONAL PAPER 151 Planted forests in emerging economies Best practices for sustainable and responsible investments Lucio Brotto Department of Land, Environment, Agriculture and Forestry – University of Padova Davide Pettenella Department of Land, Environment, Agriculture and Forestry – University of Padova Paolo Cerutti Center for International Forestry Research (CIFOR) Romain Pirard Center for International Forestry Research (CIFOR) Center for International Forestry Research (CIFOR)
Occasional Paper 151
© 2016 Center for International Forestry Research
Content in this publication is licensed under a Creative Commons Attribution 4.0 International
(CC BY 4.0), http://creativecommons.org/licenses/by/4.0/
ISBN 978-602-387-035-6
DOI: 10.17528/cifor/006136
Brotto L, Pettenella D, Cerutti P and Pirard R. 2016. Planted forests in emerging economies: Best practices for sustainable
and responsible investments. Occasional Paper 151. Bogor, Indonesia: CIFOR.
Photo by Tri Saputro/CIFOR
White teak trees or Gmelina arborea in Lambakara village, Southeast Sulawesi, Indonesia
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Any views expressed in this publication are those of the authors. They do not necessarily represent the views of CIFOR, the
editors, the authors’ institutions, the financial sponsors or the reviewers.Contents
List of abbreviations v
Glossary vi
Acknowledgements vii
Executive summary viii
1 Introduction 1
2 Objectives of the study 3
3 Research background 4
3.1 Planted forest trends: An update 4
3.2 Investments in planted forests 4
3.3 Corporate social responsibility 5
3.4 Sustainable and responsible investments (SRIs) 5
3.5 Strategies for selecting and investing in SRIs 6
3.6 SRIs in productive planted forests 8
4 Materials and methods 9
4.1 Description of SRIs 9
4.2 Quality assessment of SRI tools 10
5 Results 11
5.1 Planted forests investment process 11
5.2 SRI tools for the planted forests sector 12
5.3 SRI tools quality assessment 16
6 Conclusions 22
6.1 What are key characteristics of investments in planted forests? 22
6.2 Which SRI tools are commonly used? 22
6.3 What are the issues covered by SRI tools? 23
6.4 Which SRI tools do best in incorporating environmental,
social and governance (ESG) issues? 23
6.5 Recommendations 24
7 References 25
Annexes 30
1 Historical overview of investments in planted forests 30
2 Historical overview of sustainable and responsible investments 31
3 Strategies of sustainable and responsible investments 32
4 Stakeholders operating in the forest SRI sector 33
5 SRI tools descriptive variables 35
6 Sections, subsections and number of issues 39
7 SRI tools database 40
8 SRI tools description 46
9 ESG reference document 51iv
List of figures, tables and boxes
Figures
1 Scope of the research. 3
2 Actors in sustainable and responsible investments in planted forests. 11
3 Specificity of SRI tools by type of instrument. The number of codes of conduct
is underestimated and only represents a sample. 12
4 Governance structure of SRI tools by type of instrument. 13
5 Users of SRI tools by type of instrument. 14
6 Number of SRI tools and level of control used by stakeholders. 15
7 Performance by type of SRI tools based on frequency of issues. In green,
the occurrence of the issues is weighted with the level of control. 19
8 Performance of SRI tools based on frequency of issues. In green, the occurrence
of the issue in SRI tools is weighted by the corresponding level of control. 21
Tables
1 Comparison of classification systems for SRI strategies. 7
2 Value and growth of SRI strategies in Europe, 2011–2013. 7
3 Role of planted forest investments in SRI strategies. 8
4 Example of a hierarchical framework consisting of a section, subsections,
issues and verifiers for the assessment of SRI tools and their ESG criteria. 10
5 Top three issues for each section. 17
6 Top-ranking issues for each section including the level of control. 18
7 Low-ranking issues for each section including the level of control. 18
8 SRI tools with the highest performance by type. 20List of abbreviations
AUM Assets Under Management
CDM Clean Development Mechanism
CSR Corporate Social Responsibility
DAC OECD Development Assistance Committee
EFAMA European Fund and Asset Management Association
EIB European Investment Bank
ESG Environmental, Social and Governance
ESRA The Assessment of Environmental and Social Risk in Loan and Investment Fund Applications
FDI Foreign Direct Investment
FGHY Fast Growing and High Yielding
FLEGT Forest Law Enforcement Governance and Trade
FSC Forest Stewardship Council
GSIA Global Sustainable Investment Alliance (www.gsi-alliance.org)
ILO International Labour Organization
IOs International Organizations
IRR Internal Rate of Return
ISEAL International Social and Environmental Accreditation and Labelling
JI Joint Implementation
NGO Nongovernmental Organization
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
PES Payments for Environmental Services
PEFC Programme for Endorsement of Forest Certification Schemes
RBV Resource-Based View
REDD+ Reducing emissions from deforestation and forest degradation and the role of conservation,
sustainable management of forests and enhancement of forest carbon stocks in
developing countries
SIF Sustainable Investment Forum
SRI Sustainable and Responsible Investment
SSIs Sections, Subsections and Issues
TIMOs Timber Investment Management Organizations
T-REITs Timberland Real Estate Investment Trusts
UN United Nations
UNFF United Nations Forum on Forests
US United States of America
USD United States Dollar
VSS Voluntary Sustainability Standards
WRI World Resources InstituteGlossary
Terminology Definition Source
Corporate social CSR includes a wide range of voluntary and regulatory instruments, including European
responsibility sustainable and responsible investments. CSR binds companies that voluntarily Commission
(CSR) integrate environmental and social concerns in their business operations and in their (2011)
interactions with their stakeholders. CSR is expanding out of the corporate sector to
include organizations of all types and taking the name of Social Responsibility.
Emerging Any area that is taking steps toward developing a market-oriented forest sector Investopedia
market economy, and has the potential to provide a viable and significant market for forest (2016)
commodities or forest products.
Environmental, Nonfinancial issues/risks/factors/indicators included in the investment process to Investopedia
social and screen investments. (2016)
governance (ESG)
Institutional These are investors such as pension funds, insurance companies and banks that Davis and
investors generally have substantial assets and experience in investments, and pool and Steil (2004)
invest capital on behalf of corporations or private individuals. They also include
mutual funds, holding companies, brokerages and other funds. Foundations,
endowments and family offices are also very often grouped under and treated in
this category.
Investment Investment companies are firms that invest the funds of investors (e.g. institutional Investopedia
company investors such as pension funds) in securities appropriate for their stated investment (2016)
objectives in return for a management fee. This category also includes investment
managers, asset managers, asset management companies, timber investment
management organizations (TIMOs) and real estate investment trusts (REITs).
Planted forests Planted forests are areas of trees established through planting and/or deliberate FAO (2010)
seeding of native or introduced species. Establishment is either through afforestation
on land that had previously not been classified as forest, or by reforestation of land
classified as forest, for instance after a fire or storm or following clear-felling.
Private equity Private equity derives from investors and funds that invest directly in private Investopedia
companies or conduct buyouts of public companies that results in a delisting of (2016)
public equity.
Retail investors Retail investors deal in securities only occasionally, and often deal in only small Investopedia
quantities. They include individual investors, private investors, odd-lotters and (2016)
small investors.
SRI This refers to the set of organizations specifically dedicated to advocacy of SRI and own
infrastructure provision of SRI services (e.g. standard setters, certification bodies, SRI forums, etc.) elaboration
SRI tools SRI tools are a set of common tools (standards, guidelines, codes, etc.) to assure the own
integration of ESG issues in the investment process. Examples are forest certification elaboration
schemes, codes of conduct and investment rating systems.
Sustainable SRI is a generic term covering any type of investment process that combines EUROSIF
and responsible investors’ financial objectives with their concerns about environmental, social and (2012a)
investment (SRI) governance (ESG) issues. SRI is one of the voluntary approaches to promoting CSR.Acknowledgements This research was conducted with the financial support of the UKAID-funded KnowFOR (Forestry Knowledge) program and the CGIAR research program on Forests, Trees and Agroforestry (FTA). The authors would like to acknowledge Benjamin Singer, Sepul Barua and Steven Lawry for the valuable comments made to a previous version of this document.
Executive summary
Investments in industrial-scale planted forests have the SRI tools’ capacity to incorporate and foster
grown exponentially in recent years, and current positive impacts on ESG issues. The present study
assets under management total USD 70–80 billion, therefore has two objectives: first, to identify,
up from about USD 1 billion in 1980. Once describe and analyze the tools that have been
almost exclusively focused on timber production, designed in order to promote SRIs in planted
investments are now rapidly broadening their forests; and second, to suggest a framework for
scope to embrace products and services that the evaluation of SRI tools vis-à-vis their capacity
include ecosystem services, bioenergy and certified to address ESG issues in relation to investments
forest products. Planted forests are included into in planted forests, with a longer-term aim of
investment portfolios for various reasons, ranging improving the SRI tools of the future.
from diversification and risk mitigation strategies –
which are reinforced when investments also rely on An analysis of 121 investments in emerging
indicators of sustainable forest management – to economies enabled us to identify 339
attractive rates of return. organizations (i.e. stakeholders involved in the
SRI process) and 50 SRI tools. The description
Concurrently, the rapid growth of investments in and subsequent classification of SRI tools was
plantations, notably in the tropics, has fostered based on several variables, including:
controversies that are becoming more prominent • type of tool, based on nine categories:
and critical and that need to be faced by investors. investment index, code of conduct,
In particular, such rapid growth may incur negative reporting standard, investment guideline,
social and environmental impacts of planted legality benchmark, investment standard,
forests, such as soil erosion and degradation, water investment rating, bank investment policy,
cycle disruption, pests and diseases, and conversion management standard
of natural forests. These can result in biodiversity • specificity of the tools, from those with a
loss or the abuse of local and indigenous broad scope to those focusing on forests
communities’ rights within productive planted (including planted forests) and on planted
forests, notably plantations with monocultures forests only
of exotic species under intensive management • governance, depending on the involvement
practices. These are major reasons why investment of businesses, governments, NGOs or
companies and fund managers are increasingly academic institutions
interested in using sustainable and responsible • users and where the tools interfere in the
investment (SRI) tools (e.g. standards, guidelines, investment process, including processing
and codes of conduct) that help them ascertain industries, plantation companies, investors,
whether planted forests assets are ‘safe’ or ‘risk-free’ investment companies and asset managers
as far as environmental, social and governance • level of control induced by the SRI tools to
(ESG) issues are concerned. Indeed, more than ensure that ESG requirements are met, from
30% of the professionally managed assets are today control of some initial steps (e.g. getting
assessed as being managed in a ‘sustainable and a signature to a declaration of intents, or
responsible’ manner. agreeing to participate in networks and
forums aiming at the better inclusion
However, a classification system for SRI tools in of ESG issues into business models), to
the field of planted forests still lacks consensus, effective compliance with the more stringent
which in turn implies a knowledge gap in terms of certification schemes.ix
Results indicate that the most common SRI The SRI tools with the highest overall performance
tools used to date are management standards among the 50 SRI tools analyzed were found
(e.g. the Forest Stewardship Council’s to be those of the Forest Stewardship Council
standards, called the FSC Forest Certification (FSC) and Gold Standard: they monitor more
Scheme), bank investment policies (e.g. ABN issues and ensure greater quality of control (e.g.
AMRO Forest and Plantation Policy) and third-party independent certification) than do
investment rating systems (e.g. RepRisk). other entities. RepRisk, Certified B Corporation,
SRI tools usually have a broad sectoral scope. ABN AMRO Forest and Plantation Policy, WWF
Only a few tools are specific to planted forests. Responsible Investment Guide, FairForest and the
Business-oriented organizations produce and FTSE4Good Index Series were also found to have
manage about 60% of the SRI tools assessed, high performance.
followed by NGOs (16%), which in recent
years have played a more relevant role in the Overall, findings indicate that very few SRI tools
development of management standards. are designed in ways that take adequate account of
the specific social and environmental sustainability
The classification of the 50 SRI tools based on issues relevant to planted forests. In fact, SRI tools
the abovementioned set of variables allowed focus mainly on issues appropriate to assessing the
us to define an ESG Reference Document for management of natural forest rather than that of
quality assessment of the SRI tools. Results planted forests (e.g. they assess aspects related to
indicate that the most important issues illegal logging and high conservation value forests,
highlighted in the available SRI tools used to which are only partially relevant for plantations).
assess the tools’ ESG performance are: legality
of operations, environmental impact assessment This is an important shortcoming of the current
requirements, third-party certification, SRI tools and we recommend the development
consideration of tenure rights, impacts on forest of SRI tools developed specifically for productive
degradation, stakeholders’ communication and plantations. For practitioners, policy makers
presence of policies related to climate change. and local populations, it is indeed important
that planted forests are evaluated either through
Conversely, issues such as poverty alleviation, specific SRI tools, or at least with appropriate
minimum percentage of protected areas and consideration given to the specific situation of
prevention of encroachment were found not planted forests within existing, broader, SRI tools.
to be properly addressed or monitored in In particular, it is critical that key aspects such as
current SRI tools. This is an important finding the improvement of livelihoods, and the prevention
because such topics carry significant risks for and management of encroachment and conflicts
investments if not properly monitored or are properly addressed, and indeed thoroughly
controlled for. monitored, in improved future SRI tools.1 Introduction
The area of land covered with planted forests is and indigenous communities) generate serious
growing worldwide. According to FAO (2010), concerns (Morrison and Bass 1992; Cossalter
since 1990, planted forests have been increasing and Pye-Smith 2003; Bowyer et al. 2005; Van
mostly in tropical and subtropical countries in Asia Bodegom et al. 2008; Lawson et al. 2014).
and South America by 4.3 million ha/year. Planted
forests correspond to 7% of the global forest area The concerns about the negative impacts of
and cover an area of 264 million ha. planted forests are all the more critical because:
• retail investors look to increase their market
Today, 30% of all industrial roundwood share and are less likely to care about
production is sourced from these planted forests social and environmental impacts than are
(Jürgensen et al. 2014). Planted forests are institutional investors (Simula 2008)
expected to overtake natural forests in production • planted forests are mostly expanding in
to reach 75–100% of industrial timber production countries (often tropical and subtropical)
by 2050 (Sohngen et al. 1999; Evans and Turnbull characterized by fragile social situations and
2004; Carle and Holmgren 2008). Warman (2013) relatively poor law enforcement compared
convincingly describes how the peak of production with conventional areas of investment
from natural forests occurred in 1989 worldwide. such as the USA (Voegtlin et al. 2011;
Zhanget al. 2014)
The expansion of planted forests is traditionally • productive planted forests will be prioritized
linked to the demand for wood fibers and biomass over protective ones and will entail higher
for energy, but nowadays planted forests are social and environmental risks.
also counted on for climate change mitigation
and adaptation, e.g. the Clean Development Considerable resources are required for the
Mechanism (CDM) and Reducing Emissions from establishment of planted forests; here, upfront
Deforestation and Forest Degradation (REDD+) investments are critical for their development
schemes (Scheyvens and Lopez-Casero 2009; and largely determine the quality of their
Hamilton et al. 2010; Stanton et al. 2010). In the design and functioning. The investment aspects
context of declining relative timber production therefore play a decisive role and deserve scrutiny.
from natural forests and expanding planted forest Currently, USD 70–80 billion is invested in
estates, the estate managers might be credited timberlands1 all over the world, with over 70% in
for their capacity to support forest conservation the USA alone (Nicklin and Cornwell 2012).
(Pirard et al. 2016).
Increasingly, investment companies and funds
Planted forests are increasingly seen as a source willing to invest in timberland, and particularly
of forest products and services able to also deliver in productive planted forests, adopt so-called
environmental, social and economic benefits (Boyle sustainable and responsible investment (SRI)
et al. 1999; Bull et al. 2006; Carle and Holmgren strategies (EUROSIF 2010; UNECE/FAO
2008; UNEP 2009). However, the negative social 2014). For example, investors may want to
and environmental impacts of planted forests invest only in timber plantations where the
(e.g. water cycle disruption, soil erosion and
degradation, biodiversity loss, pests and diseases,
conversion of natural forests and abuse of local 1 Timberlands include both natural and planted forests.2 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
managing company adopts and implements Increasingly, however, they aim to ensure that
measures targeted at reducing conflicts with the a particular set of environmental, social and
local populations. To implement such a screening governance (ESG) risks are properly addressed
strategy, investment companies and fund managers in the investment process. In technical jargon,
would need to rely on standards, guidelines, codes investment companies and fund managers adopt
of conduct or other directive (hereinafter called SRI strategies that make use of SRI tools to
SRI tools). There are many SRI tools, which guarantee that their investments do not cause
may vary in their format and their objectives. negative ESG impacts.2 Objectives of the study
The concept of sustainable and responsible Thus, taking stock of the increasing interest
investment (SRI) is evolving, with new financial in investments in planted forest, especially in
service providers developing methods and tropical countries, this study has the following
approaches to include ESG issues in their business- two objectives:
as-usual scenarios. Indeed, the market for sustainable • to describe existing sustainable and responsible
investments increased from USD 13.3 trillion in investment tools adopted in planted forests
2012 to USD 21.4 trillion in 2014, and it represents in emerging markets and to identify their key
today more than 30% of professionally managed characteristics; this is supported by a survey of
assets globally (GSIA 2014). Retail and institutional the most used SRI tools
organizations are showing a significant interest • to evaluate the performance of SRI tools based
in ‘socially responsible,’ ‘green,’ ‘sustainable’ or on the number of environmental, social and
‘ethical’ investments, seen as being due to the media governance (ESG) issues considered, namely the
and social pressure. In some cases, a socially and nonfinancial issues and risk indicators included
environmentally responsible behavior is adopted as in the investment process.
a result of new commitments by the shareholders
and top managers, typically on a voluntary basis, Our scope and objectives can also be represented as
to reduce risks and to promote more effective shown in Figure 1.
marketing strategies.
To prove that investments are ‘ethical,’ ‘green’ or
other, the adoption of various standards, guidelines Investors (and investment companies)
or other directives (SRI tools) has been growing
constantly in recent decades (EUROSIF 2014). use
Yet, such an increase in self-defined ‘sustainable’
investments or in the use of various SRI tools is not SRI tools
matched by any agreed classification system for SRI Scope of the to ensure proper
tools. As a result, it is very difficult for investment study critically consideration of
companies, funds, and indeed shareholders to analyzed
really understand how their money is promoting ESG aspects in SRI
positive environmental and social impacts.
for achieving
For people making investment decisions and
managing assets, it is a challenge to understand Corporate social responsibility
the differences between the range of available
financial products. At a national level, markets
may require differing strategies depending on local Figure 1. Scope of the research.
investors’ preferences, with associated differing
approaches and products to guide the investments
(Sievänen et al. 2012).3 Research background
3.1 Planted forest trends: An update of their assets under management in the USA
increased dramatically from around USD 1
The focus of this study is on productive planted billion to USD 10–12 billion (Zinkhan et al.
forests, where investments are massive. Productive 1992). In the early 2000s, TIMOs expanded
planted forests produce either or both non- into emerging markets (e.g. Brazil), where forest
timber forest products (rubber) and wood (e.g. assets exhibit higher risk–return profiles. In
timber). Fast growing and high yielding (FGHY) South America and Asia, the area of planted
plantations cover an area of 54.3 million ha forests has been increasing due to conducive
worldwide, excluding rubber and nonindustrial biophysical conditions, low production costs,
fuelwood plantations (Indufor 2012). The USA, proximity to emerging markets and acceptable
China and Brazil are the countries with the risk levels. Rising land prices in emerging
largest areas of planted forests, each having over 5 markets can be considered an indicator of
million ha of FGHY plantations (Indufor 2012). this growth.
Productive planted forests are intensively managed
in order to generate high financial returns, and As of today, 50–70% of timberland investments
thus are usually based on mono-specific and exotic are still located in the USA (Asen et al. 2012).
species (e.g. Pinus spp. and Eucalyptus spp.). Yet, More than 1000 organizations (e.g. planted
they are also associated with greater negative forests owners, investors and managers) are
environmental impacts compared with protective involved in the investment process (Indufor
planted forests. 2012). Admittedly, planted forests usually
represent no more than 2–3% of the total
In many developing and emerging countries, the investment portfolio of institutional investors
expansion of production and export of wood (Staub-Bisang 2011), but this sector plays an
products in recent years has been made possible important role in balancing overall risks by
by the raw material supplied from plantations many investment funds.
(FAO 2014).
Nowadays, roughly USD 70–80 billion is
invested in planted forests, up from less than
3.2 Investments in planted forests USD 1 billion in 1980 (FAO 2012; and
Annex 1). Institutional investors have played
Timberland investments started in the USA in the a prominent role in the expansion of tropical
early 1980s, in relation to the significant growth of planted forests in the past, but completion is
planted forests ownership by institutional investors growing with more retail investors entering
(Rinehart 2010). The ownership of planted forests the market (Laaksonen-Craig 2004). The
shifted from strategic investors (forest industry, major reason for investing in planted forests
energy and mining companies as well as soft is wood production, but the supply of some
commodity traders and local landowners) to ecosystem services (e.g. carbon credits) has
institutional investors. This phenomenon generated also been gaining prominence in recent years.
an upsurge of timberland real estate investment Numerous studies have shown the multiple
trusts (T-REITs) and timberland investment benefits of introducing planted forests into
management organizations (TIMOs). In the investment portfolios. Relevant benefits (HTRG
1990s, the number of TIMOs and the amount 2003; Lausti 2004; Scholtens and SpierdijkPlanted forests in emerging economies | 5
2008; Lutz 2009; Toppinen and Zhang 2010; According to the existing literature (Jenkins
Fu 2012) include: and Smith 1999; Kurucz et al. 2008; Vidal
• low correlation with other asset classes – the rate and Kozak 2008; KPMG 2011a), the major
of return on planted forests investments is not reasons for companies to engage with CSR
correlated with returns on other financial assets are to i) increase transparency and minimize
(such as equity, fixed income and commercial reputational risks; ii) reduce costs connected to
real estate), and thus decreases the overall risks in lawsuits, boycott campaigns, etc.; iii) gain market
an investment portfolio competitiveness (e.g. avoid loss of market share,
• competitive risk-adjusted rates of return – enter new markets and obtain a price premium);
historically, plantation investments have iv) improve reputation and legitimacy; and v)
provided appealing average returns in relation to integrate stakeholders’ interests with the purpose
their volatility, especially in emerging countries of creating win–win synergistic value activities.
• inflation hedging – planted forests are an
inflation hedge, being the rate of returns in
real terms from forests positively correlated 3.4 Sustainable and responsible
with inflation2 investments (SRIs)
• green and social credentials – investment risks
can increasingly be reduced, while brand and Sustainable and responsible investments (SRIs)
reputational values can be increased through have their roots in the concept of ethical finance
certification and other SRI tools that can provide that was initially developed in religious spheres
evidence that the forests are managed sustainably. (Kinder and Domini 1998; Louche et al. 2012).
In the 1930s, religious groups in the USA started
to exclude investments in alcohol and tobacco
3.3 Corporate social responsibility and instead supported pro-poor investments
(Annex 2). In recent decades, SRIs have
The concept of corporate social responsibility (CSR) undergone dramatic growth further fueled by the
was first defined in scientific studies in the 1980s 2007–2008 financial crisis (Becchetti and Fucito
(Carroll 1999). Notwithstanding the name and 1999; Turcotte and M’Zali 2004; KPMG 2011;
the initial focus on social aspects, CSR is nowadays Richardson 2013; Benn et al. 2014; EUROSIF
increasingly aligned with the topic of sustainability, 2014; Scholtens 2014).
encompassing governance, environmental and
financial aspects (Vidal and Kozak 2008). It is reported that SRIs represent USD 13.6
trillion (GSIA 2012), an estimated 21.8% of
In the forest sector, CSR instruments appeared all assets under management (AUM). Europe is
in the early 1990s (Cashore 2002) driven by i) by far the largest current SRI market and, with
the failure of policy instruments (command and the USA and Canada, accounts for 96% of the
control instruments) in promoting the sustainable AUM (KPMG 2013). Institutional investors
management of natural resources; ii) an increased lead the demand for SRI, representing 94% of
role of civil society in decision making, shifting the European market (EUROSIF 2014). Both
from ‘government’ to ‘governance’; iii) the institutional and retail investors are increasingly
internationalization of companies, and the shifting entering the SRI sector, generating more
of operations to less developed countries with poor than 10% annual growth rate (Allianz 2010;
law enforcement and fragile social situations (Heal VIGEO 2012; EUROSIF 2014). In Europe
2008; Voegtlin et al. 2011; Zhang et al. 2014); iv) in 2013, the most common SRI financial
growing difficulties of governments in regulating products were equities (50%) followed by
and monitoring transnational corporations bonds (40%) (EUROSIF 2014). The demand
and the financial market; and v) the ‘rolling for SRIs is mostly driven by consumers,
back the frontiers of the state’ with a transfer of and then captured by institutional investors
environmental and social decisions from the state to motivated by the reputational risks (Allianz
the corporate sphere (Heal 2008). 2010; EUROSIF 2014). At the same time, a
growing number of wealthy individuals (or high
2 Wood-based products can be used in a wide variety of net worth individuals), who are traditionally
sectors (paper, energy, construction, etc.); thus, investments in very cautious, are also entering the SRI market
planted forests can potentially hedge against inflation. (EUROSIF 2012b).6 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
From traditional exclusion screening 3.5 Strategies for selecting and
strategies (e.g. no pornography and no investing in SRIs
weapons), the introduction of ratings
and metrics has diversified SRI strategies, Many different initiatives and SRI forums
moving toward a broader approach aimed at around the globe promote the integration of
changing the business behavior of companies environmental, social and governance (ESG)
(Dillenburg et al. 2003). criteria into conventional finance, resulting in
confusion about the definition of SRIs (Scholtens
Despite the large theoretical support behind 2014). For the purpose of this study, SRIs are
the assumption ‘the more responsible, the more defined as “any type of investment process that
profitable,’ and some empirical studies revealing combines investors’ financial objectives with
a positive correlation between responsibility their concerns about Environmental, Social and
and financial performances (Feldman et al. Governance (ESG) issues” (EUROSIF 2012a,
1997; Loucks et al. 2004; UNEP and Mercer 8). The choice of EUROSIF’s (2012a) definition
2007; Bouslah et al. 2010), most studies agree is motivated by the fact that the European SRI
that there is no statistical difference between market is the largest one and that EUROSIF
the financial performances of conventional and provides constant up-to-date market trend analysis
responsible investment funds (Hamilton et al. of SRI strategies.
1993; Hoepner and McMillan 2009; Leite and
Cortez 2014; Scholtens 2014). In addition, different organizations adopt
different strategies or criteria through which SRIs
Yet several studies (Figge 2001; Hoepner and are defined and selected or excluded from the
McMillan 2009; Cortez et al. 2012; Leite investment portfolios. At least five organizations
and Cortez 2014; Scholtens 2014) report are categorizing SRI strategies (Table 1):
that the lack of positive correlation between the European Fund and Asset Management
responsibility and profitability is impaired Association (EFAMA), EUROSIF, the United
by methodological arguments such as Nations Principle for Responsible Investments
the following: (PRI) initiative, the Global Sustainable
• SRI is not a straightforward concept and its Investment Alliance (GSIA) and the Association
applications are heterogeneous. Different of the Luxembourg Fund Industry (ALFI).
SRI strategies can be applied and they might
have different impacts on returns. The five classification systems appear to be
• A clear definition of SRI is missing, with the coherent and identify in total seven SRI strategies.
upper and lower limits being confused with GSIA and EUROSIF use almost identical
philanthropic investments and conventional categorizations. ALFI gives priority to the ESG
ones, respectively. component in the investment process. This
• The current internationalization process method separates SRI into ESG cross-sectoral,
of investment funds could allow SRIs to ESG environment, ESG social, ESG governance
achieve better portfolio diversification in and Ethics cross-sectoral. The PRI classification
the medium term. Nowadays, while it is in system lacks Impact Investing. EFAMA separates
fact easier to find conventional investments SRI strategies into two groups. The first is based
rather than SRIs in emerging economies, on screening and includes Exclusion, Best-in-
this trend is likely to change in the future. Class, Thematic approach and Norms-based
• The financial performance of SRI funds approach. The second group is based on active
can benefit in the medium term from the ownership and includes Engagement and Voting.
inclusion of climate change risks.
For the purpose of this study, the classification
With a growing number of tools (e.g. standards, system of EUROSIF is preferred as it best reflects
guidelines, codes of conduct) serving the the approaches of all classification systems, and
demand for SRIs, a clear classification system is frequently used in Europe, the largest global
is thus needed in order to better investigate market for SRIs. EUROSIF (2012a) defines
potential synergies between responsibility seven strategies for SRIs (a detailed analysis of the
and profitability. seven strategies is provided in Annex 3):Planted forests in emerging economies | 7
Table 1. Comparison of classification systems for SRI strategies.
EUROSIF GSIA PRI EFAMA ALFI
Exclusion ESG Negative screening ESG Negative/Exclusionary Screening: Negative screening
screening −− Negative and Ethics
Norms-based Norms-based screening Norms-based screening screening or Negative screening
screening Exclusion and Ethics
−− Norms-
Best-in-Class ESG Positive screening ESG Positive screening and based Positive screening
selection and Best-in-Class Best-in-Class approach
Sustainability Sustainability themed ESG-themed investments −− Best-in-Class ESG social and
themed −− Thematic environmental
investments
ESG Integration ESG Integration Integration of ESG issues - ESG cross-sectoral
Engagement and Corporate engagement Engagement (three types) Engagement ESG governance
Voting and shareholder action (Voting)
Impact Investing Impact/Community - - Social impact,
investing microfinance funds
Source: adapted from EUROSIF (2012a, 2014) and KPMG (2013).
• Exclusion is an approach that excludes specific Table 2. Value and growth of SRI strategies in
investments or classes of investment (e.g. Europe, 2011–2013.
companies, sectors or entire countries) from the
Value (€ Million)
investment portfolio. Exclusion is among the SRI Strategies CAGRa
oldest and most common strategies and is based 2011 2013
on negative screening. Exclusions 3,584,498 6,853,954 +38.3%
• ESG Integration is the explicit inclusion by asset ESG Integration 3,164,066 5,232,120 +28.6%
managers of ESG risks and opportunities into
Norms-based 2,132,394 3,633,794 +30.5%
traditional financial analysis and investment screening
decisions based on a systematic process and
appropriate research sources. Engagement 1,762,687 3,275,930 +36.3%
and Voting
• Norms-based screening is the screening of
investments according to their compliance with Best-in-Class 283,081 353,555 +11.8%
international standards and norms. Sustainability 48,046 58,961 +10.8%
• Engagement and Voting is based on engagement themed
activities and active ownership through voting of Impact 8,750 20,269 +52.2%
shares and engagement with companies on ESG Investing
matters. This is a long-term process, seeking to
a compound annual growth rate
influence behavior or increase disclosure.
• Best-in-Class is an approach where leading or Source: (EUROSIF 2014).
best-performing investments (within a category
or class) are selected or weighted based on
ESG criteria. impacts alongside a financial return. Impact
• Sustainability themed is an investment in investing can be made in both emerging and
themes or assets linked to the implementation developed markets, and targets a range of
of sustainable measures. Thematic funds returns from below-market to the market rate,
focus on specific or multiple issues related to depending on the circumstances.
environmental and social sustainability, as well
as the implementation of measures that foster Often, several strategies are used in conjunction,
good governance. so it is not easy to divide current investments into
• Impact Investing relates to investments made clear-cut classes. Yet, with that caveat in mind, it is
in companies, organizations and funds with the clear that all the strategies have fast growing rates
intention of generating social and environmental (Table 2).8 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
3.6 SRIs in productive planted forests EUR 3.1 billion of AUM (KPMG 2013). Forest
investment funds may also apply other strategies,
Although both the number of SRI tools and such as Impact Investing, ESG Integration and
investments in productive planted forests are Best-in-Class (Table 3).
increasing (EUROSIF 2010), few studies have
investigated their interactions. The most widely Current initiatives such as the International Social
adopted strategy in planted forest-related and Environmental Accreditation and Labelling
investments is the ‘Sustainability themed’ one (ISEAL) Alliance for the definition of relevant
(EFAMA 2014; EUROSIF 2014), i.e. a strategy indicators, the Committee on Sustainability
that looks for investments with a focus on specific Assessment for impacts measurement, and the
or multiple issues related to environmental and International Centre for Trade and Sustainable
social sustainability, as well as the implementation Development’s database with the Standards Map
of measures that foster good governance in project, could collectively increase the knowledge
the forest sector. As many as 31 forest-related on impact measurement methodologies and
funds were registered in 2012, accounting for indicators (ITC 2011).
Table 3. Role of planted forest investments in SRI strategies.
Strategy How does it work? Applicability to planted forestsa Example
Sustainability Transitioning to more HIGH: forestry-dedicated funds. From noncertified to certified
themed sustainable consumption Also climate funds forests
and production
ESG Integrating financial MEDIUM: use of due diligence Use of Forest Footprint
Integration analysis with ESG risks and approach. Requires field visit Disclosure for the inclusion of
opportunities risks. Use of FSC certification
as a framework for risk
management
Impact Generating measurable MEDIUM: favored by the Generally small projects
investing social and environmental advanced level of sustainability as microfinance schemes.
impacts (e.g. improved measurement in the forest Initiatives such as the Impact
forest management in sector (e.g. forest management Reporting and Investment
developing countries, certification). Also connected to Standards (IRIS) or Global
REDD+, CDM and JI projects) climate change Impact Investing Rating
Systems (GIIRS)
Best-in-Class Selecting top ESG MEDIUM: for large pulp and Using rating systems to check
companies within a sector paper companies listed on the best-performing pulp and
for placement in portfolio stock change paper mill companies
Exclusion Removing companies or LOW: usually applied at the Removing the forestry
sectors from portfolio sector level, mostly refers to sector from the portfolio
controversial issues (weapons, due to the issue of primary
tobacco, gambling, nuclear forests conversion. Can be
power, etc.). More likely to used for planted forests
be applied for natural forests using genetically modified
management and conservation organisms or exotic species
Norms-based Using international norms LOW: international norms Based on UN Global Compact,
screening and standards for company mostly targeting natural forests. any company involved in
selections Potential applicability with corruption is excluded from
FLEGT. Voluntary standards not the portfolio
yet included
Engagement Influencing other LOW: engaging through forestry Increasing transparency on
and Voting shareholders on ESG funds boards funds remunerations
decisions
a The level of applicability expresses the ease of adapting the SRI strategy to investments in planted forests. High: already
applied, Medium: possibility of application, Low: rarely applicable.
Source: EFAMA (2014); EUROSIF (2014).4 Materials and methods
4.1 Description of SRIs reports and finally with direct interviews by phone
or at conferences. The SRI tools eligible for the
A total of 121 planted forests investments and survey had to meet two requirements:
339 organizations3 using SRI tools in emerging • being applicable to planted forests (those
economies have been inventoried and analyzed. tools applicable only to natural forests
Investments and organizations have been identified were excluded)
through web searches, interviews with key • being already applied in at least one on-going
stakeholders and participation at conferences. planted forest investment project (for example,
Following an investment process approach (i.e. an the FAO’s Voluntary Guidelines for the
approach that considers the sequence of actions Responsible Management of Planted Forests
implemented to i) understand the risks, ii) choose was not considered in this review because it
the portfolio and iii) evaluate the performance was not in use for the investments considered).
based on investors’ preferences), our survey set
out to classify into three groups the organizations As stated above, there is no widely accepted
operating with planted forests investments classification system for SRI tools. Lammerts
(Annex 4): Van Bueren and Blom (1997) and subsequently
• Ordinary market players: organizations Holvoet and Muys (2004) introduced some
operating with planted forests investments, basic elements for a classification, later refined by
either conventionally or with dedicated SRI Masiero and Secco (2013) and described them
strategies; these organizations can relate more according to the following variables (please refer
(e.g. TIMOs and planted forests companies) to Annex 5 for further methodological details on
or less (e.g. European Investment Bank) the classification of SRI tools):
specifically to the forest sector • Type: what type of tool is it (e.g. a bank
• Players managing SRI infrastructure: investment policy, or a code of conduct, etc.)?
organizations specifically dedicated to advocacy • Specificity: is it a forest-specific or broader
of SRIs and provision of SRI-related services scope tool?
(e.g. standard setters, certification bodies, • Governance: which type of organization
forums, etc.) develops and manages the tool?
• Governments and civil society: mostly • Investment process stage: who uses the tool
networks, NGOs, associations and (e.g. an investor, a plantation company, etc.)?
intergovernmental organizations having a stake • Level of control: how is the implementation
in planted forests investments but not directly of the instrument controlled?
participating in the investment process or • First time to be made public: when was the
provision of SRI-related services. SRI tool first made public?
• Geographical origin: where was the tool
Tools used by the three groups of players have been first produced?
identified through an analysis of the literature, • Geographical application: where is the tool
SRI infrastructure and investment directories, SRI implemented/implementable?
stakeholders’ websites, environmental and social • Coordination with other tools: to what
extent is there coordination or cross-
referencing with other tools?
3 For the purpose of the study, an organization is an actor • Market share: what are the impacted area and/
involved in the sustainable and responsible investment process. or number of companies using it?10 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
4.2 Quality assessment of SRI tools primary forests and wetlands is frequently
found in SRI tools with different wording (e.g.
After the identification and characterization of humid forests, protection of wetlands, intact
SRI tools using the abovementioned variables, a forest landscape, tropical forests, native forests,
quality assessment of how they adopt or consider primary forests, etc.). For each issue, a list of
environmental, social and governance (ESG) verifiers for field evidence assessment has also
criteria was performed. The quality assessment been developed.
consists of the following steps: 2. Gap analysis of each single SRI tool in
1. Preparation of an ESG Reference Document comparison with the ESG Reference
starting from existent planted forests standards Document in terms of how many issues are
and quality assessment frameworks (Lammerts considered by the single SRI tool. Gap analysis
Van Bueren and Blom 1997; Holvoet and is a well-known technique for the analysis
Muys 2004; Merger 2008; WWF 2008; of forest management standards (Ferrucci
Merger et al. 2011; Masiero and Secco 2013; 2004; Hickey and Innes 2005; Masiero and
Masiero et al. 2015). The ESG Reference Secco 2013).
Document refers to a hierarchical framework 3. Assignment of control factors to account
made of sections, subsections and issues (SSIs). for the level of control of each SRI tool. Four
An example is reported in Table 4. A final set levels of control and, more specifically, eight
of 7 sections, 22 subsections and 155 issues control strategies have been included.
was produced (Annex 6). The first set of SSIs 4. SRI classification system that brings together
is the one formulated by Holvoet and Muys a number of issues addressed by each single
(2004) and further refined by Masiero and SRI tool, the control factors and categorization
Secco (2013). New SSIs encountered during by type of instrument.
the analysis of SRIs have been included in
the ESG Reference Document. An example Furthermore, the SSIs with the highest frequency
is the section ‘Climate change and ecosystem in SRI tools have been identified. In theory and
services,’ which emerged during the analysis for the purpose of this study, issues occurring in
of forest carbon standards. Similar issues were several different SRI tools are expected to be more
grouped together. For example, the aspect important than those occurring only in a few
of conservation and avoided conversion of SRI tools.
Table 4. Example of a hierarchical framework consisting of a section, subsections, issues and verifiers
for the assessment of SRI tools and their ESG criteria.
Section Subsections Issues Verifiers
Legal and Legislation Respect of locally and nationally applicable −− Penalties and fees since
institutional laws and regulations project starting date
framework −− Complaints by stakeholders
and NGOs
Compatibility with international or national …
agreements signed by the hosting country
Conformity to labor legislation (e.g. ILO standards) …
Illegal logging … …
Property … …
Source: own elaboration.5 Results
5.1 Planted forests investment agencies collaborate with both investment
process companies and plantation and processing
companies providing guidelines, research and other
In the planted forests investment process, the services. At the level of plantation companies, a
financial flow typically goes from institutional specific advocacy role is carried out by plantation
and retail investors to investment companies and associations (i.e. associations of planted forests
involves financial pooling operators such as banks owners providing technical and advocacy services,
and funds (Figure 2). such as the Uganda Timber Growers Association –
UTGA). In some cases, plantation associations can
Investment companies allocate investments to also be fully integrated with investors, investment
plantation companies, which are eventually companies and processing industries (e.g. the
integrated with processing industries. International case of The Brazilian Tree Industry – Ibá). NGOs
organizations and research and consultancy usually focus more on advocacy and campaigning
Institutional Investors Retail Investors
Accreditation
SRI Associations and Bodies
Forums, SRI Directories
Funds & Banks
SRI Standards
Setters
International
Organizations SRI Rating
(IOs) and Investment
Research Companies or
Organizations Asset Managers
Certification
Bodies
Plantation
Associations
Plantation
Companies
NGOs SRI Consultants
and Advisors
Processing
Companies
Legend:
Governments & Market Players SRI
Civil Society Infrastructure Financial Flow Services & Advocacy Quality Assurance
Figure 2. Actors in sustainable and responsible investments in planted forests.12 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
at the level of plantation and processing companies are management standards (11), followed by
where they are located on the ground, rather than bank investment policies (9) and investment
at the investment level. ratings (8). The less well-represented tools are
codes of conduct and investment indexes. Nine
Concerning SRI infrastructure, accreditation country indicators have also been analyzed.
bodies accredit both SRI rating agencies and These indicators are useful for comparing
certification bodies. Certification bodies control the suitability of countries to host planted
the application of standards at the level of forest investments.
plantation companies and processing industries,
while SRI rating agencies score the quality of 5.2.2 Specificity and governance
banks, funds and investment companies. SRI
standard setters are the developers of rating systems Most instruments have a broad sectoral
and standards to be controlled by SRI rating approach (29) or a forest sector focus (19)
agencies and certification bodies. SRI advisors and and include both planted and natural forests.
consultants, together with SRI directories, forums Management standards are mostly specific for
and associations provide advocacy and consultancy forest and planted forests (Figure 3).
services on SRIs.
Investment guidelines (e.g. WWF Responsible
Investment Guide) and legality benchmarks
5.2 SRI tools for the planted forests (e.g. Lacey Act) are mostly forest specific;
sector however, reporting and investment standards all
have a broad sectoral approach. Investors and
5.2.1 Type of instruments investment companies are the players using the
majority of broad-scope SRI tools. This is not
A total of 50 SRI tools have been identified (Annex surprising since only 1–2% of an investment
7 and Annex 8). The most frequent instruments portfolio is made up of forest assets.
Investment Index Broad Sectoral
Approach
Code of Conduct Forests (Including
planted forests)
Reporting Standard
Planted Forests
Investment Guideline
2
Legality Benchmark
Investment Standard
19
Investment Rating 29
Bank Investment Policy
Management Standard
0 2 4 6 8 10 12
Number of SRI tools
Figure 3. Specificity of SRI tools by type of instrument. The number of codes of conduct is underestimated
and only represents a sample.Planted forests in emerging economies | 13
Investment Index
Business
Code of Conduct Government
NGO
Reporting Standard
Academic
Investment Guideline
2%
Legality Benchmark 16%
Investment Standard
Investment Rating
22%
60%
Bank Investment Policy
Management Standard
0 2 4 6 8 10 12
Number of SRI tools
Figure 4. Governance structure of SRI tools by type of instrument.
Only two standards are specific to planted forests: codes of conduct and investment guidelines, it
Gold Standard and the Clean Development is business organizations that predominantly
Mechanism4 standard. One interpretation is develop and manage investment indexes, bank
the absence of a market for tools specific to investment policies and investment rating
planted forests investments. For example, FSC agencies. Governments are active in developing
certification, one of the most widely used SRI and managing legality benchmarks and
tools for planted forests (even though it was investment standards. Only one instrument,
initially created for natural forests), eventually the Ecobanking Project, has a strong
removed criterion 10 for planted forests in 2015. academic background.
The decision was made by the FSC in order to
ensure the same quality of forest management The role of private, for-profit companies
across all types of forests. in developing and managing SRI tools is
particularly evident for three types of SRI
Concerning governance (Figure 4), 60% of tools: bank investment policies, rating of
the instruments are produced and managed investments and investment standards. While
by business-oriented organizations, followed bank investment policies are obviously drafted
by government (22%), NGOs (16%) and by banks themselves as internal procedures
academic (only 1 instrument). Although NGOs to account for ESG impacts, investment
are actively developing management standards, standards and investment ratings are evaluation
instruments aimed at comparing different
investments. Importantly, the lack of NGOs
4 CDM standards are applied to multiple sectors, but and independent monitoring organizations in
also have a specific methodological part dedicated to
afforestation/reforestation projects; hence, these standards
the development and evaluation process of SRI
are categorized as planted forests specific. tools can generate credibility risks.14 | Lucio Brotto, Davide Pettenella, Paolo Cerutti and Romain Pirard
5.2.3 Investment process stage and level the four groups of users, from investors to
of control processing industries. The majority of the
instruments are either used at the beginning
SRI tools can be classified also in relation to of the investment process (e.g. UN PRI and
the groups of targeted users. In particular, four all the bank investment policies) or at the end
categories of users have been identified in the of the investment process, either by plantation
planted forests investment process: investors, managers or processing companies (e.g. almost
investment companies, plantation companies and all the management standards).
processing industries (Figure 5).
Concerning coordination between instruments,
Investors use the highest number of SRI tools almost 20% of the SRI tools are stand-alone,
(31), followed by processing industries (24), with no specific reference to or linkage with
plantation companies (22) and investment other SRI tools. About 50% have at least one
companies (13). Most of the instruments used connection with other SRI tools, e.g. a bank
by investors are bank investment policies, investment policy that mandates the bank to
investment ratings and investment standards, use only FSC-certified paper or to invest only in
while plantation managers concentrate their FSC-certified forests. The more coordinated SRI
efforts on management standards. Processing tools are the ‘WBCSD Sustainable Procurement
industries use the more diversified types of of Wood and Paper-based Products Guide
instruments, while investment companies use a and Resource Kit’ and the ‘WWF Responsible
restricted set. Investment Guide,’ which are connected
respectively to seven and six other SRI tools.
Only five instruments (i.e. the FTSE4Good
Index Series, the Global Reporting Initiative, This study also distinguishes among SRI
the Global Compact, the SA 8000 and the instruments based on the level of control for the
IFC Performance Standards) are applied across verification of ESG impacts: from the lowest
Investment Index
Investors
Code of Conduct Investment Companies
Plantation Companies
Reporting Standard
Processing Industries
Investment Guideline
Legality Benchmark 31
24
22
Investment Standard
13
Investment Rating
Bank Investment Policy
Management Standard
0 5 10 15 20
Number of SRI tools
Figure 5. Users of SRI tools by type of instruments.You can also read
