New Forests Pty Limited was established in Australia in 2005 with the objective of developing a forestry business investing in sustainable forestry and environmental market assets globally. In 2008, it opened an office in Southeast Asia to manage timberland investments in the region. New Forests launched its Tropical Asia Forest Fund (TAFF) in 2012 to raise private funds to develop forest plantation assets focusing in Malaysia, Indonesia and Vietnam. TAFF also may invest in other countries in Southeast Asia. The private equity fund was officially closed at US$170.7 million in June2013. Timber Malaysia caught up with Managing Director, David Brand, to seek clarification on TAFF and the mechanics behind running a financially viable forest plantation development project that is also based on ethical and socially responsible principles.

TM: Under TAFF, what countries will you be focusing on and what species will be planted in these countries? How big are the planned plantation areas in Indonesia and Vietnam?

DB: Malaysia, Indonesia and Vietnam are top priority countries for TAFF. We expect to have a portfolio of sustainable timber plantations that will include rubberwood, Acacia mangium, Eucalyptus species, teak, and some indigenous species such as Anthocephalus spp, Paraserianthes falcataria, and Octomeles sumatrana. The fund should end up with 60,000 – 80,000 hectares of timber plantations in the three countries.

TM: When was TAFF’s first investment made in Malaysia?

DB: The first TAFF investment in Malaysia took place in June 2013, with the fund’s acquisition of a majority interest in the Hijauan Group of companies. This includes Hijauan Bengkoka Plantations, which holds the harvesting rights to an Acacia mangium plantation located in northern Sabah on the Bengkoka peninsula, and also includes Acacia Forest Industries, which has the replant rights in the same area. The companies currently operate on a stocked area of over 10,000 ha and are expanding this with the aim of reaching a stocked area of 25,000 ha. We continue to evaluate other opportunities in Malaysia, including elsewhere in Borneo and in Peninsular Malaysia.

TM: With New Forests’ scientific expertise to be injected into forest plantation development in Malaysia, Indonesia and Vietnam, what is your official position on transfer of technology and equitable sharing of returns with the host countries’ local community? 

DB: TAFF will invest entirely through locally incorporated companies with the express aim of building them up into world class operations with excellent commercial, environmental and social performance that generate a continuous timber supply for local wood-based industries and sustained positive net cash flows for shareholders. TAFF will combine scientific expertise, operational experience and commercial insight to select site-appropriate species and apply leading-edge silvicultural and forest management practices. The employees and contractors working on behalf of TAFF will be critical in achieving this, and investing in training workers and managers will be key to our success. Where appropriate and desirable, TAFF will invest alongside local commercial partners in joint ventures. Part of our role as responsible investors is to meet a high standard for management of social considerations in our investments, including employment and labour issues, information sharing, transparency, and appropriate benefit sharing with relevant stakeholders, and TAFF is committed to achieving FSC certification on all its investments.

TM: Given that the funds are structured more like a private equity fund, what is the estimated period before an investor can expect to receive the first cash returns from his investment?

DB: As forestry assets, TAFF will provide total returns from a combination of cash yield and capital appreciation. The fund will make distributions from the income of its portfolio companies whenever possible. However, in the initial years of an investment the income from timber sales will typically be required for re-investment into the asset to improve productivity and operational efficiencies and to expand the planted area. We believe TAFF may begin making distributions to our clients in 3 – 5 years, and anticipate that improved asset values at exit will provide good ROI during the exit phase of the fund.

TM: What type of institutional investors does TAFF attract?

DB: New Forests is fortunate to count among its clients some of the world’s most sophisticated institutional investors. In total, TAFF’s nine institutional investors include three European development finance institutions, two fund of funds managers, and four pension fund groups.

TM: New Forests have a limited number of private accounts clients to develop particular project and policy expertise in reducing emissions from deforestation and degradation (REDD) in other countries. Does New Forests have plans to expand this REDD-based concept to its other publicly available funds to promote a higher value in carbon-sinking capacity of tropical forests, which grow 365 days a year? 

DB: New Forests has been a proponent of REDD and advocates for its inclusion in market-based solutions to the challenges of climate change, with rigorous social and environmental safeguards. We are engaged in forest carbon policy and investment across all the regions in which New Forests invests – Australia and New Zealand, Southeast Asia, and the United States. In fact, in the US we have pioneered an investment vehicle that finances forest carbon projects generating credits for the California cap-and-trade scheme, which may someday include REDD credits.

This shows that New Forests – like other private investors – is ready and willing to inject private capital into forest activities that provide net climate benefits when the right market signals are in place. These signals include a degree of acceptable policy and market certainty, so that risk-adjusted returns are attractive for our clients. Through our TAFF investments New Forests will pursue REDD opportunities alongside commercial forestry investments, where we believe it is possible to monetize carbon revenue, for example through designating voluntary conservation set-asides managed in a mixed landscape of conservation and production.

TM: As a signatory of the UN’s Principles of Responsible Investment (UNPRI), is New Forests open to credible timber certification schemes or is Forest Stewardship Council (FSC) the preferred choice?

DB: It is important to note that as signatory to the UNPRI, New Forests does not have any obligation to use prescribed certification schemes. New Forests seeks to promote and pursue the six Principles of the PRI. The most salient of these for us is the incorporation of Environmental, Social, and Governance (ESG) issues throughout our entire investment process. New Forests does this within our Social and Environmental Management System, which includes a commitment to the use of third-party certification schemes. New Forests does pursue FSC certification for all eligible forest assets. However, we can and do also utilise other high-quality timber certification schemes equivalent to the FSC. This is, in some cases, attractive for market reasons, as our timber customers recognize the value of local standards for their markets’ regulatory or consumer requirements.

TM: What exactly is your involvement in the Malua BioBank project in the Malaysian state of Sabah? Does New Forests run other conservation banks and/or carbon credit projects?

DB: New Forests established the Malua BioBank in Sabah Malaysia in 2008.  The Malua BioBank (www.maluabiobank.com) is the world’s largest tropical conservation bank and seeks to rehabilitate and preserve 34,000 hectares (80,000 acres) of critical habitat for orang-utans and other threatened species. We established the Malua BioBank through an innovative partnership with the Sabah State Government as an investment in the rehabilitation and protection of the Malua Forest Reserve. The Malua BioBank is in a hub of conservation finance innovation that provides us access to three key markets:

–   Carbon Credits: REDD+ activities can generate and sell voluntary carbon credits, much like the neighbouring Innoprise-FACE Foundation Rainforest Rehabilitation Project (INFAPRO) project that has successfully deployed a methodology for enhancing forest regeneration through management of climber vines.

–   Biodiversity Credits: An emerging and growing market for biodiversity credits is developing. The Malua BioBank generates Biodiversity Conservation Certificates. Each certificate represents 100 square meters of rehabilitation and protection of the Malua Forest Reserve. Some of our earliest customers have included Malaysian timber companies supporting local biodiversity.

–   Oil Palm Companies: We are working to support the establishment of pilot projects under the Roundtable on Sustainable Palm Oil that support biodiversity conservation measures in combination with a commitment to support the production of sustainable palm oil.

This is an exciting time for the Malua BioBank. New Forests is working to develop these market opportunities and introduce new partners into the project. We believe the Malua BioBank provides an example for how innovative approaches can make conservation a sustainable and attractive opportunity for investors in Malaysia and beyond.

New Forests also operates a US-based fund called Forest Carbon Partners (www.forestcarbonpartners.com), which invests in carbon projects related to the California carbon emissions trading market.

UN’s PRINCIPLES OF RESPONSIBLE INVESTMENT (PRI)