This article was published in the 16 May 2011 edition of the newspaper Investment Week.

In connection with Forests 2011, we are often correctly reminded that forests are more than just the cradle of humanity. Now, more than ever, it is hard to overestimate the extent to which they hold the key to mankind's survival. Protecting forests and the many ecosystem services they provide is essential in order to combat climate change. Around 20% of all CO2 emissions worldwide come from the cutting down of tropical rainforests. Contrary to common belief, the primary cause of deforestation is not logging for timber but unchecked activity to convert forests into pasture and arable land for soya and palm oil production.

This devastating trend can only be stopped if it can be shown that preserving the forest delivers greater benefits than converting it into arable land. This is why ensuring that forests as a resource are used sustainably is the best way of preventing deforestation. From the point of view of sustainability, using wood is both desirable and makes sense. Timber can be substituted for non-renewable resources, such as oil products, or for construction materials, such as steel and concrete, whose grey energy content is many times higher than that of wood, which is carbon-neutral. Even intensively managed forestry plantations have their place – although admittedly they are no match for a natural forest in terms of biodiversity and beauty – as they help by allowing large quantities of wood fibre to be produced on a smaller area and therefore reduce pressure on the last remaining areas of unspoilt woodland.

Worldwide, demand for timber is rising sharply and keeping pace with global population growth. The boom in demand for timber in emerging markets is disproportionately large. China, which accounts for 22% of the world's population, is growing rapidly but has only 4% of the world's forest resources. The country faces an annual structural shortfall of around 100 Mm3 per year in the supply of timber. In spite of massive reforestation efforts, this shortfall is expected to double in the next ten years. Timber companies in the north-western US are already exporting an ever-growing share of the timber they produce to China. If the housing market in the US were to stage even a slight recovery and demand for building timber were to pick up, there would be good times ahead for timber companies and their shareholders. It is not only demand for building timber that is rising: demand for pulp, a key wood product, has also soared and its market price is currently close to an all-time high, and it is likely to rise further. Pulp is no longer used just to produce paper, cardboard and packaging. Ever since the price of cotton rose by more than 150% within the space of just a few months, textile companies have rediscovered the virtues of viscose, an artificial fibre manufactured from very high-grade wood pulp, whose market price has now become so attractive that many companies are working to re-equip their production lines to benefit from the boom. What more proof is needed to confirm that wood can be put to virtually any use?

What is more, you do not have to own a forest to benefit from growth in this sustainable field. Investing in a portfolio that contains shares in selected listed timber companies with large forest holdings allows even private investors to benefit from the positive trends associated with this renewable resource. Indirect investments made in listed forestry companies offer many advantages over investing directly in forests. Many companies of this type not only have forest holdings but can also be viewed as well diversified forest portfolios, as the holdings are spread across different geographical locations, tree species and markets. Another advantage of investing in listed forestry companies is that they can be traded on a daily basis and offer good liquidity, whereas direct investments through the private equity market frequently come at the cost of long holding periods. Moreover, based on their intrinsic value, many listed companies' forestry holdings are undervalued. Many US companies in particular still determine the book value of forests using the average historical purchase value. If the forests were acquired a long time ago, their actual value may be many times the book value. In addition, the fact that forests are real assets means that they provide effective protection against rising inflation. From a historical point of view, there is a strong positive correlation between the yields on forest investments and the inflation rate and, give or take very few exceptions, the yields have always been higher than the inflation rate. Interestingly, from the point of view of timing, the yields on forest investments are slightly ahead of inflation rates, which suggests that investors always take positions in good time when faced with higher inflation expectations.

Investors seeking an appropriate way to mark the International Year of Forests might therefore wish to consider investing in this natural resource, which - if sustainably managed - is available in positively limitless supply.