Investing in Logging: is it Sustainable?

By Duncan Ferris

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Sustainable forestry looks like becoming a key part of the battle against climate change

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Sustainable forestry looks like becoming a key part of the battle against climate change. With COP26 well underway, there have already been a number of commitments regarding deforestation.

For example, more than 100 world leaders have signed the Glasgow Leaders’ Declaration on Forest and Land Use. This is a commitment to end deforestation by 2030. For these targets to become a reality, logging practices are going to need to change.

COP26

So, what exactly did nations agree to at COP26? Ending and reversing deforestation by 2030 sounds all well and good, but it’s a little light on detail. Signees of the agreement include Canada, Brazil, Russia, China, the US and the UK. Between them, these nations cover around 85% of the world's forests.

Additionally, major financial companies like Aviva, Schroders and Axa have pledged to halt investment in activities linked to deforestation. This could limit available funding for loggers that fail to fully embrace sustainable practices.

The first thing these signatories have agreed to do, is to hurl some money at the problem. The parties have pledged $19.2bn of public and private funds. This money will go towards sustainable logging, as well as helping to restore damaged land, tackle wildfires and support indigenous communities.

It sounds great, but there is a lot of pressure on leaders to actually follow through with the pledge. Multilateral declarations have been made before without having much impact. For example, academics say an agreement in 2014 at a New York summit to halt deforestation by 2030 yielded little change.

What is sustainable logging?

Simply put, sustainable logging or forestry is when logging methods limit the impact of the process on the forest ecosystem. Several steps can be taken to achieve this.

First, logging companies and governments can establish protected areas of forest. These efforts can help to conserve native tree species and maintain genetic diversity. Additionally, logging companies need to refrain from using unnecessary chemicals like pesticides. Loggers can also take care not to dump harmful waste products in areas which will harm the forest’s health.

Another key aspect of the sustainable forestry process is selective logging. This requires advanced planning to identify trees which can be felled responsibly. Forests survive natural phenomenon like landslides and fires, so selectively removing some of the trees will not be a death sentence.

Rainforest Alliance has explained that the goal of harvesting trees in this way is to ensure species are given the chance to regenerate, and that “the forest’s overall ecological health is maintained, restored, or even enhanced”.

Labelling

Products which were manufactured with use of sustainable forestry can be simply identified. Different Forest Stewardship Council (FSC) certifications can be found on goods around the world. These include the FSC 100% label, which is used for products where the wood has entirely come from FSC compliant sources. Second, the FSC Recycled label appears on products made from fully recycled materials.

Additionally, the FSC Mixed label denotes goods made from a mixture of materials from FSC-certified forests, recycled materials, and/or FSC controlled wood.

However, this labelling system does seem to have some shortcomings. For example, in June 2020 Earthsight accused Ukrainian loggers of conducting unsustainable logging and selling the resulting timber as FSC certified. The logging company in question, VGSM, denied these accusations.

Investing in logging

You can invest in a wealth of publicly traded logging companies in North America. These include West Fraser Timber Co (TSE: WFG), Canfor Corporation (TSE: CFP), Resolute Forest Products Inc (NYSE: RFP) and Weyerhaeuser Company (NYSE: WY). However, how can you know the extent to which these companies will be impacted by new deforestation commitments?

Let’s take West Fraser Timber, the largest North American logging company in terms of output, as an example. The company proudly proclaims on its website that all of the Canadian woodlands operations it directly manages are independently certified to the Sustainable Forestry Initiative (SFI).

However, A report released by the Natural Resources Defense Council in September claimed that West Fraser Timber, along with six of the seven largest pulp producers in Canada, failed in almost all areas in which the organisation had evaluated it. These categories included safeguarding primary forests, committing to higher certifications and securing consent from indigenous peoples.

With ambitious aims announced at COP26 and no final word yet on how these will be monitored, logging firms may be in for a wake-up call. Their operating costs and production could be damaged if they are suddenly met with steep regulations. Additionally, investment might be thinner on the ground as institutional investors are less keen than ever on deforestation.

Unless you can identify a bonafide sustainable logger, leaning into a long-term investment in the industry seems like a risky proposition right now.

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In this article:

Topics:
ESG
Forest Products
Industries:
Materials
Companies:
West Fraser Timber
Weyerhaeuser
Resolute Forest Products

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.