FLS in the news: LGPS and the case for forestry beyond the UK

This article first appeared in AgriInvestor

By Charlie Sichel, Managing Partner, FLS ® ForestryLinked Securities

The forest has always occupied a special place in ourimaginations, serving as the backdrop for many of our most enduring myths.Today, they are also capturing institutional investor interest, especially inthe UK’s Local Government Pension Scheme (LGPS) sector. With LGPS poolsprojected to manage £500 billion by 2030, there's rising demand for scalable,resilient, and impactful investments. A 2024 Room 151 and Schroders surveyfound that 20% of LGPS investors are already active in natural capital, withanother 45% planning to follow suit.

Forestry – not just domestic, but international – isemerging as a particularly attractive route. It combines potential long-termfinancial returns with measurable contributions to climate goals. The AvonPension Fund is among those leading the way, earmarking £100–£150 million fornatural capital in 2024/25, with sustainable forestry as a central focus.

However, not all forestry investments deliver equalvalue. For investors aiming to combine strong returns with high-impact carbonsequestration, four factors are key: credible carbon measurement, the type offorestry project, geographic location, and a pragmatic long-term commercial model.

Carbon integrity matters

Forests are powerful carbon sinks. But voluntarycarbon markets have drawn scrutiny, with concerns over the credibility of someemissions claims. Compliance with standards such as Verra or Gold Standardshould be viewed as a baseline, not a finish line.

From there, managers are advised to go deeper; engagedirectly with project leadership, scrutinise the project’s initial carbonbenchmarking, assess the robustness of ongoing measurement practices, andverify the bona fides of scientific staff or technical partners involved incarbon modelling and reporting.

Afforestation vs conservation

Conventional wisdom implies that older (brownfield)established timberlands are safer investments and that these contribute best toconservation and biodiversity. afforestation or reforestation on degraded orunderused land may offer greater benefits. Planting trees on such landmaximises "additionality", the assurance that the carbon gainswouldn’t have occurred without intervention.

Young trees sequester carbon at faster rates duringtheir growth phase. While mature forests are critical for preservingbiodiversity and existing carbon stocks, they offer limited capacity for newcarbon removal. Afforestation also improves soil health, restores water cycles,and creates new habitats, benefits that can be clearly measured and monetised.

Global opportunities mean greater impact

LGPS is consolidating from 86 authorities into eightasset pools, creating larger entities with more capacity for private marketinvestments. While UK-based opportunities remain important, global forestryassets open new doors, especially in tropical regions. Critically, LGPSinvestors remain driven by financial performance: the Schroders study foundjust 5% would accept lower returns for local impact investments.

From a biological and ecological standpoint, tropicalforests – primarily in Latin America (LatAm), Africa, and Southeast Asia –vastly outperform their temperate counterparts in terms of carbonsequestration. With year-round growing seasons, scalable access to land, richerbiodiversity potential, and trees that can grow up to 10 times faster than manyOECD countries, these regions are emerging as the powerhouses of global carbonremoval.

This was in evidence when pensions giant NEST includedChile and other LatAm countries as among the target regions for its newforestry portfolio. Stable governance, dollarised economies, and efficienttransport networks make these regions increasingly investable. For long-termasset owners, the implications are clear: faster-growing trees mean fastercarbon absorption and higher timber yields.

A pragmatic commercial model

Forestry investment models must balance carbon removaland commercial revenue. Relying entirely on carbon credits exposes investors toregulatory and market volatility. Instead, diversified models such as “mosaicforestry” offer a more resilient approach.

Mosaic forestry integrates commercial timberplantations with conservation areas. Fast-growing species generate stableincome, helping to finance the ecological benefits of protected zones. Thisapproach supports biodiversity and soil restoration while delivering financialsustainability. Mosaic models are well-suited to pension schemes’ longtimelines. They offer strong, risk-adjusted returns alongside measurableclimate outcomes, an increasingly vital dual mandate. When well-designed, theseprojects can deliver measurable climate impact and strong, risk-adjustedreturns.

A new chapter for LGPS and forestry

The pension schemes landscape is evolving fast. AsLGPS funds consolidate into larger pools, their ability to allocate capital toilliquid assets like forestry will grow. While UK-based infrastructure andnatural capital remain important, international forestry offers a powerfulcomplement.

For pension funds committed to fiduciary duty andclimate responsibility, global forestry may be one of the most fertileopportunities. And this time, the benefits are no myth.

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