Case study by New Forests
New Forests invests in forestry and land-use projects to create productive and sustainable landscapes to benefit our clients and the communities where we operate, in Australia and New Zealand, the United States and South East Asia. We embed ESG and impact management throughout each of our investments, enabling both risk mitigation and value creation through managing ESG factors.
Why focus on shared prosperity
We believe that strong ESG risk management and pursuing positive impact in line with the Sustainable Development Goals goes hand in hand with strong financial and operational performance. We have comprehensive internal systems that support our ESG integration, including our social and environmental management system (SEMS), our responsible investment policy and an enterprise risk management framework. While these systems guide our policies and procedures for identifying and managing ESG and other risks, we are equally committed to pursuing positive impact.
Our impact approach is based upon our Sustainable Landscape Investment (SLI) framework, which has six defined themes that describe the material considerations for forestry investors, and which provides metrics and indicators for more effective impact management. This framework is designed to be a standard part of our asset management practices: financial, operational and ESG data are collected and managed in an integrated manner.
The SLI framework incorporates the concept of Shared Prosperity. We believe that our investments can help address social challenges and inequities, such as rural poverty, unclear land tenure, poor recognition of customary rights and inadequate practices in the forest sector regarding training, development and diversity, equity and inclusion. At the same time, managing risks and identifying opportunities associated with these issues can also benefit our investee businesses and ultimately help deliver strong risk-adjusted returns for our investors.
How we deliver shared prosperity across investees
We have no standard formula for ensuring that our investee companies deliver Shared Prosperity for the communities in which they operate; each investment and project is different and so requires different approaches. However, the process is underpinned by a deep understanding of local issues, concerns and opportunities, with strong stakeholder engagement at its core. We also believe this process needs local leadership and execution, so we focus on enabling and supporting this in our role as fund manager, placing an emphasis on key issues that we believe position investments effectively for community development success. We require our local managers to:
- Set clear expectations for forest certification and standards that include the highest levels of respect for land tenure, human rights, stakeholder engagement and grievance mechanisms. We require that our investee companies seek to achieve Forest Stewardship Council certification and, in addition, our emerging markets investments must adhere to the International Finance Corporation (IFC) Performance Standards. These standards provide guidance that supports the effective identification of social impacts, the development of engagement plans and the design of community development initiatives.
- Ensure appropriate resourcing at the forest management level to manage social issues, including stakeholder engagement and proactive community development initiatives. We believe ownership at forest management level is necessary to ensure alignment with forest management planning and to benefit from the local insights and experience of the management team. We also provide capacity development to forest managers where needed, for example supporting their social engagement and sustainability staff in developing programmes, accessing funding, collaborating with civil society and working to meet targets.
- Ensure accountability, consistent management focus and oversight of social considerations through good governance. We work with our forest managers to ensure they have appropriate systems to monitor, manage and report on social programming, risks, incidents and grievances. These systems help assure the quality and timeliness of reporting to company boards, to operational oversight committees and to our funds.
Example: Mekong Timber Plantations
In 2017, our Tropical Asia Forest Fund (TAFF) invested in a plantation forestry company in Laos called Mekong Timber Plantations (MTP). The prior owner had established an outgrower programme whereby local villagers and farmers planted commercial timber trees on their land, with the agreement that the company would later harvest the trees to supply the company’s planned pulp mill. However, the programme was stranded when the company abandoned its mill construction plans; approximately 3,500 outgrowers were left without a clear market or buyer for the trees they had grown and, in many cases, significant debt.
Our due diligence of the investment opportunity identified the outgrower programme as a significant social liability as trust had been eroded between the company and local villages. The due diligence also identified other legacy social challenges, such as the lack of a Free, Prior, and Informed Consent (FPIC) process conforming to current international best practice. Accordingly, we made it a priority for MTP to address these social challenges.
The first step was to write off the value of loans outstanding from the smallholders to the company. The 100-day plan for the MTP acquisition also included social engagement and strategy, establishing clear expectations with new senior management that engagement, FPIC and outgrowers were important to the business and to the TAFF as majority shareholder. A new sustainability manager with expertise in the forest sector and with the IFC Performance Standards was recruited immediately into MTP and worked with existing staff to develop social programming. Key partners, such as the IFC and FMO (the Netherlands Development Finance Company and an investor in TAFF), provided technical and financial support.
Subsequently, we have supported MTP in the design of the Mekong Smallholder Development Program (MSDP), aimed at promoting economic development in the communities in and around which MTP operates. The MSDP was developed as a key strategic initiative for MTP and seeks to integrate risk management practices and lessons learned from past programmes to support the company’s relationships with local communities, promote capacity-building among smallholders and ultimately achieve financial break-even.
From a fund perspective, we look to set realistic targets with MTP around the growth of the MSDP. We use an ESG target-setting template that links with our SLI metrics, such as the number of outgrowers/smallholders engaged and area of community or livelihood plantings inside or outside the forest management units. While the programme was launched in late 2019, a modest target of 100 hectares across five cluster groups has been set for new smallholder participant recruitment in 2020. We will continue to work together with MTP through the expansion of the MSDP, with the MTP monitoring and evaluation systems providing real-time information to management and shareholders.