No matter what type of investment, investors will always seek to capitalise on large returns and if ethical or ‘green’ investments are able to generate them then so much the better for the environment. Interest is particularly high in forestry investments since they have many benefits to recommend them, such as: returns of 10-14% per annum (on average), portfolio diversification and they are very environmentally friendly.

There is also no shortage of demand for forest products. Companies that require natural resources for their products range from handmade greeting cards, tissue paper to furniture makers.

So bearing all that in mind with the trend for green investments set to continue now might be a good time to make it an important part of your portfolio.

This expressive growth could be a result of a strategy by the Chinese paper industry who put aside sizeable investments to increase production of eucalyptus based products, such as in the printing and tissue paper sectors. Known for its high quality the drop in commodity prices favoured the Brazilian input inventory last year.

With strong pressure from the World Trade Organisation (WTO) and the United Framework Convention on Climate Change (UNFCCC) for China to reduce its CO2 emissions, China is keen to make efforts to attain high sustainable standards. This is what makes Brazilian pulp so attractive, besides its high quality it is also known for coming from a planted forest, it is a natural renewable resource, it has a highly productive output and acts as a carbon sink, while it is growing.

Returns will be generated from a variety of methods, such as: carbon credit sales in the open market and the sale of biofuel from tree’s seeds.

Patricia Ellis, director of Green Oil Plantations, said the decision to launch an OEIC has followed the success of their unregulated funds, of which they have two.

She explained, “It is most likely to be an income fund and we are likely to have more information towards the end of July – we appreciate the appeal of a regulated market but we are not only going to sell regulated products.”

Since the start of the year Hornbuckle Mitchell, Lifetime Sipp, Brooklands Trustees and Pointon York have given their approval to Green Oil to allow its unregulated funds into their SIPPs (self-invested personal pension).

Green Oil aren´t the only ones to launch a fund in the forestry sector, in this past year Stellar Asset Management launched a second forestry fund. With the rise in capital gains tax now is the time to launch a forestry fund according to Jonathan Gain.

He explained, ‘The attraction isn’t simply tax relief and the feel good factor, although the 100 per cent inheritance tax, income tax and CGT relief does make forestry an attractive investment for many.”

‘The outlook for forestry is also immensely appealing at this time. There is considerable demand for uses such as construction, packaging and home improvement and the forests can also provide additional income from communication masts and allowing the constructions of wind farms on the land.”

‘Timber is also harvested and distributed to renewable energy power plants, which is a market with substantial capacity for growth.”

And things haven’t much changed in three years; forestry is still a popular investment along side stocks and emerging markets. To quote Jeremy Grantham the chairman of Boston based investment firm Grantham Mayo Van Otterloo, “If the sun shines and it rains, the trees grow about on schedule.” During an address in New York at the Ira Sohn Investment Research Conference, the GMO chairman said that he expects timber to earn 6% per annum over the next seven years.

Looking back over the last twenty years or so it appears that Grantham’s enthusiasm for forestry hasn’t been misplaced. From 1987 to 2009 the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, earned a compounded annual return of over 14%. By comparison the S&P 500 had a compounded annual return of 9.4% during the same period.

Unfortunately forestry investments are notorious for having a history of uncorrelated returns. The correlation of the Barclay’s Aggregate Bond Index since 1987 has been just 15%, whereas the NCREIF Timberland Index with the S&P 500 has been roughly 35%. During the same period the correlation between the timberland index and the consumer price index has been 45%. This suggests that forestry has been a good long term inflation hedge.

Investing in timber couldn’t be easier either with timberland investment management specialists that offer a form of private equity whereby investors can become direct owners of specific plots of timber bearing land. And this isn’t just reserved for the very rich. Investments with forestry management specialists such as my sponsor Greenwood Management can start from as little as €7,695.

The advantages to investing in forestry are that it adds diversification to an investor’s portfolio as well as providing a safety net; as value is stored in the stump so the longer the tree is left to grow the more valuable it becomes. This is unlike gold as values may go up but the amount you started with will always be the same.

While no asset class is devoid of risk, this asset class has a lower level of risk than others. Forest fires and natural disasters are extremely rare and all reputable forestry investment specialists will be insured against this. Should prices go down in the projected harvest year the harvest can be put back till a time when the timber prices are more favourable. Unlike most harvests trees don’t have an expiry date!

The alternate bill will also reduce the level of forest cover protecting the river and stream banks. The control of the land clearing in these areas would be given over to the regional and local authorities who are largely under the influence of large landowners and agribusiness interests.

It was the gradual strengthening of the Forest Code and the more recent improvements in enforcing the code that has lead to Brazil’s success in scaling back the horrific levels of deforestation in the Amazon over recent years.

However research presented at a seminar earlier in the year by NGOs including the WWF showed clearing exceeded the legal requirements by over 40%. The bill proposes to offer amnesties on existing fines for illegal clearing; in essence this would make the illegal clearing legal. In the WWF-Brazil’s opinion the amendments were hardly debated and as it is likely that it will be passed by the Lower House then it will nullify all the efforts the Brazilian Government has gone to in order to preserve Brazil’s forests.

The only real chance of the bill being halted is if President Lula chooses to veto it. However with the elections coming up in October controversial legislation such as this, traditionally either takes a back seat in the immediate run up to the election or is pushed through by the present government.

Compared to this Brazil is roughly two thirds the size of the US in terms of population and the country is half the size of Russia. But don’t sell Brazil short, among BRIC funds, this Latin American country offers fantastic investment opportunities.

For years the Chinese have been inappropriately allocating capital on a grand scale and the interest rate in China has been far below the economic growth rate, which for 20 years has resulted in a runaway real estate market. There is also a growing concern of China’s protectionist policies and fears of a US trade war. This means that not only are private sector companies from foreign nations at a disadvantage, but also BRIC investments in China are at risk of being in a company run by Beijing instead of businessmen. After all, China is a country that prefers state owned enterprises.

Compared with China, India offers more of a long term promise due to its democratic government. Despite this, long term profits won’t be forthcoming anytime soon as of all the BRIC nations India is the poorest nation and its infrastructure is a serious problem. India is likely to lag behind other BRIC funds until this improves.

I can see a lot of potential in Russia, it is a huge country with vast natural resources but the lack of economic diversification and stability means it is a risky short term bet. The emerging market has been volatile due to currency problems and inflation worries in global markets.

Given these risks it seems that Brazil offers the most advantageous opportunities for investment. Compared to the other BRIC countries Brazil businesses are not controlled by the state, the nation is rich in natural resources, which has diversified the economy and the nation enjoys a lack of dependence on exports of consumer goods. Also, unlike the other countries in this group Brazil has a stable democracy.

There are other advantages of investing in Brazil than just the obvious. Brazil generates 73% of its energy from hydroelectric power and is home to one of the largest oil reserves in the world. Their middle class is booming so sales inside this BRIC investment zone offset sales of resources abroad. There is a competitive manufactured goods industry in which Brazil does not engage in a mercantilist exchange rate policy to boost exports.

At over 72 million hectares this has become the world’s biggest commercial forest conservation deal. In the hope of sustaining endangered caribou populations logging will be totally banned on some of the land. The total protected area is roughly twice the size of Germany and equals the area of forest loss globally between 1990 and 2005. The timber companies hope the deal with bring commercial gains such as timber buyers seeking a higher ethical standard.

“The importance of this agreement cannot be overstated,” said Avrim Lazar, president and CEO of the Forest Products Association of Canada (FPAC). “Together we have identified a more intelligent, productive way to manage economic and environmental challenges in the Boreal [Forest] that will reassure global buyers of our products’ sustainability.”

Calls for boycotts and criticism of the industry have been suspended by the environmental groups as part of their agreement. The Pew Environmental Group, said it was ‘excited’ by the agreement and has been trying for over a decade to ‘green’ Canada’s forestry industry.

“We’re thrilled that this effort has led to the largest commercial forest conservation plan in history, which could not have happened without both sides looking beyond their differences,” said Steve Kallick, director of Pew’s International Boreal Conservation Campaign.

The protected lands run right across the country from the Pacific to the Atlantic coasts this is an area that is larger than in some agreements currently feted as global leaders, such as the Brazilian Amazon Region Protected Areas project. Companies and environmental groups have pledged to work together to implement world leading forest management and harvesting practices.

The timber will be certified as coming from sustainable sources and the effects on forest protection will be monitored, especially the caribou. This agreement could act as template for future forest agreements in other parts of the world, according to Pew, as industry leaders respond to an increasingly environmentally aware public.

“There is recognition that this is how forestry will be done in the 21st Century, and there’s a great interest in getting ahead of the rest of the industry,” Mr Kallick told BBC News.

At present the agreement covers the timber companies and environmental groups and they are now looking for reinforcement and backing from the government. In the Canadian system that means the national and provincial authorities and ‘First Nation’ governments of indigenous groups, some of whom have already given their support.

A Chinese company, which already has a high level of interest in the region, is currently planning to send some of its senior executives to visit the northwest. According to Bell they are interested in the region’s forest resources as a whole and not just for the export of raw logs.

“The interest we’ve had expressed by companies like China Forestry Exchange is specific to manufacturing in the northwest,” said Bell.   He adds “there’s always been some interest in log exports but our goal and objective is to rebuild a manufacturing sector in the northwest.”

In addition the mothballed Eurocan Paper mill in Kitimat is being eyed up by some Swedish business people, according to Bell.

This weekend marks the International Day for Biological Diversity and to alert public opinion to the looming dangers, national parks in the region will rally together for this event.

One of the countries worst hit by deforestation is Albania. According to several environmental non-governmental organisations contacted by AFP woodlands that once covered 51% prior to 1990 have now been reduced to 25%.

A prime example is the Vlora region on Albania’s southern Adriatic coast, where according to the Albanian National Forest Association 102 hectares (252 acres) of forests were cleared to make room for illegal construction.

Illegal loggers haven’t even spared Albania’s national parks such as the Lura, considered a gem of the Balkans with its vast expanse of pine, fir and beech trees. According to the national statistics institute no one has been tried and convicted for illegal logging although ten times more trees are felled illegally than legally.

Meanwhile Romania boasts the second largest woodland expanse in Europe after Russia with 300,000 hectares of intact forest. Even so its national parks are also under threat. Between 2004 and 2007 in Piatra Craiului Park in the Meridional Carpathians, nearly 300 hectares of forests were cut down illegally. In protest an environmental group called Agent Green used huge logs to write the word ‘crime’ on one of the now bald mountainsides.

“This is a disaster; I’ve never seen anything like this. If logging continues, the area will turn into a desert,” Alex, an environmental activist told AFP.

If that wasn’t bad enough offical figures in Romania show a worrying trend, more than 170,000 cubic meters of illegally cut timber are seized every year and out of the 25,000 fines issued over the last three years only two have ended up in actual convictions. Cristian Apostol a Romanian junior minister for forestry blamed legal loopholes for the situation. He cited various reports where more than 180,000 hectares of forest had been illegally cleared since the fall of the late communist dictator Nicolae Ceausescu in December 1989.

Since that time some of Romania’s deforestation has been blamed on the shifts in ownership after the collapse of communism.

“The law was there but the necessary structures to enforce it were missing,” said Apostol.

Today there are more than 800,000 private owners of forest land and for obvious reasons it is not easy to control them all.

“Things have improved, however, thanks to regional enforcement bodies and private firms and foundations,” he said, adding more than one-quarter of Romania’s forests were now privately managed.

During the 1992-1995 war forests suffered massive destruction in Bosnia with some 100,000 hectares of forests infested with land mines and expected to remain off limits for many years to come.

The Balkans have also been badly affected by forest fires. Macedonia saw 35,000 hectares turn to ash in 2007 resulting in floods, landslides and a depletion of wildlife. Authorities and NGOs in the Balkans have now, after years of neglect to take action to reverse the decline of forest land.

Croatia has slapped severe restrictions on construction in forest areas and Romania has pledged tougher sanctions against illegal lumbering. Romania has also joined Macedonia and Serbia in launching ambitious reforestation programmes.

Despite this Grabriel Paun, the head of Agent Green, warns against expecting miracles.

“The trees we are planting now will only turn into a mature forest in 80 years’ time,” he said. “We won’t be there to enjoy it, but we are doing this for the next generations and hoping to see the wildlife return.”

A couple of interesting statements are as follows:

“We heard a strong consensus from CEOs that the FPP industry needs to do a much better job at raising public awareness and understanding of the fundamentals of the business. The industry must improve its ability not only to publicize its successes in increasing efficiency and reducing carbon emissions, but also to convey the realities of modern sustainable forestry and pulp and paper-making processes.”

“Virgin fibre based carton board is the most sustainable, most environmentally sound packaging application and we are very confident that the total demand and consumption of those packaging materials will very strongly increase also in the future.”

On the whole these statements are correct. However, the industry will have a hard time proving that their products are environmentally sound as long as there are companies out there who are supplying their demand from old growth rainforests. Despite this a large number of paper companies have invested a lot in making sure that their production and wood supply is environmentally friendly and comes from sustainable sources.

Unfortunately these efforts are not very news worthy and all it takes is one irresponsible company that conduct their business at the expense of the environment and the whole sector suffers.

An added problem is that the industry has to think very carefully on how it shows itself to be environmentally friendly. The public is ready to condemn any project when development of genetic material is mentioned by the industry. As long as genetic engineering is part of these operations the public will not accept operations as environmentally friendly. Even the use of clonal material for timber plantations creates problems with environmentalists who cite the loss of biodiversity when using clonal material.

“Increasing the fibre yield from existing forests will also play a role in helping the industry maintain competitiveness, such as… other executives point towards Brazil as leading the way, particularly in terms of developing genetic materials to increase yield”

The forest products industry has a lot of potential for coping with challenges of in the future. Such as the new business model that the economic downturn and climate change are demanding. Called the ‘bio-based economy’, the forest product industry could be one of the key pillars of this new economy model. The main raw material for this industry is, was and will always be wood, however the challenge for the future is to make more out of wood.

And forests are the first step. Timber must be grown in well managed forests, preferably by forest management specialists such as The Phaunos Timber Fund, Greenwood Management or Cambium. In this way sustainable forest management provides the proof that the wood has been grow in an environmentally friendly way.