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“Gold That Grows”: How Can Blockchain Transform Forest Ownership and Impact Investing?

When most people think about investments, owning sustainable forests as a means of growing wealth reliably over time doesn’t usually come to mind.  Yet there has been growing recognition amongst discerning investors, that forests offer a plethora of unique benefits, which include real, stable returns over the long term that are largely uncorrelated with more traditional assets such as stocks or bonds. How can Blockchain transform Forest ownership and Impact Investing?

While gold has long been recognised as a “defensive asset”, in recent years sustainable forests have also started to gain the prominence they deserve. As “real” assets, both tend to protect investors’ wealth from the twin threats of economic downturns and inflation. In particular, forests are also near-perfect assets for the environmentally conscious investor, since photosynthesis as a growth process naturally takes carbon out of the atmosphere whilst the trees are growing – both in size and economic value.

The Problem with Sustainable Forestry

Despite the obvious benefits, however, very few people own any forests at all as part of their investment portfolio. Those that do, have usually come into ownership either via inheritance or by investing very large sums of money – typically more than 5 million Euros. Then there is the slight inconvenience of having to hang on to an asset which takes decades to reach maturity, and remains largely illiquid and rather challenging to resell before then.

These factors have traditionally served as barriers to entry, thus limiting forest ownership to only governments, institutions, and a very narrow class of super-wealthy individuals (who represent the top 0.1% in the world), and consequently limiting growth and liquidity in the asset class.

At its core, our diagnosis of what has prevented the forestry investment sector from achieving its true potential has been the high transaction costs between the people who own the forest and those who manage it.

Here’s a simple illustration of how transaction costs have made things unviable:  In mature economies with ageing societies and lukewarm economic growth like the European Union, most of the returns from forest assets tend to come from just biological growth (the two other drivers being land and wood price appreciation), yielding an approximate rate of 3-4% per annum. After taking into consideration relevant fees for estate managers, administration and financial intermediaries – investors are effectively left with less than 1-3% per annum.

Prohibitive transaction costs in the forest investment sector can also come in many forms: From the acquisition of forests and difficulty in understanding the drivers of returns, to the opaque processes for investor reporting, reselling, and even in returning capital to the rightful owners on harvest. The sector has been plagued with projects utilising questionable marketing tactics and governance standards.

Photo credit: Ekofolio

Blockchains and Forests: A Natural Fit

Blockchain, as one of the key enabling technologies for Bitcoin and other cryptocurrencies, has gotten a lot of hype and attention in recent times. Proponents of the technology claim a nearly limitless suite of applications and industries where it will be fundamentally transformative. While our team remains healthily sceptical of some of these wilder claims, we have come to be convinced that with forests, and more broadly the “Natural Capital” sector – blockchains could be a true game changer.

All hype aside, the promise of blockchain technology has ultimately been about lowering barriers to entry, and enabling an “Internet of Value” – a near frictionless system for moving value without the need for traditional intermediaries. This is pretty much why it seems obvious to us at Ekofolio that blockchain is a natural fit for sustainable forestry.

Allow me to explain.

On one hand, Forests represent indisputable real value for people – in economic, social and environmental terms. More importantly, however, they are real assets that grow in a predictable way over time – and have a multitude of uses in everyday life.

On the other, our conversations with a diverse array of investors – spanning a wide range of objectives, geographies and professions – indicate clearly to us that there is a latent, potentially large pool of untapped “Conscious Capital”. These are people who express a latent dissatisfaction with the status quo of alternative investments, where they are made to choose between doing well for themselves, and doing good for others, or indeed the environment. “Conscious Capital” wants to marry profit with purpose – and often would like to do so in a measurable, tangible way.

So far, we have the perfect asset class for a ready and willing pool of investors, but no real way for them to access it. So far, so bad.

Enter blockchain.

Putting Forests on a Blockchain through “Tokenisation”

“Tokenisation” is pretty much a fancy way of describing the process of breaking up a large asset – for example a forest, into smaller tokens, recorded on a self-maintaining Distributed Ledger or blockchain, and enabled by a number of technological and legal innovations.

While tokenisation itself is not the revolution, it does serve as the first step on the path to removing the barriers that have caused these assets to underperform their potential – including large tickets, illiquidity, and poor asset governance stemming from poor visibility. It makes ownership small and accessible enough to make a difference when put in the hands of this growing class of Conscious Capitalists, or as some prefer, Impact Investors.

As a system with minimal intermediaries and low costs for transactions, blockchain becomes the engine for moving value around securely, at unprecedented low cost, in the process being inclusive to the broadest base of investors. This ultimately ensures that the maximum proportion of returns go back to who they should fundamentally belong to – forest owners.

Ekofolio believes that technology, and specifically blockchains, provides ready, transparent, and economic infrastructure for radically lowering transaction costs between owners and managers – if not eliminating them entirely. This has the potential to empower a whole new class and communities of “Conscious Capitalists” who genuinely think and act like owners – both economically and psychologically. It is the social dimensions of this democratisation of ownership that is the game changer waiting to happen.

In other words, the democratisation of forestry investments worldwide utilising blockchain technology will enable an influx of capital into the sector, helping to plant millions more trees and combat climate change – essentially letting investors “save for their future, whilst saving the future”.

Ekofolio team at a forest visit in Latvia. photo credit: Ekofolio

Win, win, win

We are working hard to realise our vision for a dynamic, transparent, and liquid marketplace for forests globally, where both institutional and retail investors can participate on comparable terms. The following simple equation illustrates our thinking behind where we need to be:

Financial Inclusion = Liquidity = Impact

Financial Innovation: Creating a new class and community of forest owners from the 99% through ‘Tokenisation’. Each token is divisible, affordable, and legally backed by real assets.

… Creates …

Liquidity: The ability to trade Forest tokens between willing buyers and sellers, long before the forests actually mature. Liquidity benefits all investors – large and small, as it enables them to realise returns on their investments without “holding to maturity”.

… that enables …

Impact: The ability to channel new capital to the forest investment management sector that reinvigorates it, grows the sector up to a trillion dollars (current size about US$150-200B globally now), and possibly solving climate change by accident.

In our opinion, impact is best created by engineering win-win-win scenarios, and in this particular case, we truly believe that what we are creating will be good for investors, rural communities, the forest investment management sector, and the planet.

PS: This is just the opening act …

Ekofolio has currently been admitted to the inaugural class of 3 startups in the Financial Technology (Fintech) Sandbox by the Danish Financial Supervisory Authority. The Fintech Sandbox allows ideas such ours, with the potential to positively impact society, to experiment within a controlled and safe environment, with the full oversight of the financial regulators.  We will be making two pilot, institutional investor grade forest assets available on our platform – a Mixed Boreal Forest in the Baltics, and a Teak forest in Central America. We look forward to growing along with our community.

Can blockchain transform forest ownership? For more information, or to follow our developments – please visit www.ekofolio.com .

Ian Choo is currently the Founder and Managing Partner of Ekofolio, a fintech company based in Copenhagen, Denmark – whose mission is to make quality investments in forests available to everyone. Ian has been a management consultant, lecturer, as well as guest speaker at a number of global entrepreneurship events and accelerator programmes. He has […]
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