A conversation with Paul McMahon, co-founder SLM partners, about forestry being the gateway drug for natural capital for institutional investors to put money to work. Why? Because they are used to investing in forestry — it is a well-established investment sector with very long-time horizons. Rotations here are 30+ years, but it’s also one with many challenges: current practices usually mean cutting down a forest after 30 years and completely replanting it. That basically scars a landscape for life — mostly monocultures.

Interestingly, alternatives have been popping up over the last few decades. Continuous Cover Forestry (CCF), where you selectively harvest and let natural processes do most of the work, requires highly skilled foresters, but it can deliver superior returns alongside all the environmental benefits. These are production forests you want to be in — and forest bathe in. Now that a lot of academic research is emerging about carbon levels, returns, etc., the time might be right for more money to flow into it. Interestingly enough, there are established markets for quality in forestry — bigger, better logs (which you can get with CCF) fetch substantially higher prices. All reasons for agricultural investors and actors to look at forestry and see what we can learn.

The financial case is compelling. Studies from across Europe consistently show CCF delivering higher internal rates of return than rotational forestry. Meanwhile, as climate change intensifies, these diverse forests are proving far more resilient. During recent catastrophic storms and pest outbreaks, continuous cover forests suffered significantly less damage than monoculture plantations. With European timber demand projected to increase 50% by 2050 to support the bioeconomy, this approach offers a win-win solution.

Most fascinating is how CCF challenges our philosophical assumptions about humans and nature. McMahon shares research showing that actively managed continuous cover forests can actually support higher biodiversity than unmanaged areas.

WHAT MAKES CONTINUOUS COVER FORESTRY (CCF) DIFFERENT AND INTERESTING COMPARED TO ROTATIONAL FORESTRY

CCF avoids clear-cutting, maintains permanent forest cover, and prioritizes natural regeneration. This approach contrasts sharply with rotational forestry’s cyclical clearing and replanting. Rather than the standard practice of clear-cutting and replanting trees every 30-35 years, CCF maintains permanent forest cover by selectively harvesting individual trees while promoting natural regeneration. The result? A structurally diverse, multi-species forest that produces quality timber continuously while storing more carbon and supporting greater biodiversity.

“The first principle [of CCF] is it tries to maintain permanent forest cover, so you’re never clearing the entire forest. Instead, you’re keeping that permanent forest cover intact in perpetuity. You harvest individual trees or groups of trees, opening gaps to let in light and promote natural regeneration. This is the equivalent of regenerative agriculture for forests— working with nature, not against it.” Paul McMahon

THE EXISTING MARKET FOR QUALITY: BIGGER LOGS COMMAND MUCH HIGHER PRICES

There is a clear economic incentive for growing larger, higher-quality timber, which is central to CCF’s commercial viability.

“So in Germany and continental Europe they’re used to dealing with big logs and big trees and actually they get paid very good prices because you get a much higher quality product. If you can take a big saw log, you can make into wider timbers and cut it in different ways. You need to retool a little bit the sawmills, but there’s no reason why they shouldn’t. The bigger saw logs should be processed and attract a very high premium in the market.” Paul McMahon

CCF’S RESILIENCE AGAINST DISEASE, PESTS, AND CLIMATE CHANGE COMPARED TO ROTATIONAL FORESTRY

Diverse, multi-species forests under CCF are inherently more resilient to climate extremes and pest outbreaks.

“A monocultural plantation using very limited genetic diversity, that’s much more vulnerable, you know, to these kinds of physical risks. Whether that’s a big storm coming through and blowing everything down, which we definitely see in Ireland, the British Isles or whether is pests and disease, like the bark beetle, which has ravaged Central European forestry. For example, Germany lost 2% of all its forests to bark beetle between 2018 and 2020, and that was linked to drought conditions”. Paul McMahon

“The key is diversity. You need to have forests with multiple species, with genetic diversity within each species, so that they can adapt. And so, yes, some trees will fall by the wayside and not make it, but other trees will actually flourish… there’s some amazing research also from Austria where they looked across 40,000 hectares over a 25-year period, and what was being damaged by both wind and pest and disease. And again, they were finding that the forest of more diversity managed, using continuous cover were the ones that had, I think, a third less damage than the more monocultural species stand.”.” Paul McMahon

HOW CCF WORKS WITH NATURE, ALLOWING NATURAL PROCESSES TO HANDLE REPLANTING

CCF leverages natural regeneration, reducing reliance on costly replanting and creating self-sustaining ecosystems.

“Rotational forestry is expensive because you’re kind of fighting against nature. You had a forest ecosystem, you cleared it all, and now you have to reestablish it. So you’re constantly battling against the elements. Whereas with continuous cover forestry, you keep the permanent forest ecosystem intact, you have the right conditions. It’s not too bright, it’s not too dark, it’s the right conditions for those trees to reestablish. It’s quite technical, but by varying the amount of light that’s coming through the canopy, you can actually determine which species will regenerate. So if you want more light-demanding species, like certain conifers, you might open up the canopy more. If you want more shade-tolerant species, maybe like an oak, you can have a kind of tighter canopy. So it’s very interesting how the light effectively determines what grows back and how quickly” Paul McMahon

OTHER POINTS DISCUSSED

Koen and Paul also talked about:

1. Strong tailwinds for timber production and demand in Europe for construction, bio chemicals, packaging etc.
2. Why research shows returns can be equal or greater, specifically risk adjusted returns
3. Forestry attracts institutional natural capital investment.

LINKS:

• SLM Partners
• White Paper Investing in Continuous Cover Forestry in Europe
• AirForestry

LINKED INTERVIEWS:

• Paul McMahon – With over $500M invested, there is a regenerative edge of about 1-3%
• Paul McMahon on building a 250M climate positive portfolio of tree crops in Europe
• Paul McMahon on why ecological agriculture makes more business sense than chemical agriculture
• Marcelo Salazar and Zé Porto – A forest super shake to preserve and regenerate the Amazon, the world’s largest agroforestry system
• Kevin Wolz – Starting an agroforestry industry in the belly of the beast, the soy and corn monoculture heartland of the US Midwest
• Jonas Steinfeld – The many shades of green of agroforestry systems

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The above references an opinion and is for information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.