What we are looking for
North American-listed forestry companies poised to benefit from climate change mitigation.
A confluence of factors has improved the short-term outlook for lumber prices recently. Strong U.S. housing starts has increased demand, supply is being squeezed by slowing shipments from Europe into the United States, and wildfires in Canada – which are becoming more frequent and intense due to climate change – are affecting the harvesting of timber. Climate change is also a long-term tailwind for the forestry industry, as wood can be a much more climate-friendly substitute for cement and steel, which are responsible for 8 per cent and 7 per cent of global greenhouse-gas (GhG) emissions, respectively. Also, China is far and away the world’s largest producer of both cement and steel, and there are emissions resulting from the transport of those products. And as large Western economies seek to reduce their reliance on China, there are geopolitical, as well as sustainability-related motivations to construct more buildings with wood. With this in mind, we will look to see which companies are positioned to be the sustainable wood suppliers of the future.
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The Screen
- We will start with the six largest (by market capitalization) companies in the forestry industry that are listed in North America.
- We will then see which produce or distribute products labelled as certified sustainable by a body such as Forest Stewardship Council, and the percentage of its products this represents (for those that voluntarily report such a figure).
- Finally, we look at Scope 1 and 2 GhG emissions (those from company operations and from the power they purchase) per million dollars of revenue and see how this figure has changed annually on a one-, three- and five-year basis. Again, these are voluntarily disclosures, so a five-year percentage change is only available for companies that have been disclosing their emissions for that long.
What we found
Each company, except for Stella-Jones Inc., sells wood products labelled as certified sustainable, but only Canfor Corp. and West Fraser Timber Co. Ltd. disclose the percentage this represents – 93 per cent and 100 per cent, respectively. And while these two companies emit the most GhG per dollar of revenue generated today, for West Fraser this metric decreased by more than half from a year ago, and has decreased at a compound annual rate of more than 14 per cent over a three- and five-year timeframe – the most of any company in the screen.
In its 2022 Sustainability Report, West Fraser highlights the fact that the company uses 99 per cent of every log it processes and that most of its mills generate renewable energy, which is used on-site, from biomass material recovered from manufacturing.
Investors are advised to do their own research before trading in any of the securities shown.
Hugh Smith, CFA, MBA, is head of sustainable finance and investing for the Americas at London Stock Exchange Group.
Hugh Smith, CFA, MBA