Investors supporting transformation towards sustainability in the forestry sector

Adam Grant Manager, Certification and Environmental Markets PEFC Kuala Lumpur, Malaysia November 2013

Important Note
New Forests 2013. This publication is the property of New Forests. This material may not be reproduced or used in any form or medium without express written permission.
The information contained in this publication is of a general nature and is intended for discussion purposes only. The information does not constitute financial product advice or provides a recommendation to enter into any investment. This presentation has been prepared without taking account of any persons objectives, financial situation or needs. This is not an offer to buy or sell, nor a solicitation of an offer to buy or sell any security or other financial instrument. Past performance is not a guide to future performance. Past performance is not a reliable indicator of future performance. You should consider obtaining independent professional advice before making any financial decisions. The terms set forth herein are based on information obtained from sources that New Forests believes to be reliable, but New Forests makes no representations as to, and accepts no responsibility or liability for, the accuracy, reliability or completeness of the information. Except insofar as liability under any statute cannot be excluded, New Forests, including all companies within the New Forests group, and all directors, employees and consultants, do not accept any liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this presentation.

The information contained in this publication may include financial and business projections that are based on a large number of assumptions, any of which could prove to be significantly incorrect. New Forests notes that all projections, valuations, and statistical analyses are subjective illustrations based on one or more among many alternative methodologies that may produce different results. Projections, valuations, and statistical analyses included herein should not be viewed as facts, predictions or the only possible outcome. Before considering any investment, potential investors should conduct such enquiries and investigations as the investor deems necessary and consult with its own legal, accounting and tax advisors in order to make an independent determination of the suitability, risk and merits of any investment. New Forests Advisory Pty Limited (ACN 114 545 274) is the holder of AFSL No 301556. New Forests Asset Management Pty Limited (ACN 114 545 283) is registered with the Australian Securities and Investments Commission and is an Authorised Representative of New Forests Advisory Pty Limited (ACN 114 545 274, AFSL 301556). New Forests Inc. has filed as an exempt reporting adviser with the Securities and Exchange Commission.

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Overview of New Forests

Founded in 2005 Managing forestry investment for institutional investment clients Currently managing nearly US$2 billion in assets in the Asia-Pacific region Head office in Sydney; 38 employees in Australia, New Zealand, Singapore, and San Francisco
Managing over 420,000 hectares of land and forestry assets across the Asia-Pacific region and United States New Forests has generated excellent returns to our clients over 8 years, and has aimed to operate as a leading sustainable and responsible investor in the forestry sector

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What Differentiates New Forests?

Strategically, New Forests is
1. Focused on Asia Pacific opportunities Unique for a TIMO headquartered in Sydney with an office in Singapore Largest forestland owner in Australia and active in markets throughout Australia, New Zealand, and Asia Providing investors with exposure to the integrated Asia Pacific regional timber tradeextensive experience in domestic and export markets 2. A leader in sustainable forest management Investment team experienced in sustainable forest management and environmental markets; company-wide Social and Environmental Management System Member of Forest Stewardship Council (FSC) International and FSC Australia Signatory to United Nations Principles for Responsible Investment (PRI) 3. Forward Thinking Engaged with international NGOs, and participating in global initiatives including World Economic Forum Global Council, Aspen Institute, etc.

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New Forests Business

New Forests Pty Ltd (Sydney)
San Francisco
The Eco Products Fund

Sydney
Australia New Zealand Forest Fund Australia New Zealand Forest Fund 2

Singapore
Tropical Asia Forest Fund

Forest Carbon Partners Mitigation Partners*

Back Office, Administration, Risk and Compliance Systems and Governance Financial and Forest Resource Modeling Services Sustainability and Responsible Investment Investor Services

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Tropical Asia Forest Fund - TAFF

TAFF is a commingled fund investing in tropical timber plantations in South East Asia with US$171 million in commitments. Clients include pension funds and development banks.
Forestry in Asia is changing:

Originated from logging concessions in natural forests Low cost of timber from these concessions meant attractive returns were possible without operating efficiently or sustainably
Natural forest timber has been largely depleted

Global concern over rainforest logging and a demand for certification and sustainable forest management models are on the rise Fast-growing, high-quality managed timber plantation estates are emerging as the basis for the future of the industry, which will require significant capital Invest in existing forestry enterprises or assets Upgrade and expand those businesses
Help Implement modern forestry systems and practices

TAFF will:

Obtain certification and where possible, access environmental markets Exit after 10-15 years of investment

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The Changing Forestry Landscape

1. Shift to plantations and the declining economic frontier of natural forests 2. Global timber demand growing and restructuring to accommodate Asian demand growth 3. Shifts in Pulp & Paper markets and increasing demand for bio-energy, bio-fuels, and other bio-products 4. Rising institutional ownership of high productivity timber plantations 5. Sustainability imperatives and the pricing of ecosystem services
Three-year old Teak Plantation Solomon Islands
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Natural Forest Harvest in SE Asia in Decline

Steady Decline in Natural Forest Logging in Malaysia and Indonesia
Malaysian Log Production
40
Annual harvest levels (m3 millions) 35

Indonesian Log Production

25
Natural forests Plantation forests

Log Production (M m3)

30
25

20

15

20 15
10

10

5 0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

1994 1996 1998 2000 2002 2004 2006 2008

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Sources: Malaysia Timber Council and personal communication with Yayasan Sabah; ITTO; Indonesian Forestry Department Annual Report, 2008.

Limited Plantation Investment

Asia has lagged behind other regions in the development of commercial plantations for higher value end uses. Significant plantation areas in Indonesia, South China (approximately 6.0 million hectares) and Vietnam are being grown on short rotations for chip/pulpwood only.

Both China and Vietnam currently import plantation hardwoods from South America, North America, Europe and Africa primarily to fulfill demand for certified timber. There are significant cost advantages to regional sourcing.
Source: New Forests Asia estimates based upon RISI 2011 Pulp and Chip wood Conference, ITTO 2005 Sus tainable Forestry Ma nagement Report, a nd government data s ets. Data does not include rubber estates and i s based on priva te/government commercial scale plantations not small holders (except for Thailand where s ma ll scale priva te growers are fundamental to the industry)

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Opportunities for TAFF

Investing in Southeast Asia with priority for Indonesia, Malaysia, and Vietnam Attractive growing conditions, low costs, and close access to growing markets Investment team in financial hub of Singapore Combination of existing and greenfield plantations 4-year old clonal teak in Java Environmental, Social & Governance (ESG) factors and environmental markets offer value-add opportunities

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Sustainability as a Stay in Business Issue

Institutional Investors require sustainability policy, labour policy, corruption and bribery standards, use of certification, and monitoring of performance standards Major consumer groups are increasingly demanding certification or product chain of custody documentation Governments are under pressure to create business environment that will encourage investment and support competitiveness of local industry

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Sustainability at New Forests

New Forests is a signatory to the UN Principles for Responsible Investment (PRI) and commits to integrating Environment, Society, and Governance (ESG) principles into investment decision making
ESG policies are implemented at the fund level through a Social & Environmental Management System (SEMS) with internal auditing

Responsible Investment SEMS

The SEMS defines third-party certification and responsible management requirements relevant to the asset class and type of investment Sustainability reporting is integrated into funds reporting structure and New Forests publishes an annual Sustainability Report covering responsible investment activities, targets, and progress
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Certification & Responsible Management

Sustainability Reporting

TAFF Sustainability Goals

New Forests is committed to sustainable management of TAFF investments
Environmental, social and governance best practice will ensure TAFF contributes to:

Reduced greenhouse gas emissions and other forms of pollution Maintenance or enhancement of high conservation value forests and biodiversity Improvements in local livelihoods and safe working conditions Recognition of indigenous rights Price premiums and better market access for certain products Lower project and political risk through reduced social conflicts Improved asset liquidity and lower risk-adjusted discount rates on exit Lower cost of debt capital and better debt access, especially from development banks Improved access to licences, operating permits or additional assets from host countries Reputational risk reduction for fund investors Opportunities for increasing operating efficiencies through better management Opportunities for environmental market products from areas set aside from production

Third-party verified sustainable forest management will add significant value:

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Opportunity Costs in the Landscape

Markets set prices for timber products, but how do we value other benefits?
Forests provide not only timber, but a myriad of other benefits related to freshwater, carbon cycling, biodiversity conservation, human health, and well being These ecosystem services have not been priced and therefore are used wastefully and disregarded in land conversion decisions Leads to plantation and agribusiness industry using more land rather than increasing productivity per hectare Policy in conflict with overwhelming economic fundamentals is difficult to enforce on a sustainable basis
Region
Malaysia

Value of Natural Vegetation

$500 (logging concession after primary harvest)

Value of land converted to Agriculture

$20,000 to $25,000 (oil palm)

Brazil US South
Australia

$155 (Amazon frontier land) $2500 (mixed timberland)

$1900 (woodland properties)

$420 (grazing) $6250 (cropping)

$4850 (mixed cropping and grazing)

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Innovating Markets
New Forests established Malua BioBank in 2008 with seed investment from The Eco Products Fund. The project creates an alternative economic value for Borneos rainforests and offers sustainability solutions for oil palm supply chain.

Unlocking Demand for Biodiversity

-Roundtable on Sustainable Palm Oil (RSPO) compensation mechanism for past HCV clearance -Forest Stewardship Council (FSC) compensation mechanism for past downwards conversion

Further Investment Potential

-Carbon value through proven methodology -Impact or CSR investment to catalyze biodiversity market growth and establish sustainable brand value

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Environmental Markets Lessons Learned

Price signals work

SO2 market drove changes in fuel from high to low sulphur coal EU Emissions Trading Scheme (ETS) drove $ billions into carbon funds and carbon companies Australian water market restructured agriculture to increased efficiency and more valuable cropping US Mitigation Banking is a $billion+ turnover industry Investment funds sprang up related to the EU ETS, Australian Water market, and Mitigation banking industrycreates liquidity to meet market needs Markets create transparency in pricing; futures and options create stability; water rights as collateral for investment in water use efficiency Meddling by Government killed the SO2 markets Excessive allocations and unexpectedly huge offset supply have made the EU ETS unstable Lack of price premium has hampered most voluntary certification schemes REDD has struggled to have impact because private sector is disengaged and continues to operate on a business as usual basis

The finance and investment sector can facilitate change

Stability is necessary, but fine-tuning is also necessary

It needs to cost more to remain outside rather than inside a scheme

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Towards the Future

Can forestry represent a natural infrastructure asset class?
Projections are that global industrial roundwood demand will begin to plateau around 2.3-2.5 billion m3 per annum in 2030. 100 to 150 million hectares of commercial plantation area (2.5-3.75% of world forest cover) could supply most of this timber, while timber production from frontier regions (Canada, Russia, tropical natural forests) will stabilize or decline. Biomass demand may double this. Mechanisms to price ecosystems via REDD, BioBanking, watershed protection, etc. alongside commercial timber plantations could produce the basis for the stabilization of conservation and production functions Large scale deals like NZ, Australia, Indonesia-Norway, Boreal Canada, etc. Ultimately this must be driven by private capital and investment

Canopy view of New Forests Malua Biobank in Sabah, Malaysia.

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Key Points & Conclusions

World timber demand will continue to rise, markets will evolve to encompass Asian demand growth Supply increases will primarily come from timber plantations, rather than further expansion of the economic margin in primary forests Increases in plantation area are more difficult to achieve than increases in productivity of existing plantation baseland competition will also rise among food, energy, and fibre crops Institutional portfolios have gone from 5% real assets in 2000 to 15% real assets today, and likely will reach 25-30% by 2025huge inflow of capital for real estate, infrastructure, agriculture, forestry, etc. Need fopr a financing source for conservation as well as production this could include REDD+, biobanking, water rights, no net loss supply chains, etc. Social and community integration via benefit sharing, consultation, and governance models, and respect for traditional and legal rights will be core to sustainable outcomes

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www.newforests.com.au

Appendices

New Forests History

July 2005 Company established in Sydney and receives Australian Financial Service Licence
May 2007 Establishes US office

August 2008 Establishes SE Asian office October 2009 Begins Funds Management Business August 2010 Closes the AU$490 million Australia New Zealand Forest Fund January 2011 Closes AU$415 million acquisition of 270,000 hectares of Australian forest land from the Receivers of Great Southern Plantations 2011-2012 Acquires major softwood plantations and softwood sawmills in Australia June 2013 Final close of the New Forests Tropical Asia Forest Fund, now with commitments of US$171 million, and first close of the New Forests Australia New Zealand Forest Fund 2 with AU$570 in commitments June 2013 Makes first Asian investment, acquiring Hijauan Benkoka plantations in Sabah

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Supply from Russia is Declining

Russian softwood exports have hit a wall
60 Roundwood Sawnwood

50

40

Russian log exports have fallen dramatically over the past six years while lumber exports have been flat to slightly increasing.

Millions cubic metres

30

20

10

0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

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Source: FAOstat

Canadian Supply Falling

Policy Constraints and Mountain Pine Beetle impact will lead to near-term decline in timber supply, leveling off in the medium to long term.
Canadian Timber Supply 2009 & 2050 Forecast (million m3)
90
80 70

60 50
40 30

20 10
0

British Columbia

Alberta

Ontario

Quebec

Softwood Annual Allowable Cut 2009

Estimated 2050

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Source: Mark Kennedy, CIBC. Global Perspectives on Forest Products Trade. Presentation to Future Forestry Finance 2012.

Natural Forest Logging Collapse (repeated from main preso)

Regional Collapse in Natural Forest Logging in Malaysia and Indonesia

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Sources: Malaysia Timber Council and personal communication with Yayasan Sabah. / Indonesian Forestry Department Annual Report, 2008.

Australian Plantation Harvest Rising

Australian hardwood plantations are steadily replacing a declining supply from native forests
Native and Plantation Hardwood Harvest
12 000

Native
10 000
8 000

Plantation

'000 m3

6 000

4 000
2 000 0

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Source: ABARES, Forest and Wood Product Statistics.

Increasing Importance of Plantations

Global industrial roundwood demand is likely to rise from 1.5 billion m3 in 2013 to 2.5 billion m3 by 2050 Somewhat speculative forecasts suggest biomass energy, biofuels and biomaterials demand could dwarf industrial roundwood demand over next 30 years* Almost all incremental supply will come from timber plantations both productivity enhancement and plantation area will need to increase Investment needed could range between $100 and $500 billion to meet these levels of demand

*WWF, 2013 Living Planet Report

Slide 120 Source: FAO, 2010. Global Forest Resource Assessment.

Plantation Productivity Can Increase

Example of Productivity Gains Softwood in Australia
30 800

Average Growth Rate (m3/ha/yr)

600 25

400

20 200

15 2012 2025 2035 2045 2055 2065

Base Genetics

Management TRV

Nutrition

If industrial wood demand grows at an equivalent rate to global GDP can we meet much of this via productivity enhancement rather than land base expansion Investor strategies focus on silviculture, nutrition, risk management and genetics to increase productivity by 50-100% over the next 50 years

*Source: Timberlands Pacific Pty Ltd

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TRV - Total Recoverable Volume (m3/ha)

What Government Policies are Needed?

A modern forest policy framework needs to address wood supply, forest conservation and sustainability issues

Future wood supply growth will largely be delivered by plantationsthis will be from existing plantations managed more intensively and expansion of plantation areaexpansion is a key policy challenge As timber plantations take on increasing share of wood supply, innovation is needed in financial mechanisms for forest conservationREDD, biobanks, supply chain initiatives Social outcomes need to balance multiple stakeholders and conflicting interests and rights. Innovations around consultation/governance models, sharing in economic benefits, community benefits are needed

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TAFF Certification & Sustainability

New Forests is committed to sustainable management of TAFF investments
Third-party verified sustainable forest management will add significant value:

Price premiums and better market access for certain products Lower project and political risk through reduced social conflicts Improved asset liquidity and lower risk-adjusted discount rates on exit Lower cost of debt capital and better debt access, especially from development banks Improved access to licences, operating permits, or additional assets from host countries Reputational risk reduction for fund investors Opportunities for increasing operating efficiencies through better management Opportunities for environmental market products from areas set aside from production Achieve compliance against IFC Performance Standards within three years of acquisition on all assets including plantations, natural forests, and processing facilities Achieve FSC certification on all natural forests within three years of acquisition if the asset meets all FSC eligibility criteria Where plantation assets do not meet all FSC eligibility criteria, engage an FSC-accredited certification body to undertake third-party verification of compliance with all applicable FSC requirements and, depending on market requirements, pursue additional third-party certification against an alternative certification system depending on market demands such as PEFC, LEI, FSC controlled wood, VLO, and/or VLC or other future standard that may be developed

TAFF Certification Policy:

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External Motivations
New Forests designed its Social and Environmental Management System (SEMS) in 2010 and began full implementation in 2011. The SEMS is designed to systematically identify, manage, and report on social and environmental issues and potential impacts.

The SEMS helps us win clients:

English pension fund manager said, Youre the only manager weve seen who can show how they manage assets sustainably. Dutch pension fund manager said, FSC certification is absolutely required for us as a target and your SEMS shows us how you pursue that. Provides a reference point and tool for due diligence Current clients ask to see audit reports Streamlines responses to client inquiries

The SEMS helps us provide client services and meet requests:

Risk management and continual improvement.

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