Stoel Rives | Deeply Rooted Podcast S1E6: Understanding the Intersection of ESG and the Forest Sector with MaryKate Bullen, Director of Sustainability and ESG of Forest Investment Associates

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In the latest installment of the Stoel Rives | Deeply Rooted Podcast, titled Understanding the Intersection of ESG and the Forest Sector, MaryKate Bullen, Director of Sustainability and ESG of Forest Investment Associates, and Adam Dittman discuss perspectives on the role of environmental, social and governance, aka “ESG,” considerations in timber and forest sectors, including:

• Importance of ESG initiatives in assessing risk and adapting to changing physical and regulatory landscapes.
• Targeting a positive environmental outcome through impact forestry plans
• Prioritizing biodiversity in land management
• Climate impact of carbon removal - thinking beyond carbon offsets

Episode Recap

Understanding the Intersection of ESG and the Forest Sector

For the season one finale of the Stoel Rives | Deeply Rooted Podcast, host Adam Dittman met with MaryKate Bullen, Director of Sustainability and ESG for Forest Investment Associates, to discuss the role of environmental, social, and governance, also known as “ESG,” considerations in the timber and forest sectors.

Setting the Table: The Parameters of ESG for the Timber and Agriculture Industries

The term “ESG” is becoming increasingly prevalent in the financial news, at industry events, and in business discussions surrounding investment and other transactions in the timber and agribusiness industries. MaryKate opened the conversation with Adam by setting a framework for what elements encompass ESG. “It seems sometimes that you could consider almost anything to sit under environmental, social, and especially when you include governance,” MaryKate said, adding, “basically it is the business responsibility you have to all of your stakeholders, whether [they are] the environment . . ., the people who are working for you, or the people who live near an investment, because things we do at an individual forest or farm level can matter to others.”

MaryKate further broke down the parameters of ESG commonly invoked in resource-based industries:

E: Pollution, climate impact, greenhouse gas emission, water management.

S: Stakeholders such as the environment, employees, and people who live near investments. Access to land for recreation also is a consideration. “Even where there are strong property rights, people do not like to see certain types of activities on hillsides, hilltops, or even by the highway they are driving along. This emotive aspect of land can mean there are social views of what private business is doing,” MaryKate said, noting that “‘S’ is also for safety. Are your workers or contractors working to a standard that is safe for them?”

G: Good corporate governance is highly correlated with investment performance. Topics that are rising in interest include diversity, equity, and inclusion. MaryKate said these topics raise “[q]uestions like, ‘Do you have a diverse board?’ There is good evidence that more diverse boards lead to better business performance. Are you doing things to be inclusive in the workplace? Are your practices supporting diversity and inclusion?”

“If we turn to why it matters, the core of ESG has always been started from a foundation of risk. Investors care about risk-adjusted returns. How do we make sure we identify and talk about how ESG can affect the value of our investments? Let’s consistently identify them to understand how to price those risks, mitigate them, and manage them. That’s really been the heart of it,” MaryKate added.

Implementing ESG Initiatives and Anticipating Regulation

Investors are asking more sophisticated questions around forest sustainability certifications and, in some cases, are starting to require it. Though not 100% universal yet, certifications can give extra assurances to investors that systems are in place to identify potential risks and manage against them happening.

MaryKate shared that even when certifications are not required, there are several benefits of adopting an ESG centric approach, saying, “If we anticipate regulation or some severe shock to the system is going to happen, I really do believe that those companies who are out there attempting, experimenting, trialing with ESG initiatives are going to be ahead of the game and how to adapt. They’re also going to be more likely to find an innovative solution. And if, and when, that regulation comes, I think they are going to find it easier to comply.”

Operationalizing ESG for Impact

The benefit of operationalizing ESG, regardless of a business or investment, is the ability to prove the good of what you’re doing and to future-proof against criticisms by having transparent policies in place.

MaryKate shared an example within her firm: “We have an ESG policy that sets out how we operate. And what’s important to us about ESG is that it links the fact that we believe good ESG management and good stewardship [are] naturally aligned with good investment performance and long-term outcomes for our clients. This is the beauty of sustainable forestry and sustainable agriculture. Long-term performance depends on good environmental quality [and] good social performance, and that’s where it’s closely linked to investment performance as well. So that’s at the heart of our ESG policy,” she said. From an investment management context, MaryKate added that her firm evaluates its investment pipeline for any ESG risks, including environmental and social threats. “We want to make sure that we’re putting ESG consistently in every step of the investment process,” MaryKate said.

Episode Transcript

Adam Dittman 00:06
Today I'm talking with MaryKate Bullen, the Director of Sustainability and ESG at Forest Investment Associates about the role of environmental, social and governance, aka ESG, considerations in timber and forest sectors. Welcome to the studio, MaryKate.

MaryKate Bullen 00:53
Thanks so much, Adam. It's great to be here with you and really pleased to be sharing with the Deeply Rooted audience

Adam Dittman 00:58
Before we jump in, why don't you give our listeners a little sense about your background? And then also, what Forest Investment Associates does?

MaryKate Bullen 01:07
Yeah, absolutely. So I've been working in the forestry investment space for around 13 or so years, but actually came to it from a kind of unsuspecting pathway. I studied anthropology when I was in college. And during that time, went off to the Peruvian Amazon to try and count and track monkeys at an ecotourism Lodge. I had deep ambitions of being the next Jane Goodall and counting monkeys in Peru is as close as I could get at the age of 20. And while I was there, I really fell in love with forests, first of all, fell in love with the rain forest and everything that they had to offer. But I also saw firsthand how very important that market based incentives for conservation and for maintaining forest resources, and ecosystem services really, really were. So as I was graduating and looking for next steps, I started looking into all sorts of things going, who is trying to make these ecosystem services and payments for ecosystem services work so that we can get financial incentives aligned with better resource management, better forest management in ways that will help the environment and help people who are living around this forest and who use and depend on them for so many things. And with that found myself coming into the world of carbon markets and forest carbon. And via that came into forestry investment, because who better to engage in forest carbon management, then folks who are investing in forests and trees, and whose entire job is to make those trees grow better, healthier and faster over time. So that's how I got into forestry investment. for about the past decade or so I've been specifically looking at it from this ESG perspective, you already noted that stands for environmental, social and governance perspective, there are factors that you really integrate into the way you work, I would just call that basically environmental and social responsibility, as well as good corporate governance. And my job within ESG has been to work within Investment Management businesses, and help them have the policies, systems and procedures that back up a really strong ESG Foundation, to what we do as investors in the forestry asset class, increasingly over the past couple years, that has also moved more and more into the area of local impact investing as well, which might be like supercharged ESG, where you're not only looking to make sure you don't do anything wrong, and that you have good environmental and social responsibility, but you're actively pursuing goods and benefits through the way you invest. Great,

Adam Dittman 03:26
That's really helpful context. We have listeners, not only in the forest sector, but also in the agribusiness, food and beverage sector. And I think we, you know, we hear the words or the acronym ESG a lot, right? For you, whose job is the director of sustainability and ESG, right, this is your day job, this is what you do. You're fully immersed in the topic. However, I can imagine that some of our listeners have probably heard the term ESG use, but don't, you know, really kind of know what that entails, or are familiar with kind of the parameters of what an ESG agenda, you know, might include. So, for the benefit of our listeners, I'm hoping that you can start out today by sharing just, you know, a very high level, you know, what we're talking about, when we're talking about ESG? And the ESG agenda?

MaryKate Bullen 04:16
Yeah, absolutely, Adam, I will take a step back, because I forgot to mention what my other three letter acronym si does. So for us investment associates, because that's the perspective that I can share with you from my current role, but also, absolutely, so much of the ESG conversation is really translatable across forestry, AG, and natural resources, because all of those are really firmly in this real assets world where we're dealing with tangible investments out in the world and very tangible environmental and social aspects. So yeah, what are the parameters of ESG? You know, it seems sometimes that you could consider almost anything to sit under environmental social, and especially when you include governance, which is a really important part of it, but often kind of overlooked. I mean, that basically comes back to me of the business responsibility half to any of your stakeholders, whether that's in the environment as a stakeholder, if you will, if it's the people who are working for you, the people who live near investments, that sort of social and societal side, as well, big picture societal, because things we do at a individual forest or farm level can matter to others. People care about how we manage wildlife, for example, and habitat. And then the governance side comes right back to shareholder value. Good corporate governance is a main driver and highly correlated with with good investment performance and shareholder value. So, you know, these are important topics ESG. You know, there are a real focus subset of things in categories that you might think of, though, if we looked at environmental, for example, pollution is a big one, climate impacts specifically in greenhouse gas emissions, but also things like water management, resource efficiency, all those fit under that kind of e and environmental banner under social. When we think about things like resources, Ag and forestry, there's a bunch of social interest in those because land is is a motive and land is really important to people in communities. So you have factors like land tenure, which may not be as big of a consideration and developed markets. But when you think about emerging markets, customary land use and right for indigenous peoples in First Nations is a huge consideration. You also have the social factors like access to land for recreation for amenity value, you know, even where they're strong private property rights. People don't like to see certain types of activities on hillsides, hilltop, they're along even the highway or the roads they're driving along. So people again, this emotive aspect of land can can mean that there's social views about what even a private business or investor is doing. And then another important part under safety, or under social would be safety. So how is your supply chain? integrating and safety? Are your workers and contractors working in a standard that safe for them? And under corporate governance? You know, there's a real wide range there everything from anti corruption and bribery, and just kind of core ethical business standards, through to topics that are really rising interest today, and much, much more point of conversation, like diversity, equity and inclusion. The question there might be, how diverse is your board? There's good evidence that more diverse boards lead to better business performance. You know, are you doing things to be inclusive in the workplace? What are your practices internally for workers? And are they supporting that diversity and inclusion? So those are all sort of examples? Under ESG? If we turn to the Why does it matter that the core of ESG has always been and really started from a foundation of risk, because this is a concept that came off and got popularity, popular through investment, and what investors care about, they care about returns first, but usually they care about risk and return or risk adjusted returns. And so there was a movement that started around 2005, when ESG was coined, and started to be used quite a lot around how do we make sure that we are identifying and talking about the ESG issues that might affect the value or performance of an investment. That's where it all came from. So it really was rooted in this? What environmental problems or risks might be out there, what social risks are out there, and what governance risks are out there? Let's consistently identify them, so that we can understand how to price those risks, mitigate them and manage them. That's really been the heart of it.

Adam Dittman 08:24
Yeah, I mean, that's, that's really interesting. And, you know, it makes you start to wonder, I mean, risk is there, and everybody wants to control risk, it makes sense that the investment community, like you said, kind of, maybe the driver of kind of the the push for ESG in the modern era. But I mean, that's a that's a voluntary decision, right, that this voluntary decision of the, the, you know, particular investor in wanting to look at those risks, and maybe even, you know, prioritize or, or chase kind of aspirational goals beyond risk. So that's voluntary, though, in my mind. And so one question that comes up is, you know, what's the business case? Right for voluntary? You know, ESG implementation in what would you say to those who are kind of waiting for something regulatory to push them down these roads?

MaryKate Bullen 09:15
Yeah, I First off, I think it's interesting to consider it voluntary, just because it's not yet maybe regulated. I think there are real pushes to the white. It's the reasons why we might pursue an ESG aligned pathway, and why it's, you know, more than just the option to decide to kind of assess these issues. Because if you can better price risk, you can make better investment decisions, right? So let's think about something like perhaps the risk of wildfire or environmental threats to a forest or to farmland. Now I could just buy a forest in a high wildfire risk area and not consider that wildfire risk. I doubt many folks are doing that today. Not everyone thinks of it as an ESG thing, but it is because that is environmental. So it's being driven by a whole slew of factors, not the least of which is climate change. And to not price in that risk, I think folks would agree is pretty silly, right? So even if you're voluntarily doing it, that's something you want to understand in due diligence, and that you want to carry forward into asset management, right? So just to kind of push back a little bit on voluntary, however, picking up with, you know, Why get ahead of regulation, maybe, well, there's a reason, because you can, you know, understand the potential risks and threats to your business price a better anticipate a better, and maybe make some internal investments to give yourself a better resilience to some of these risks are shocks. But also, there's a competitive edge here, right? So the writing's on the wall about a few things. I think we live on a planet that currently has finite resources, finite size, a rising population, rising consumption, and really dramatically changing ecosystem services and functions, like our climate, our water flows, all of those things. Now, the changes, those pose are going to hit different forest farms and resources and different ways at different times. But they will come. And especially if we don't start changing how we behave as businesses, right. So if we anticipate that regulation, or some severe shock to the system is going to happen, I really do believe that those companies who are out there attempting, experimenting, trialing with ESG initiatives are going to be ahead of the game and how to adapt, they're also going to be more likely to find an innovative solution. And if and when that regulation comes, I think they're gonna find it easier to comply. I feel this way about investor requests or requirements, something that might sneak into what we call our side letters, and like a fund or an investment agreement. I always want to be ahead of those things, right? Because when that happens, and an investor says to us as an investment manager, thou shalt thou shall have this compliance obligation with a absolutely we already do that not. Oh, gosh, how are we going to figure out how to comply with that so we can sign on the line here? I think it's the same way when it comes to regulation at that the sort of company level or the asset level. You want to be able to go, yep, good. We're doing that can prove it. It's auditable, fantastic, rather than quick clip scramble to make sure we no longer mismanaged that resource just because they told us we couldn't do it anymore.

Adam Dittman 12:22
Right. Right. So to segue a little bit, and just think about how ESG factors kind of impact the the forest sector particularly, because again, this is this is where you live, right? I think a lot of folks who are forest owners, for us investors out there, say, Well, you know, Marriott they may say America, we already practice sustainable forestry, right? We have FSC, or SSI, or American tree farm certifications or whatever, on our Timberlands, is that the same thing as ESG. And you know, I've recently heard you say, in a different context, that there's kind of a spectrum that that exists. And I'm wondering if you'd share a little bit with our listeners about kind of where you think sustainable forestry fits in the overall kind of ESG picture?

MaryKate Bullen 13:13
Yeah, that's a great question. And one where you could probably get 10 different answers from 10, ESG, people, even ESG, and forestry people. So to me sustainable forestry, you know, as a concept, it's been around for a very long time, but in a serious way, for around about 30 years or so, since the early to mid 90s, when forest certification really started to emerge, which gave us a way to say, here's an agreed set of criteria by which forest management can be assessed and audited to confirm that basically, you know, you are not doing any environmental harm, and not doing social harm, and that you have management systems, to identify those potential risks or downsize and to manage against those things happening. super important. I'm a huge believer and big fan of four certification systems that I would call, you know, kind of basic, modern, sustainable forestry. There were sustainable forestry before that, which for us, has been doing forever, which has been focused on how do we make sure that this forest continues to be healthy and productive over the long term. And that is something as core as making sure that we're managing on a timescale and intensity that does not leave there, less wood to harvest in the future than there is today basically, right? And or that that forest continues to function and be healthy in the future. That's kind of big picture sustainable forestry. That has been around by forest managers, you know, back to the days of Caesar and whatnot, right? But in the past 30 years, this kind of certification range of sustainable forestry, I would call that almost a starting place the yardstick for kind of ESG and forestry today, most investors are are starting to ask more sophisticated questions around for certification are starting to require it. Definitely not 100% universal yet. But I think, you know year on year we're seeing more investors expecting and wanting to see their portfolio certified, it just gives them that extra assurance around the good forest management that's happening. So if you go to all the trouble of managing a forest, well, making sure that you're doing right by wildlife, water quality, local communities, kind of why wouldn't you get the the tick of approval? That helps you prove that out?

Adam Dittman 15:33
Yeah. Well, I appreciate the the perspective on that. And I would just if I can ad lib a little bit further on that in, in this, the spectrum that you've been describing. So I think I have a good sense of where kind of sustainable forestry and certification fit. I've also heard you in other context described kind of impact forestry, would you mind sharing a few thoughts on kind of what that is? And how that might be different?

MaryKate Bullen 16:00
Yeah, absolutely. So we've kind of placed sustainable forestry in that realm of, of ensuring forest resources are there going forward, and doing no net harm to other resources or groups or people right? Now what happens, we start to think about how do we manage forests in a way that improve outcomes for the environment or for society. That's where impact forestry or impact investing and forestry come in. And I would say that is where there is an intentional plan, that the way you manage a forest or the way you make an investment into a forest, land or other any other investment, especially real assets, where you're targeting a positive environmental outcome, particularly one that is better than business, as usual, is an impact investment. Sometimes that involves in additional financial return. Sometimes there might be a trade off, or sometimes it's neutral, that sort of doesn't matter. And I want to mention that and because sometimes folks can get wrapped up in thinking that impact investing is this thing that just like so philanthropy does, and that it's not something that's commercial. But there's a whole whole body of evidence building right now around the many types of investments, particularly in real assets, and land use and forestry, that you can do that align financial outcomes for investors, together with good environmental outcomes or social outcomes, I might pause and turn to a couple examples, what they look like so that this is something you know, we can think about in practice.

Adam Dittman 17:27
Yeah, I would love that, please, please share.

MaryKate Bullen 17:29
So a really popular one right now is to think about what we call nature based climate solution, nature based solutions, or natural climate solutions. There's a lot of rising interest in this because as the world is trying to decarbonize, we also know that we need to take tremendous amounts of carbon that's already in the atmosphere back out. Trees are the natural answer for that, literally, they've been doing it forever. And when you scale that technology of a tree, removing carbon from the atmosphere, you get a forest so that we can manage now just by knowing that forests through their growth mechanism, how does the tree grow, it takes in carbon dioxide from the atmosphere, photosynthesis helps it along, it locks that carbon into its biomass as it grows. That's doing us a huge favor from a climate perspective right? Now that just what happens in any managed for us, but what if you started trying to manage your forests for additional carbon sequestration? So you said I want to grow this forest to be a bit bigger, a bit older, a bit larger, before I start harvesting those trees, because that means that each tree has more carbon and its biomass, it's had a greater impact on removing carbon from the atmosphere. Also, then when I harvest that tree, that carbon stays stored in the tree, and it transfers into the harvest of wood products that go into the world around us. It's in the buildings that we live in work in, it's in the desks that we're working out within those buildings, it's on, you know, the paper napkins, all of those things. They're storing carbon. There's a difference though between, you know, the the lumber and structural timber in a building and that carbon in a napkin. So if I think about how long the carbon is going to be kept out of the atmosphere, much, much more in my lumber than in my paper. So that shifts that to what type of product Am I selling from my forest. So when you sell Polk wood, it's going into these shorter lived products that still have an important role, I mean, much better than using a product made out of fossil fuels. So for choosing paper over plastic or something like that, for example, paper still aligned with a low carbon economy. But if I'm producing more things that go into saw logs that make furniture and cabinets and lumber that's going to keep that carbon stored for a long time. So we're now at a point where we see investors thinking very carefully about if I want to have a climate minded Timberland investment strategy that still makes money for growing trees and selling trees, but also has positive climate impact. What would that look like? Would I buy a different forest? Would I manage it a bit differently? Would I sell it for different products, those become super interesting questions. And a great example of where you can have an impact investment in an existing asset class with known financial parameters, known risk parameters, all of that,

Adam Dittman 20:22
that's fantastic, it makes you want to go out and build all of our buildings with structural wood products.

MaryKate Bullen 20:27
Totally. And there's actually another exciting element to that, that is starting to take off. And I think where you're based in Portland, there's a couple of good examples, we talked about what's called mass timber, which is where you're building larger buildings can be made with these engineered wood products that basically can glue together and make very, very strong large pieces of structural timber to build enormous buildings that you never would have thought you could build so many, you know, 10 2030, plus much larger even buildings entirely out of wood. Now, that is not only locking up a bunch of carbon for the long term in that building. But it also has we call the substitution effect, which is a really important climate concept where that building by choosing to build from wood, you're actually displacing steel and cement building, most likely, in ceilings combat, or what we call hard, high carbon embodied materials, it takes a lot of greenhouse gas emissions to make them. So if I want to build a skyscraper or multi storey building with steel and concrete, I've got to admit a whole bunch of carbon to build that frame by want to build it with wood, I'm going to be buying this mass timber, which is storing and locking carbon in for the long term, displacing the emissions that would have been there by built with steel or concrete. And I know that it's come from a forest that initially removed that carbon from the atmosphere in the first place. So there's a quiet impact cycle there. Important to note that forest has to be replanted. That keeps it as a continuous loop. So just to kind of recap, there's a few S's to keep in mind, if you want to think about forest and climate sequesteration, the trees grow, they bring in the carbon from the atmosphere, storage, they store it both in their living biomass, but also in wood products, and substitution, what happens when wood products get used in new and innovative ways and displace things that used to have greenhouse gas emissions, instead of this kind of renewable power?

Adam Dittman 22:29
I like that, that's really easy to remember. Three, three S's. Okay, Mary Kate, you know, let's explore some of the top priorities on ESG agendas. I think I think we've talked about a number of them, I mean, the movement toward net zero emissions. I don't know if we've talked as much about biodiversity management. And I know that, you know, that's a topic that that is kind of important to this area, and important to what you do is I'd like to hear some of your thoughts, you know, on some of those kind of those top priorities, if you can share some thoughts.

MaryKate Bullen 23:00
Yeah, absolutely. And, and let's start with biodiversity. But I'd love to come back also to make sure we touch on water, and people, there are the other sort of key things in my mind about what forests can do for the global sustainable development agenda. So biodiversity. First off, if it's a term people aren't familiar with, it's funny, I feel like you can't define biodiversity without saying biodiversity. biodiversity is basically the concept of all the biological diversity that exists across all the species of everything on the planet. That includes plants and animal microorganisms. All of that is biodiversity. For shorthand, you might also just consider the concept of nature. And what that means. And I would say both biodiversity and nature are increasingly common words mentioned in investment conferences and the financial world today, like the the uptake, if we checked on Google, of how much those words compared with finance over the past, one to two years would be, you know, a gazillion fold compared to a couple years ago. Right? So why do we care about biodiversity within forest land use ag resources, we need biodiversity for the planet to have functioning ecosystem. There's all the kinds of organisms that live in soil and make it rich that makes stuff grow. There are the interactions between different plants, and among plants, and animals, all of that. And it's just really the concept of how are we managing biodiversity in a landscape. Now, managed forests themselves can be very good homes for biodiversity. We think about, you know, the Pacific Northwest, where we have diverse structures of forests that have a bundle of different species living within them. But also if we think about something like an intensively or actively managed plantation asset as a monoculture. What good is that for biodiversity? It's still quite a lot of good. The reason for that is because forests are part of the landscape, right? And so one thing The world needs to do is produce more what we've got that rising population, we mentioned before Rising consumption. That means we need pretty much more of everything, but especially more of what and renewable resources because we're trying to get on this glide path to this low carbon or net zero economy. That means we got to keep displacing fossil fuels and keep making more stuff out of things. We grow in renewable resources, right? So we're thinking about how do we produce more renewable resources on a finite planet, That, to me is imperative to all of us who are involved in any sort of land use to say production area needs to be as productive as possible, so that we can continue to spare and protect areas that have high conservation values, that house biodiversity are sensitive ecosystems, those types of things. So, you know, I'm pretty confident to say, almost every single monoculture plantation the world you go to, there's going to be a piece of the landscape it's in which is managed for conservation and protection. That might be that there's a stream or a river going through that plantation. And you'll find that there are riparian buffer zones that make sure that aquatic habitat can move can be conserved and preserved. And that's also an important perhaps corridor for wildlife to move through these landscapes. So the world isn't, you know, black and white, right? We're a little bit of a mosaic puzzle of different types of land use, we've got farms, forests, communities, all these things together on this finite planet, we can allocate production areas to be really productive, and focus on conserving and promoting biodiversity and other areas. You know, that's a real Win win. So I think that's something we see within sustainable forestry. We see it as part of forest certification standards. And there's opportunities for land managers to think about, what are the biodiversity values that best aligned with their objectives? And how can you find Win win. So an example I might give here, as a forestry investor, we might say, we know that there is a, a bird of prey in an area that is threatened. And that bird of prey, we want to understand how does it use the forest landscape, and how might our silviculture or harvesting activities impact upon that, that's me a really wise ESG project would be to find a local university or research agency NGO that wants to look in these topics and say, Hey, come on to our land, help us find the bird of prey, help us monitor their activities, understand what they're doing, so that we can then have really data driven and science based rule sets and ways to show that our management is not harming them, and hopefully promoting them by leaving the right amount to set aside their own nest, by controlling activities in certain areas. And I would say, you know, there's probably some older school forest managers who might be going, I think she's just talking about regulation and what they make us do. But by getting ahead of it, as we talked about before, if you have an ESG initiative around this thing that you think might be a risk or might be of interest to one of your stakeholders, you can say, Well, actually, you know, we know because we've been observing and working with this trusted third party, that when we do X, there's no negative impact. So we can continue to do X, but Gee, this other activity, you know, we really do need to leave these quiet months around nesting, that's important. So those types of things, you know, if that's you prioritize your ESG activities in ways that you should also hopefully find operational wins for yourself and know how to manage your forest more efficiently within potentially the regulatory constraints or voluntary constraints.

Adam Dittman 28:32
Okay, so Mary Kate, you know, that's fantastically useful to think about. So you mentioned you mentioned water and water is a is a topic of course, that it goes beyond forestry, right? I mean, our ag investors and ag producer clients, right? They're always worried about water. That's the existential threat for them. So once you tell us a little bit more about how water fits into the overall picture.

MaryKate Bullen 28:52
Yeah, absolutely. I think this is where forests and farmland to have a nice synergy because it has been more obvious for business and investors and ag for a while now that water is something we need to get our heads around, we need to be smart about understanding its availability and how we manage it and what our impacts are on it. On the forestry side, something I find really interesting is, is the forest industry has been clued in to the role of forest for watershed management for a very long time. I would say water still don't really hit forestry from an ESG or impact investing side yet. But when you talk to people in the forest sector and folks that go in and out the forest, about what are the real environmental benefits of forestry, they go straight to water. That's because forests are really important part of the way our ecosystems work to ensure the, you know, delivery and acquisition and maintenance of water stores and clean water. So forests through their mere existence, they capture quite a lot of water, filter that into subsoil and sometimes into ground aquifers. That's a really natural system that we need to ensure is maintained to the way we manage forests to not disrupt that is really important thinking about things like not compacting the soil. But also thinking about the way that water moves through on the surface before it's a super important. So the streams and rivers that go through forests, which are really plentiful. When you get out there into a forestry asset, we need to do things like think about where do we cross rivers? How do we maintain streamside? buffers and management zones? How are we, the forest management practices that we apply, potentially going to have a negative impact on the aquatic life or quality of those streams and rivers, and the Pacific Northwest, this is really cute, but it happens everywhere. But because of how much we like to eat our salmon, it's a real clear one. Our salmon supply needs good forest management. And if folks want to keep eating salmon, we need good forest management. And folks don't often think about that. But you know, the salmon that ends up on our dinner plate is going through so much industrial forest land, start to see why good practices that don't pollute water. And that helped maintain shade over over rivers, which is really important, because that helps regulate the temperature of the water becomes important. The last thing I noticed with water, it's one that folks don't think about or talk about quite as much before us also play a really important role in local water cycles and how much it rains in certain areas, just because the inner planet existence of forests and what they're doing with the local climate. And that's an increasingly important thing as we're seeing more fluctuations and volatility in climate. forests that are helping stabilize and regulate that local weather cycle is really, really important, can also help you be more resilient to storms and significant events. So you know, we've seen it this year with the hurricanes that have moved inland over the Gulf. You know, some of what we thought could have been the worst with Ida came in through a natural system at the most part, hitting at marshes, which are naturally designed to kind of absorb some of that impact, for us are the same. They're absorbing that impact and play a really important local role. So that's just to say, you know, the clean water that comes out of our faucet, that is the home for the aquatic life that ends up on our plates. This all depends on for us to

Adam Dittman 32:07
Yeah, that's advertising. I mean, you sold me at salmon.

MaryKate Bullen 32:12
Good wild salmon. Right?

Adam Dittman 32:14
Right. Right. Yeah, Docker ready to give that up. So switching gears, then to transition a little bit, you're in forestry. I think there's a lot of buzz around carbon offset projects. And, you know, what roles do for forest carbon offset projects play? Which is entirely fair, I mean, given that, you know, we have, you know, a regulated market, we have voluntary market, this is kind of a natural thing that's kind of evolved in terms of, you know, how can forestry, you know, intersect with some of these broader questions. But, you know, this is this is, again, this is your day job. How do we take the conversation beyond forest carbon offset projects, what was the larger role and kind of global, you know, net zero emissions and in decarbonisation?

MaryKate Bullen 32:57
Yeah, I really appreciate that question. This is something that that's near and dear to my heart as a human and to what I hope to achieve as a person with a career. It's so the whole reason that fourth carbon offsets became a thing was because of how important forests are in the global climate cycle in the global carbon cycle. There is a natural carbon cycle that has always existed for what we might call biogenic carbon, or carbon that comes from living things where forests grow, they absorb it they put into biomass. Before we started harvesting forests, and old forests ourselves some wood that the cave falls down, decay goes into the soil, many, many years later, we get a fossil fuel. And when the fossil fuels are burned, or when the forest is decaying, it releases carbon back into the atmosphere that eventually another plant absorbs that is the natural carbon cycle. Now the way that we manage forests, as we talked about before can influence that carbon cycle. And you can influence how much carbon is stored in forests. Now forest carbon offset were a way to harness some of the power of forests and nature as a climate solution. Because economic incentives were not necessarily aligned with getting more carbon into forests and wood products. You know, economic incentives were aligned with selling more wood products or clearing more land to do other activities, right. So forests are carbon offsets were originally designed to kind of correct for that problem. And when they're used right there a way to engage the forest sector and land use and part of the climate solution. I want to be clear, I don't think fourth carbon offsets or any offset should ever be used to displace what I call direct emissions reductions or changing behavior, where there are current emissions, right? We know that the world needs to lessen emissions, we need to dramatically change the way we produce things and live right. And that shouldn't be scary to say dramatically because there are totally viable ways to do this that aren't going to make your me any less comfortable in our day to day lives. We're still going to have a prosperous life, it's just going to be a lokar In life, now that's happening, that emissions reduction kind of glide path down, right where every good we produce should have lower carbon intensity year on year. But we know from the science that even if we stopped emitting all greenhouse gases, today, we're going to overshoot our climate targets. That's because there's already so much in the atmosphere, we have to take greenhouse gases out of the atmosphere. Carbon dioxide is the prime one for that, there's two ways to do it, you can pull it out with plants, like all plants and trees, or you can pull it out with we called direct air capture and technology, that's still pretty expensive, folks are working really hard to make it scaled and cheaper. And that's super important. But nature is the option we've got right now. So when we think beyond carbon offsets, to how do we get as much potential out of forests Ag and land use to keep pulling carbon out of the atmosphere and, and, you know, take more of the atmosphere than you put back each year through whatever your business processes are. This is where the opportunity for full climate impact reporting or greenhouse gas inventories is really important. So folks would be familiar with the concept of a carbon footprint, you might think about what's your carbon footprint footprint of your life of your plane travel? Now, if you think maybe that plane like, you know, if I fly x miles, I got this carbon footprint, I can offset it for a couple of bucks. Well, what about the airline company that's doing that their business is emitting carbon as it as it goes along? Right. So they have a carbon footprint, they report that publicly in their annual report, every year, pretty much every major airline will be doing this, because they are listed on stock exchanges. And their investors require them to do this, so that they can see this. And this falls into their ESG data. And they have what they call their emissions report, or GHG. inventory, greenhouse gas inventory. Those inventories today have always been based only on emissions. We want to know, how much bad is that company doing? Well, we're at a point that folks are going Hang on, what about how much good companies are doing? Sometimes that has been two companies, you know, trying to offset that, you know, mitigate their footprint by offsetting and say their net zero, or carbon neutral, you might hear, but there's also an opportunity for businesses like Agriculture and Forestry. If you have a greater carbon removal more coming from the atmosphere than going back. Why shouldn't you get to report that in a greenhouse gas inventory, right? So my trees are growing more than they're being cut and turned into other products, there's more carbon in the forest. And there's still carbon stored in those wood products I'm selling. I want to talk about that. So there's an initiative underway right now through what's called the greenhouse gas protocol, which is basically the dominant rule set that all those public companies are using to report their carbon footprints, and non public companies, bundler companies, this is the dominant framework to add removal to inventories, and not just emissions. And this is super exciting, because it means that we can have forest carbon counted in a greenhouse gas inventory, we can talk about the value of the wood products storage and inventory. And we can talk about soil carbon in agriculture, in this inventory, and really starting to describe that will show investors in the public, these businesses are doing good through their business as usual, not just doing less harm. And so if we think about where capital is flowing with ESG, and impact investing, I think that will lead to over time, more capital, going to those who are better at having more carbon removals, not just those who are doing a better job at having fewer emissions. So it's kind of a big picture thing. But it's like why have we not been reporting on the good, the good, the good in there? And and that I think aligns and let people see what is the role of the land sector, basically, and getting to one and a half degrees, which is the ultimate goal, the Paris Agreement is to limit global warming to two degrees with ambitions of one and a half degree limit. Right? Right. We're not going to get there if we don't think about land.

Adam Dittman 39:02
Yeah, well, and like you said, there's, it's a missed opportunity if you're not getting credit for what you do good. So well, Mary Kate, we've talked a lot about the kind of conceptual issue how this fits. It's been super informative to me. One question I want to ask you is, you know, so this being the case, either be it by investor mandate by kind of one's own tolerance of the various risks associated with forest ownership, how do you actually actually operationalize these types of priorities or principles? Can you just share a few thoughts on on that?

MaryKate Bullen 39:40
Today is a great question. And it's really important because we've gotten this far in a conversation with ESG without mentioning the word greenwashing, which is a really important topic that folks want to understand today. So to me, the benefit of operationally operationalizing ESG Well, in any business or any investment, is that you can prove out the good of what you're doing. And it kind of future proof few against some of those criticisms, and at least is the onroad, to transparency into engagement about these really important topics. So I'll give you an example of what this looks like for me as a person who does ESG within Investment Management. So we have an ESG policy, that policy sets out how we operate. And what's important to us about ESG. And really importantly, it links the fact that we believe, good ESG management and good for stewardship is naturally aligned with good investment performance and good long term outcomes for our clients. This is the beauty of sustainable forestry and sustainable ag. Long term performance depends on good environmental quality, good social performance, and that's where it's closely linked to investment performance as well. So that's at the heart of our ESG policy. That policy then also talks about the ways that we implement that. So we refer to things like using for certification as a, as a tool to management system, and the foundation through which we're going to operationalize this. So in an investment management context, we want to make sure that we're putting ESG consistently in every step of the investment process. And that starts with pipeline where we start gathering and looking at potential deals and transactions, the way we look at ESG, there would be going, you know, what are the big ESG? risks? Is it a environmental threat, like a pest, or fire or storms? Is there a social threat, like it's an area that is just you know, not on board with forestry, because they've only seen bad forestry in the past and haven't had good neighbor relationships? Or maybe there's a land tenure question where you're operating? Or is there a governance risk that you're talking about buying into a company that just has poor controls, and might be engaging in bits of corruption, which has been, you know, historically, a thing that occurs and resource sectors, particularly in certain countries, you want to pick those things up early, when you're doing your evaluation of a deal. From there, you want to give that information to your investment committee, right? And say, we identified these risks. This is what we believe we could mitigate. This is what that would look like from an ESG perspective. And this might be the residual risk, like, that's still kind of an area where corruption tends to be a thing and say, licensing for forestry concession. So good to know about that let's the Investment Committee consider those factors and make a really well rounded informed decision. Once those say yeah, okay, transactions completed, you celebrate your deal, you get your plaque that goes then into asset management, right? So now you own this thing, and you need to operate it for good ESG. This is about setting some targets and benchmarks and saying, how are we going to get there. So let's take that certification again, as an example, saying, well, we want to get certified within two years of owning this asset. So that means that we're going to assess the ecologically sensitive ecosystems, we're going to do a wildlife assessment, we're going to check boundary issues with neighbors, and we're going to set up a management system that shows how we're putting this all together. So those are steps in an ESG process. Now if you're in one of those impact investments, you might also be layering some of those funniest initiatives in like, say, you're in an area where the fourth sector is kind of declining over time, and maybe stagnating and you want to help revitalize that, because you need a strong sector to have a thriving business. So you might say, I'm going to engage in some extension with nearby landowners to talk about tree planting on their properties. So that we make sure there's enough trees in this area, that these mills are going to stay open. So we've always got a market, that's a good win win social project where you're providing a good to local, say landowners who want to plant some trees and get some income. But you're also doing yourself a favor by safeguarding your market in a way. That's a good example of an impact opportunity in operation. But it also extends all the way through to the exit from an investment, where folks are increasingly saying, well hang on, I own this thing for 10 2025 years, and I made that forest more productive, healthier, I put all those management systems in that prove it out. We've got great neighbor relationships, everything's going wonderfully. It's the next person I sell this to and the next company, are they going to do the same thing. The folks are starting to think about what we'd call maybe the durability or the impact lock, and making sure that impact perpetuates. There's some mechanisms to do that both structurally and I would say you know, there's there's lawyers thinking heavily about those types of things. But there's also just pure benefits of once you get a forester farm, operating at its peak and responsibly, that's really self perpetuating in many ways. Hopefully, the markets rewarding it because you've got good relationships with Mills, who may want your certified product, or that's opening doors to more potential customers because you can offer a certified product and that can be really self perpetuating. So we think about those types of things, even when selling a property. Can those environmental goods we've been stewarding for 20 years be continued. Let's at least tell the new buyer about them and what's important about them managing them. So that's kind of an end to end investment process way of doing it. Another thing just to add in here that is helpful for thinking about ESG. And operational context is it's just about consistency. And this comes to that greenwashing again, you don't want to be cherry picking. So you don't want to be going, well gee, and Oregon I care about water because salmon are there. But and Atlanta, I'm just gonna read George, I'm just going to care about, you know, roadside buffers, and you know, the amenity value from the highway, you know, that would be kind of a little bit flitting from thing to thing. Having a consistent ESG lens is saying what's material to the type of investments we make. And that can be what financially material, what makes a difference to the bottom line, particularly if there was a risk there. And you could have periodic shocks to your revenue. But it also matters to what material to stakeholders, that includes clients, the investors, that includes employees includes the workers that are managing the forests on the ground, and includes the contractors who come in harvest trees, and it includes the communities who live near those forests, all the stakeholders who care about something different. And so we take into consideration what matters to stakeholders, when we're determining our materiality, that kind of gives us a set of topics that we know we want to manage consistently across our entire portfolio and making sure that that management is consistent in every step of the business process is really the heart of good credible. ESG.

Adam Dittman 46:32
Yeah, I'm really glad you brought that up. I mean, the consistency is one of the criticisms you hear the most I should say, inconsistency is one of the criticisms you hear the most and, and looking at it holistically. And having a consistent platform, I can see what you're saying. And you know, that's what makes it really sing true. So well, Mary Kate, I don't know how to thank you. This has been very illuminating for me. And this is a topic where I think you know, you might listen to 10 of these things or read 20 articles, and still might be kind of a mystery. But you've done a great job of demystifying that to a degree today. So I very much appreciate you coming in. Thank you for your time. It's been a real pleasure talking with you today.

MaryKate Bullen 47:12
Thanks, Adam. I think you and I could have this conversation 10 times and focus on 10 different things. forest land use the ag are they're really at the heart of so many pressing challenges and opportunities for the world. Climate change, biodiversity, resource scarcity, and even social inequality. So there's a lot of interesting conversations to be had around the nexus of forest land use and ESG. Now we're just encouraged people to start talking about them more. I think this is something that's going to be increasingly on the business agenda. And folks sometimes say ESG is non financial matters. I think their future financial matters, and really appreciate you having the conversation today.

Adam Dittman 47:48
Great. Thank you. Thank you for listening to the Deeply Rooted Podcast. To follow along and get additional insights from each episode, visit stoel.com. Please also take a moment to rate and subscribe to the podcast on Apple, Spotify, or wherever you listen to podcasts. The views expressed on this podcast are solely those of the individuals involved and may not reflect the views of Stoel Rives LLP. Participation in this podcast by any individual is not an endorsement of any view or opinion expressed. This is not legal advice and the podcast doesn't create a client attorney relationship.

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