The growth of ESG investing – which screens investments and firms based on environmental, social, and governance criteria – and markets for forest carbon and other environmental “services” highlight the importance of clear communication skills and the value of those who possess them.
Consider the situation for professionals in the timberland investment sector, a part of our research portfolio at Forisk. Timberland professionals grapple with the most effective and “context appropriate” ways to report investment performance and forest sustainability. How do we answer questions ranging from cash flows to wood flows to rates of return? Finance, investing, and forestry, come down to math.
Example: The Math of Finance and Forestry
Consider measures of forest sustainability versus investment performance. Investment returns often focus on percentages, which simplify comparisons across investments. However, percentages communicate differently than dollar amounts. Saying “you earned 5% last year” differs than saying “you earned $5,000 on your $100,000 investment.” They mean the same thing, but hearing dollar amounts clarifies the implications of how much wealth you gained.
The math of investments can, when reported as percentages, camouflage the dollar impact of fees, as well. Consider two descriptions of investment management fees:
“You will pay a 1% annual fee on this $1 million investment.”
“You will pay a $10,000 annual fee on this $1 million.”
The phrases describe identical fee structures differently. Do they sound or feel identical? The Securities and Exchange Commission (SEC) has, since 2004, accounted for this issue in shareholder reports and quarterly portfolio disclosures by requiring the reporting of fees in both percentage terms and in dollars per $1,000 invested.
The math of relative (percentage) measures versus absolute numbers applies to tree health and forest sustainability, which affects the reporting and communication of forest carbon investments and wood bioenergy projects. Saying that a timber market “has a growth-to-drain ratio of 1.1”, meaning growth exceeded removals by 10%, differs from saying “this market grows 1 million more tons than are harvested each year.”
Conclusion
A percentage, while informative, provides incomplete information. We can always estimate performance in percentage terms, while absolute values, whether in dollars or tons or board feet, communicate the cash, wood, or forests available today.