Foresight Sustain. - Annual Results
06/12/2023 07:00
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RNS Number : 7936V Foresight Sustain. Forestry Co PLC 06 December 2023
6 December 2023
Foresight Sustainable Forestry Company Plc
Annual Results for the year ended 30 September 2023
Foresight Sustainable Forestry Company Plc ("FSF" or the "Company"), an
investment company that invests in UK forestry and afforestation assets,
announces its audited annual results for the year ended 30 September 2023.
The Company also announces that its second Annual General Meeting ("AGM") will
be held on Wednesday 21 February 2024 at 1:00pm at the offices of Foresight
Group, The Shard, 32 London Bridge Street, London SE1 9SG. The Company has
published a circular convening the AGM (the "Circular").
The Company's Annual Report and Financial Statements for the year ended 31
December 2022 and the Circular will be posted to shareholders and in
accordance with Listing Rule 9.6.1 copies of the documents have been submitted
to the UK Listing Authority and will shortly be available to view on the
Company's corporate website at https://fsfc.foresightgroup.eu/ and from the
National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Performance Highlights in the year to 30 September 2023
· As at 30 September 2023, the Company's portfolio encompassed
12,545 hectares of land and comprised 38 afforestation properties, 25 forestry
properties and five mixed (forestry and afforestation) properties.
· Acquisition of 18 properties in the year, increasing the
portfolio's afforestation allocation to 45% (by value).
· Approximately 950,000 trees were planted at four afforestation
schemes during the year. The Company has now successfully completed six
planting schemes since IPO with the value of these properties increasing by
85% versus acquisition costs¹, based on their carrying value of £18.9
million as at 30 September 2023.
· These four planted afforestation schemes and strong carbon credit
pricing growth over the period resulted in the value ascribed towards creation
of carbon credits increasing to £2.7 million in total, representing an
increase of 3.5 times over the year. Once the current afforestation schemes
have been planted, the Company is targeting to have 1.0 - 1.2 million Pending
Issuance Units validated by the Woodland Carbon Code in aggregate across the
whole portfolio.
· Strong afforestation development programme of 37 additional
afforestation schemes that the Company expects to plant over the next two
financial years and bring the total trees planted since IPO to 9 million.
FSF's current afforestation portfolio, once fully planted, is equivalent to
over one third of the total area planted across the UK in the year to 31 March
2023.
· The Company expects an additional c.2,700 hectares of its
afforestation development portfolio to have completed planting by the next
valuation cycle. The recent status of the portfolio is set out in the appendix
of this RNS with progress being made on a daily basis in this busy part of the
planting season.
· During the year, the Company's portfolio sequestered 35,081 tCO2e
increasing the total to 63,954 tCO(2)e since IPO.
Key Metrics
30 September 2023 30 September 2022
Portfolio Value £174.9 million £144.8 million
Portfolio (Hectares) 12,545 9,618
Net Asset Value ("NAV") £169.2 million £180.6 million
NAV per share 98.4 pence 105.0 pence
Annual NAV return (6.3%) 7.0%
NAV per share decreased to 98.4 pence, a total NAV reduction of 6.3% for the
year. The key driver of the reduction in NAV per share has been the decline in
land values, which was impacted by a significant reduction of comparable
transactions observed by FSF's independent valuer in the nine months to 30
September 2023. Observed comparable transactions from 1 January 2023 to 30
September 2023 comprise 12% of the annual average value of forestry properties
sold in calendar year 2021 and 2022, respectively.
Results presentation
The Company will host a virtual SparkLive presentation at 9:30 a.m. (UK time)
on Wednesday, 13 December 2023. To register your interest in attending the
presentation, please register at:
https://www.lsegissuerservices.com/spark/FORESIGHTSUSTAINABLEFORESTRYCOMPANY/events/2faac27f-fed3-4f36-a70e-0c5c742e587e
(https://www.lsegissuerservices.com/spark/FORESIGHTSUSTAINABLEFORESTRYCOMPANY/events/2faac27f-fed3-4f36-a70e-0c5c742e587e)
¹ Acquisition costs = consideration paid to Seller + transaction taxes + due
diligence costs + adviser fees
Richard Davidson, Chair of Foresight Sustainable Forestry Company Plc,
commented:
"FSF's two-year journey since IPO has been full of positive milestones and I
am pleased that the Company ends the year in a position to deliver a
nationally significant afforestation programme. Whilst acknowledging the
challenging wider market conditions, FSF is investing for the long-term and
delivering on the strategy set out to shareholders."
For further information, please contact:
Foresight Sustainable Forestry Company Plc +44 (0) 20 3667 8100
Robert Guest
Richard Kelly
fsfc@foresightgroup.eu
Stifel Nicolaus Europe Limited +44 (0)20 7710 7600
Edward Gibson-Watt
Bruno Benega
Rajpal Padam
Catriona Neville
SEC Newgate +44 (0)20 3757 6882
Elisabeth Cowell fsf@secnewgate.co.uk
Alice Cho
Harry Handyside
About the Company
Foresight Sustainable Forestry Company Plc ("the Company") is an externally
managed investment company investing in a diversified portfolio of UK forestry
and afforestation assets. Targeting a net total return of more than CPI +5%
per annum on a rolling five-year basis, the Company provides investors with
the opportunity for real returns and capital appreciation driven by the
prevailing global imbalance between supply and demand for timber; the
inflation-protection qualities of UK land freeholds; and biological tree
growth of 3% to 4% not correlated to financial markets. It also offers
outstanding sustainability and ESG attributes and access to carbon units
related to carbon sequestration from new afforestation planting. The Company
targets value creation as the afforestation projects successfully achieve
development milestones in the process of converting open ground into
established commercial forest and woodland areas. The Company is seeking to
make a direct contribution in the fight against climate change through
forestry and afforestation carbon sequestration initiatives and to preserve
and proactively enhance natural capital and biodiversity across its portfolio.
It is managed by Foresight Group LLP.
This announcement does not constitute, and may not be construed as, an offer
to sell or an invitation to purchase investments of any description, or the
provision of investment advice by any party. No information set out in this
announcement is intended to form the basis of any contract of sale, investment
decision or any decision to purchase securities in the Company.
This announcement may include statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "anticipates", "expects", "intends", "may", "will",
"targeting" or "should" or, in each case, their negative or other variations
or comparable terminology. All statements other than statements of historical
facts included in this announcement, including, without limitation, those
regarding the Company's financial position, strategy, plans, proposed
acquisitions and objectives, are forward-looking statements.
Appendix
A. Portfolio Breakdown as at 30 September 2023 unless otherwise stated
(all figures in hectares)
Asset classification Forest Area¹ Other land² Total Forest Area at 17 November 2023
Development Stage Afforestation Assets 4,446 721 5,167 4,226
Planting Stage Afforestation Assets 93 - 93 373
Establishment Stage Afforestation Assets 937 98 1,035 937
Established Forestry Assets 5,184 1,067 6,251 5,184
Total 10,660 1,886 12,545 10,720
¹ Includes commercial stocked/stockable; broadleaf stocked/stockable;
designed open ground; natural forest/woodland regeneration zones; and other
land considered part of the forest area.
² Includes areas of land that sit outside the forest area; this includes, but
is not limited to, land leased for grazing; regenerative grazing land;
peatland/wetland; hill ground; non-core land considered for disposal; non-core
land not considered for disposal; house/farm curtilage.
Definitions:
Development Stage Afforestation Assets - Land prior to the securing of
planning permission and grant application.
Planting Stage Afforestation Assets - Planning permission and grant
application completed but initial planting of trees not yet completed.
Establishment Stage Afforestation Assets - Initial planting of site completed
but trees establishing and stabilising (typically a 3-5 year period).
Established Forest Assets - Trees stabilised and established.
Foresight Sustainable Forestry Company Plc
FOR THE YEAR ENDED 30 SEPTEMBER 2023
ABOUT US
Committed to long term value creation
Foresight Sustainable Forestry Company Plc ("FSF") is the first and only UK
listed investment trust focused on UK forestry, afforestation and natural
capital. FSF was awarded the London Stock Exchange's Green Economy Mark at
IPO.
In December 2022, FSF became the first fund to be accredited with the London
Stock Exchange's Voluntary Carbon Market designation.
HIGHLIGHTS
AS AT 30 SEPTEMBER 2023
£169.2 million 98.4p
NET ASSET VALUD ("NAV")(1) NAV PER SHARE(1)
(30 September 2022: £180.6m) (30 September 2022: 105.0p)
0.3% 12,545 hectares
TOTAL NAV RETURN FROM IPO(1) IN THE PORTFOLIO
(30 September 2022: 7.0%)(2) (30 September 2022: 9,618 hectares)
118,000 tonnes c.1.4 million
TIMBER ANTICIPATED TO BE HARVESTED IN TOTAL TREES PLANTED SINCE IPO
2024 PROGRAMME
(30 September 2022: c.26,000 tonnes)
6,455 hectares £2.7 million
LAND NEWLY PLANTED OR IN AFFORESTATION DEVELOPMENT VALUE ASCRIBED TOWARDS CREATION OF CARBON CREDITS(4)
(30 September 2022: 3,917 hectares(3)) (30 September 2022: £0.6m)
1. Alternative performance measures ("APMs") have been included to
better reflect the Group's underlying activities. Whilst appreciating that
APMs are not considered to be a substitute for, or superior to, IFRS measures,
the Company believes their selected use may provide stakeholders with
additional information, which will assist in their understanding of the
business. Further information is available on page 50.
2. Calculated with IPO costs netted off, see page 50 for more
information.
3. Total land in afforestation development. FSF's categorisations
have since changed.
4. To facilitate the flow of capital to climate change mitigation
projects and provide our investors with exposure to high-integrity and
independently verified carbon credits that can be used for science-based
carbon offsetting.
INVESTMENT CASE
The Company is targeting attractive total returns through investment in
sustainably managed commercial forestry and afforestation assets
The Company invests in a portfolio of UK afforestation (woodland creation) and
forestry assets to increase the UK's sustainable timber supply. The Company
targets the generation of attractive risk-adjusted total returns through land
capital appreciation, sustainable timber and carbon credits sales.
The Company's newly planted trees additionally and permanently remove carbon
dioxide from the atmosphere, making a direct contribution to the fight against
climate change. Additionally, the Company has a stated objective to protect
and enhance biodiversity across its portfolio. Read more about the Company's
business model on page 4.
Growing real assets Attractive asset class Portfolio diversification Inflation protection Fight against climate change
Trees continue to grow and appreciate in value regardless of macroeconomic UK commercial forestry hashistorically outperformed the Consumer Price Index UK forestry is uncorrelated to traditional and alternative assets (including Underpinned by a global shortage of sustainable timber, amplified in the UK as The Company will make a direct contribution to the twin fights against climate
conditions. ("CPI") on a long‑term basis. Until FSF, it has had high barriers to UK power prices) underpinned by biological tree growth which occurs regardless on of Europe's least forested countries. change and biodiversity loss.
entry. of the economic cycle.
36 First UK-listed investment trust focused on natural capital Uncorrelated to equities and bonds UK commercial forestry has strong inflation- 63,954
sites with development phase afforestation projects, covering 4,503 protection characteristics over the long term tCO(2)e carbon sequestered by the portfolio since IPO
hectares(1)
c.1.4m 98.5% 12,545 hectares managed CPI +5% 843
trees planted increase in the value of six afforestation properties developed(1) target per annum over a rolling five-year basis hectares in the portfolio which is long-term, mixed broadleaf woodland
Statistics as at 30 September 2023.
BUSINESS MODEL
What we do
The Company seeks to generate an attractive total return for Shareholders over
the longer term, comprising capital growth and aperiodic dividends. FSF
targets impact through investing in sustainably managed afforestation and
forestry assets. The Company makes a direct contribution to the fight against
climate change and biodiversity loss through forestry and afforestation carbon
sequestration initiatives.
NON-CORE <10%
Non-core assets comprise property and other assets which are not suitable for
forestry activities
a) Hold, manage and optimise, integrating with core assets,
or;
b) Dispose and recycle capital into core assets
Outputs: Jobs, education, recreation, eco-tourism, renewable energy.
How we do it
AFFORESTATION
<50%
Development returns and cash flow generation
c) Acquire suitable land
d) Secure permits and grants
e) Plant and establish trees
f) Sell established afforestation properties c.5-10 years after
acquisition
g) Recycle capital into new project
Outputs
h) Community initiatives
i) Natural capital services(1)
j) Voluntary carbon credits
1. Examples include, but are not limited to, atmospheric carbon
sequestration, flood prevention and air purification.
ESTABLISHED FORESTRY
>40%
Stable returns and cash flow generation
k) Buy and hold established forests
l) Manage the forests on a rotational basis for timber revenues
m) Improve forests through continual re-design, investment and proactive
management
n) Continuous re-stocking and replenishment
Outputs
o) Sustainable UK timber supply
p) Forestry skills training
q) Social and recreational services
UNDERPINNED BY
Risk management
Read more about risk management on pages 39 to 45.
Strong governance
Read more about governance on pages 51 to 79.
Our Fund objectives
Real returns and capital appreciation
Sustainable timber supply
Access to voluntary carbon credits
Value creation through afforestation
Combat climate change and biodiversity loss
GEOGRAPHIC FOOTPRINT
A diverse portfolio of UK forestry and afforestation asset
68
properties
Property types
25
Forestry
38
Afforestation
5
Mixed
Geographic split by area
85%
Scotland
5%
England
10%
Wales
Fordie Estate
Located in Perthshire, Scotland, Fordie is a 2,155-hectare mixed property and
is the largest within the Company's portfolio, acquired in August 2021. Read
more about our recent investor site visit at Fordie on page 15.
Whiteburn
Located in Northumberland, England, this 485-hectare property is the largest
forestry asset within the portfolio. Acquired in June 2020.
Lambs Craig
Located in Dumfries & Galloway, Scotland, this property is a 482-hectare
Development Stage Afforestation property. Acquired in November 2022, the
property has a high proportion of land suitable for planting and is expected
to form part of the 2024/25 planting programme.
For more information see pages 24 to 32
CHAIR'S STATEMENT
Richard Davidson
Chair
£38.4m
deployed into 18 properties
1.4m
trees planted (since inception)
35,081 tCO(2)e
sequestration
For year ended 30 September 2023 unless otherwise stated
Chair's statement
On behalf of the Board, I am pleased to present the Company's audited Annual
Report and Financial Statements for the year ended 30 September 2023. FSF's
two-year journey since IPO has been full of positive milestones and I am
pleased that the Company has weathered a challenging period while building our
forestry and afforestation portfolio and establishing FSF as a genuine pioneer
in the sustainable investment space.
During the year, financial markets have grappled with issues ranging from
inflation and higher interest rates to uncertainty and widening discounts in
the investment trust sector. Against this backdrop, we have seen volatility in
our share price and Net Asset Value ("NAV") as described below in this
statement but we have continued to invest in our portfolio, plant trees,
harvest sustainable timber and sequester carbon.
I would like to take this opportunity to reiterate the goals of FSF. Forestry
is a long-term business where cycles are measured in decades rather than
quarters.
Our purpose is to generate financial returns for our Shareholders through
investing in a diversified portfolio of UK afforestation and forestry
properties. Operating across the UK, our actions are guided by our commitment
to long-term value creation and sustainability.
Over our 2022/23 year, FSF has added 18 new properties to its portfolio, a
total of 2,929 hectares. Our current planting pipeline is material in a
national context and is equivalent, once planted, to one-third of the total
amount of tree planting that the entire UK achieved in the year to March 2023.
We have already acquired six sites which are due for planting in 2025 adding
to our material 2023 and 2024 planting plans.
Despite market volatility, FSF invests for the long term. However, the Board
is currently acutely aware that the Company's shares have fallen and moved to
a discount to NAV over the last six months. The share price move during the
period aligns with the broader pattern in the real assets investment trust
sector, which has shown a notable sensitivity to higher interest rates.
Our share price, at the time of writing, stands at a low since our IPO of 59.8
pence. Having traded in a 100‑110 pence range for most of the year, our
stock moved down sharply from June onwards (despite a positive first half NAV
announcement) as the dam burst on many investment trust share prices,
especially real assets.
The share price is, of course, not controlled by the Board and over the long
term we believe it will return to levels that reflect the development of the
Company's NAV and the Company's outlook and prospects more generally in its
core markets of land, natural capital, timber and voluntary carbon.
Accordingly, in the current environment, I would like to emphasise a few
points:
· FSF is unique as the only UK forestry vehicle listed on the
London Stock Exchange. The listed structure introduces a level of
transparency, liquidity and accessibility that was previously unavailable in
the forestry sector.
· FSF's properties are all located in the UK and the products from
our forests will be almost entirely used in the UK.
· FSF has, and intends to stay at, very limited levels of gearing
(currently 5.8% of Gross Asset Value ("GAV")).
· Our acquisition policy is long term and our afforestation land
due for planting in 2024 and 2025 has already been acquired.
· We are fully invested but will manage our portfolio
if opportunistic and accretive situations arose including to sell properties
to employ capital to maximise Shareholder returns.
FSF is invested for the long term and doing what it set out to do at IPO.
Highlights of the year
Our 2022/23 financial year has been the clichéd game of two halves. In the
six months to 31 March 2023, we delivered a NAV gain of 3.3%, particularly
helped by completion of planting at four afforestation properties and an
upward revaluation (by Savills, our independent valuer) to our planting land
portfolio. The second half to 30 September 2023 saw a downwards move in our
NAV by 9.3% as the number of transactions in, and prices for, forestry and
planting land slowed significantly.
The combination of these different environments means that in the full year to
30 September 2023, the Company generated a total NAV loss of 6.3% (30
September 2022: +7.0%) and a NAV decrease of £11.4 million to
£169.2 million (30 September 2022: £180.6 million).
NAV per Ordinary Share fell to 98.4 pence (30 September 2022: 105.0 pence).
Within this overall NAV number I would highlight the split between the
progression of valuations in established forestry and our planting portfolio.
Whilst afforestation values (excluding carbon) decreased by 11.2% during the
year, established forestry values were relatively resilient, decreasing by a
lesser figure of 6.5%, which means the opportunity for FSF to secure
development value through a disciplined purchasing strategy has actually
improved. The combination of increasing inflation and interest rates along
with the phased withdrawal of the Basic Payment Scheme ("BPS"), the main
farming subsidy regime, has led to a weakening of the planting land investment
market over the last six months.
The Company has continued to acquire afforestation land during the period to
take advantage of the softer land prices.
Furthermore, voluntary carbon is becoming an increasingly material part of
FSF's NAV, increasing by £2.1 million to £2.7 million during the year. Our
intention is to retain the carbon credits that we generate as a long‑term
source of future income and/or potentially distribute them to those
Shareholders who elect to receive them in-specie.
Since the last Annual Report, the Company has deployed a further c.£38.4(1)
million into 18 properties, mainly in Scotland. Of the properties acquired, 15
have afforestation potential and the remainder are established forestry. In
many cases, properties are acquired with some assets that we regard as
non-core, such as farm buildings. In the period, five sales of non-core assets
took place. A full description of our investment activity is provided in the
Investment Manager's report.
1. Inclusive of tax and transaction costs
Revolving Credit Facility
As our equity funds were fully invested by the spring of 2023, the final
acquisitions to complete our 2025 planting portfolio have been funded through
the utilisation of the Company's £30 million Revolving Credit Facility
("RCF") which is now £10.4 million drawn. The current acquisition programme
is now substantially complete and servicing/repayment of the RCF will be made
through a combination of timber harvesting and the planned disposal of
non-core or other assets.
Portfolio and operations
It has remained a busy and productive period for operations across the
portfolio. I am pleased to report that within the year we planted 472 hectares
across four properties. This has brought the total area of the portfolio
categorised as Establishment Stage Afforestation to 1,024 hectares, with c.1.4
million trees planted since FSF's inception.
Furthermore, we are currently gearing up for the 2024/2025 planting seasons,
in which we plan to deliver a total of 9 million trees planted over an area
of c.4,000 hectares. The planting programme is expected to create 1.0-1.2
million voluntary carbon credits.
Despite significant government targets for tree planting in the nations of the
UK, delivery has fallen short with only 12,960 hectares of new woodland
created in 2022/23. Disappointingly, UK planting actually decreased by 7%
year-on-year and the combined nations' target was missed by approximately
17,000 hectares. FSF is committed to narrowing this gap and our planting
programme will be one of the largest, if not the largest, planting operations
across the UK in 2024.
Sustainability and community
As a sustainable investing leader we have watched the emergence of concerns
around greenwashing. The travails of those companies who have over‑inflated
their environmental, social and governance ("ESG") credentials has cast a
wider shadow over many other companies, good and bad. By investing in and
growing trees, FSF is dedicated to actions that make a positive environmental
outcome, and offers a transparent and leading approach to sustainability.
Last year, we published our first Sustainability and ESG ("S&ESG") report,
which introduced our three key S&ESG objectives and outlined our positive
progress against them and many of our KPIs. Notably, the Company's growing
portfolio achieved 35,081 tCO(2)e sequestration from the atmosphere over the
period (30 September 2022: 28,873 tCO(2)e).
Our 2024 planting programme is expected to create around 700 rural jobs and we
have now rolled out our Forestry Skills Training programme from Wales into
Scotland.
Annual General Meeting
All Shareholders are invited to attend the Company's second Annual General
Meeting ("AGM") on 21 February 2024. Details of how Shareholders may
participate will be published in the circular accompanying this report, dated
6 December 2023.
Afforestation development is the engine room of the Company's returns and
sustainable impact. Our investment policy allows FSF to invest up to 50% of
Gross Asset Value into afforestation land and projects. The Board would like
to increase the Company's flexibility to invest in new afforestation assets
whilst keeping aggregate exposure to development risk within the agreed
tolerable threshold.
To make this possible, a proposed amendment to the Company's investment policy
will be put to the AGM, such that planted and establishing afforestation
schemes are changed from being considered afforestation assets to being
considered forestry assets for the purposes of our investment policy.
The change, which acknowledges that afforestation assets become materially
de-risked once planting has been achieved, will enable the Company to pursue a
fuller rolling programme of afforestation development, and the associated
returns and positive impact this affords.
I would like to point Shareholders towards the regulatory news service ("RNS")
announcement that will be released at the same time as this Annual Report and
Financial Statements which will provide details of the AGM resolutions,
including the proposed amendment to the investment policy and an accompanying
Circular which provides the rationale for the proposed adjustment.
Summary
I would like to thank the Fund Managers, advisers, Shareholders and other
members of the Board for contributing to another very busy year. The Board is
very aware of the disconnect between our share price and NAV and has been
discussing with Shareholders and advisers the potential to close this gap
within our commitment to long-term value creation. As Shareholders you should
be reassured that no matter what happens to the stock market or the base rate
each year, your trees will have grown.
Richard Davidson
Chair
6 December 2023
THE INVESTMENT MANAGER
FSF is managed by Foresight Group LLP ("Foresight", "Foresight Group" or
"Investment Manager"), an experienced team of investment, forestry and asset
management professionals that can draw on the depth and breadth of Foresight
Group's networks and resources, managing the day-to-day activities.
Foresight Group
Foresight Group was founded in 1984 and is a leading listed infrastructure and
private equity investment manager. With a long-established focus on ESG and
sustainability-led strategies, it aims to provide attractive returns to its
institutional and private investors from hard‑to-access private markets.
Foresight manages over 400 infrastructure assets with a focus on solar and
onshore wind assets, bioenergy and waste, as well as renewable energy enabling
projects, energy efficiency management solutions, social and core
infrastructure projects and sustainable forestry assets. Foresight operates in
eight countries across Europe, Australia and the United States with AUM of
£12.1 billion(1). Foresight Group Holdings Limited listed on the Main Market
of the London Stock Exchange in February 2021 and is a constituent of the FTSE
250 index.
¹ Based on unaudited AUM as at 30 September 2023.
Our specialist forestry advisers
EJD Forestry Limited ("EJDF")
· 80+ years of combined experience in forestry and silviculture.
· Five full-time equivalent forestry professionals dedicated to the
FSF portfolio.
Fund management
Robert Guest
Co-Lead, Foresight Sustainable Forestry Company
· Joined in 2015
· 16 years of experience
· Previously Helius Energy PLC
Richard Kelly
Co-Lead, Foresight Sustainable Forestry Company
· Joined in 2015
· 16 years of experience
· Previously Accenture
Portfolio and investment team
Julian Elsworth
Portfolio Director
· Joined in 2013
· 20+ years of experience including 4+ years of forestry experience
· Previously WSP Future Energy
Helge Hansen
Forestry Portfolio Manager
· Joined in 2023
· 10+ years of forestry experience
· Previously Head of Woodlands, Highlands Rewilding
Murray Aitchison
Forestry Portfolio Associate
· Joined in 2020
· 4+ years of forestry experience
Christian Tingsgaard Lassen
Investment Analyst
· Joined in 2022
· 3+ years of experience
· Previously PwC
KEY PERFORMANCE INDICATORS
Fund objectives
Real returns and capital appreciation
To invest funds to provide sustainable, risk-adjusted financial returns to our
investors.
Sustainable timber supply
To deliver and increase the supply of home‑grown UK timber to reduce the
country's reliance on imports, blending the commercial aspects of forestry
(planting, harvesting and the sale of sustainable timber).
Value creation through afforestation
To demonstrate the capital appreciation of afforestation sites once
development milestones are met, through carefully considered portfolio
construction and management of afforestation development schemes.
Access to voluntary carbon credits
To facilitate the flow of capital to climate change mitigation projects and
provide our investors with exposure to high-integrity and independently
verified carbon credits that can be used for science-based
carbon offsetting.
Combat climate change and biodiversity loss
To mobilise our investors' capital into projects that play a key role in
tackling climate change, protecting the natural environment and delivering
positive impacts for communities and society.
NAV/NAV per share Performance in 2022/23 Objectives for 2023/24 Principal risks
NAV and NAV per share declined in the 12-month period by 6.3%. · NAV growth targeted by developing many of the development stage Valuation risks (see risk 5 in the principal risk register on page 43).
properties to become planted properties with a higher valuation and creation
£169.2m/98.4p of associated carbon credits. Changes in regulation or support for sustainable forestry.
(2022: £180.6m / 105.0p) · The Company is targeting a NAV total return of more than CPI + 5%
per annum on a rolling five-year basis, based on NAV once the Company is
substantially invested. See the business model on page 4 for more information.
Hectares in the portfolio Performance in 2022/23 Objectives for 2023/24 Principal risks
12,545 · The number of hectares in the portfolio has increased by 30% · Disposal of some non-core assets and re-allocation within the · Lack of future funding impacts the Company's ability to purchase
since September 2022. core portfolio to maximise the afforestation development opportunity. Grow more land (see risk 4 - equity in the principal risk register on page 43).
(2022: 9,618)
portfolio if equity market conditions enable fundraising.
· Fully deploying the equity proceeds from the Company's June 2022
fundraise ahead of schedule.
· Drawing £10.4 million of the Company's Revolving Credit Facility
to fund three opportunistic acquisitions.
Tonnes of timber in annual harvesting programme Performance in 2022/23 Objectives for 2023/24 Principal risks
c.118,000 · Softening of timber prices seen since the end of 2022. · Selective harvesting in 2024 where it results in NAV accretion or · See risk 7 - demand for timber in the principal risk register on
there is a good silvicultural reason to pursue the harvesting or to provide pages 44.
(2022: c.26,000) · Ongoing harvesting at five sites. cash flow to the Company.
· The risk that a reduction in demand from the purchasers of timber
· Harvesting at several of the highest yielding sites has been would negatively impact the Company's profitability. See risk 7 in the
postponed until timber prices are considered to have returned to a premium. principal risk register on page 44.
Total hectares of land in afforestation development Performance in 2022/23 Objectives for 2023/24 Principal risks
6,455 · Focus on increasing FSF's exposure to afforestation assets over · Afforestation development will remain a focus for the Company as · The risk that there is resistance to change of land use from the
the year. a driver of higher valuation and creation of associated carbon credits. public, see risk 9 - reputational in the principal risk register on page
(2022: 3,917)
45.
· Overall percentage of the portfolio dedicated to afforestation
has risen from 40% to 45% (by value).
Trees planted in the year Performance in 2022/23 Objectives for 2023/24 Principal risks
c.950,000 · c.1.4 million trees planted since FSF's Targeting planting 9 million trees over an area of c.4,000 hectares during the · Risk that extreme weather events impact trees planted in the
inception. 2024 and 2025 planting seasons. year.
(2022: c.514,000)
Value ascribed to progress towards creation of carbon credits Performance in 2022/23 Objectives for 2023/24 Principal risks
£2.7m · In the period, four afforestation schemes completed planting and · Targeting to create 1.0-1.2 million PIU carbon credits that are · The risk that demand or volume leads to a reduction in demand
FSF has recognised an additional £2.1 million of value ascribed to the associated with the completion of the planting of 9 million trees over the from the users of carbon credits, see risk 6 - demand for carbon credits in
(2022: £0.6m) creation of carbon credits. 2024 and 2025 planting seasons. the principal risk register on page 44.
STAKEHOLDER ENGAGEMENT (SECTION 172)
The Board is committed to promoting the long-term sustainable success of the
Company whilst conducting business in a fair, ethical and transparent manner
Section 172
The Directors consider that in conducting the business of the Company over the
course of the year they have complied with Section 172(1) of the Companies Act
2006 (the "Act") by fulfilling their duty to promote the success of the
Company and to act in the way they consider, in good faith, would be most
likely to promote the success of the Company for the benefit of the members as
a whole, whilst also considering the broad range of stakeholders who interact
with and are impacted by the Company's business, especially with regard to
major decisions.
The purpose of the Company is to act as an investment company to provide
financial returns to its Shareholders taking a long-term view. Investment
companies are generally active in the long term and are typically externally
managed, have no employees and are overseen by an independent board of
Non-Executive Directors. The role of the Investment Manager is particularly
important in engaging with stakeholders on behalf of the Company and reporting
on developments to the Board and relationships with all service providers are
considered in detail at the annual Management Engagement Committee meeting.
a) Long-term decisions
b) Interests of employees
c) Fostering relationships with suppliers, customers and others
d) Acting fairly between Company members
e) Impact on the community and environment
f) Maintaining high standards of business conduct
Role of the Board
The Board recognises that the Company should be run for the benefit of
Shareholders, but that the success of a business is dependent on maintaining
relationships with stakeholders and considering the external impact of the
Company's activities. The Board, with the assistance of the Management
Engagement Committee, works closely with the Investment Manager and the
Company Secretary in reviewing how stakeholder issues are handled, ensuring
good governance and responsibility in managing the Company's affairs, as well
as openness in how these are conducted. Through measures such as these the
Board embeds a strong culture of governance.
As the Company is externally managed and has no employees, the Board considers
the key stakeholders to be Shareholders, local communities closely linked to
the portfolio, service providers and lenders, and agents of the Company
including the Investment Manager. The Board is acutely aware of its
responsibilities to all the stakeholders in the Company and has considered:
· The likely consequences of any decision in the long term
· The need to foster and retain the Company's business
relationships with suppliers, customers and others
· The impact of the Company's operations on the community and the
wider environment in which it operates
· The importance of the Company maintaining a reputation for high
standards of business conduct
· The need to act fairly towards, and ensure equal treatment of
Shareholders
Engagement with Shareholders
Shareholders are the Company's primary stakeholders, and all key Board
decisions are carefully considered with their long-term interests in mind. As
a public company listed on the LSE, the Company is subject to the Listing
Rules and the Disclosure Guidance and Transparency Rules. The Listing Rules
include a principle that a listed company must ensure that it treats all
holders of the same class of shares that are in the same position equally in
respect of the rights attached to such shares. With the assistance of regular
discussions with, and formal advice from, the Company's legal adviser, Company
Secretary and corporate broker, the Board is kept appraised of developments in
corporate governance guidance, reporting standards and other non-statutory
provisions and does its best to comply or explain why it does not comply.
The Investment Manager has developed relationships with key Shareholders and
prospective investors. During the year, the Investment Manager and the
Company's broker held multiple direct engagement sessions with major
Shareholders and prospective investors. The Chair has also met with several
Shareholders alongside the Investment Manager. During discussions,
Shareholders often ask for additional information pertaining to certain
aspects of the Company, such as the factors influencing the Company's NAV, as
well as the methodology implemented in calculating it. There has also been
interest from Shareholders in visiting sites within the portfolio.
Over the course of the year the Company has hosted several investor site
visits and will continue to expand this programme in 2024 (please see full
annual report on the website for more details).
The Company, supported by its Investment Manager, communicates with
Shareholders through a variety of means and always welcomes their views. This
includes the publication of interim and annual accounts, the AGM and
regulatory news and bi-annual NAV updates, all published on the Company's
website. The Board encourages Shareholders to vote on the resolutions to be
proposed at the AGM to be held on 21 February 2024. Investors holding shares
through platforms should contact their investment platform directly for
guidance on how to cast their vote. An increase in the number of investors who
exercise their right to vote will help the Company reflect the views of its
Shareholder base.
Engagement with the Investment Manager
The Investment Manager is responsible for the implementation of the investment
strategy and the day-to-day investment and management decisions, including
identifying assets for acquisition. The Board engages constructively with the
Investment Manager to ensure the expectations of Shareholders are being met
and that it is aware of the challenges being faced, including meeting the
long-term objectives for the Company's growth. This ensures that the Company
and the Investment Manager have aligned interests to safeguard the Company's
position and to try and ensure the future success of the Company.
The Board regularly reviews the Company's performance against its investment
objectives and undertakes an annual strategy review meeting to ensure that the
Company is well positioned for the future delivery of its objectives for its
Shareholders.
The Board receives presentations from the Investment Manager at every Board
meeting to help it to exercise effective oversight of the Company's strategy
and the performance of the Investment Manager. The Board, through the
Management Engagement Committee, reviews formally the performance of the
Investment Manager at least annually.
Engagement with lenders
The Company has a Revolving Credit Facility with Virgin Money (formerly
Clydesdale Bank Plc). This facility is subject to covenants and lender consent
may be required on certain business decisions. The Investment Manager is in
regular contact with Virgin Money to keep it appraised of ongoing portfolio
matters and general market updates so that they have a full understanding of
the Company and how it is performing.
Engagement with key service providers
The Board seeks to maintain constructive relationships with the Company's
service providers, which include its corporate broker, legal adviser and its
Public Relations agency. This occurs either directly or through the Investment
Manager, with regular communications and meetings. The Management Engagement
Committee conducts an annual review of the performance and terms and
conditions of the Company's main service providers to ensure that they are
performing their responsibilities in line with Board expectations and
providing value for money.
Engagement with local communities
The Board has placed Sustainability and ESG factors at the heart of its
investment objectives to guide the way it operates. The Company's proactive
approach to community engagement is applied across the Company's afforestation
projects as well as its established forestry and woodland assets. A case study
is provided on page 16 that provides further details. Aiming to maximise the
Company's societal impact, in partnership with Tilhill Forestry Limited, the
Company launched a Forestry Skills Training Programme in Wales last year.
Expanding its scope to Scotland in 2023, and likely England in the future,
this initiative equips local rural communities with essential skills,
qualifications and opportunities for employment within the forestry sector,
aligning with the Company's commitment to both community development and
sustainable practices underpinning afforestation-related land use change.
Completing participants are also offered paid work on the Company's
afforestation and forestry properties.
Environmental stewardship
In response to the AIC's call for ESG disclosures, the Company shared its
strategy on the AIC website in 2021. Notably, receiving the LSE's Green
Economy Mark at IPO affirmed the Company's dedication to environmental and
climate-related objectives. More details on the Company's approach and impact
are provided in the S&ESG section of this report on pages 33 to 36.
FSF's LSE Green Economy Mark and Voluntary Carbon Market designations
recognise the ongoing environmental stewardship role that FSF has and
continues to contribute towards positive environmental objectives including,
but not limited to, contributions to mitigating climate change and
biodiversity loss.
CASE STUDY
STAKEHOLDER ENGAGEMENT IN ACTION
FSF hosted its second Investor Day at Fordie Estate in Scotland on 20
September 2023, following a successful event in April 2023. This Investor Day
offered Shareholders a comprehensive insight into the Company's forestry and
natural capital initiatives. Spanning 2,150 hectares, the mixed afforestation
and forestry property at Fordie Estate, a significant asset in FSF's
portfolio, served as a showcase of the Company's diverse business model.
Located near Comrie, Scotland, Fordie Estate features various habitats and
land uses, supporting diverse ecosystems, biodiversity, socio-economic
contributions and commercial timber production.
The event provided attendees with a deeper understanding of FSF's role in
promoting sustainable land management.
Investors interacted with key members of the Foresight management team, the
Fordie Estate team, and advisory personnel, exchanging perspectives on the
Company's practices. This event highlighted FSF's commitment to environmental
stewardship and responsible forestry.
Join us for our next investor site visit. Follow this link or visit our
website to find out more.
https://www.eventbrite.co.uk/e/foresight-sustainable-forestry-company-plc-investor-day-2024-tickets-744438925867?aff=oddtdtcreator
Industry Engagement
Date Event Fund Lead
2-Nov NCIA Policy, Industry and Governance Workstream Richard Kelly
10-Nov Designing the Future - Developing the market for woodland Carbon in the UK Robert Guest
10-Nov AIC Event Robert Guest
17-Nov Nature of Scotland Awards Robert Guest
22-Nov The UK Forest Richard Kelly,
Market Report Robert Guest
05-Dec LSE VCM Launch and Market Open Robert Guest and Richard Kelly
17-Mar LSE Annual Funds Conference Robert Guest
16-17 May Foresight Sustainability Forum Josephine Bush (S&ESG Committee Chair), Robert Guest
20-23 June Royal Highland Show Robert Guest
26-Sep UK Investor Virtual Conference Richard Kelly
02-Oct UUET Agreement and meeting Robert Guest
03-Oct Carbon Credits Demystified - Stifel Richard Kelly
03-Oct Fordie Site Visit Robert Guest
19-Oct VCM Market Infrastructure Roundtable Richard Kelly
CASE STUDY
COMMUNITY ENGAGEMENT
Community engagement has been a key focus of the period with the continual
development of the afforestation pipeline.
Initiatives and outcomes in 2023
Townhall meetings
A townhall meeting either has or will be held for each of FSF's woodland
creation schemes, giving local residents the opportunity to view plans and
offer comments on the schemes. At Fordie Estate, a community engagement
meeting was held in April with representatives of the estate, Foresight and
trusted advisers hosting the meeting which was well attended by the community.
Open days at Fordie Estate
A number of open days were held at the estate to allow locals to walk the
ground of the planting scheme and gain a better understanding of how the plans
sit within the landscape. Many of the comments raised across these sessions
have been incorporated into the latest scheme design.
Research into the community impact of green investments
The James Hutton Institute has conducted research into the community impact of
green investments in Scotland and Fordie Estate has been a key case study for
this work. FSF engaged with the institute to provide their views on land use
and change and they also engaged with members of the community directly.
Engagement with local environmental trusts
The Upper Urr Environmental Trust was interested in developing a volunteer-led
woodland planting and habitat restoration project. FSF has made an agreement
with the trust covering 95 hectares, with a formal lease over a portion of the
land for this purpose.
Sale of land for community projects
Two parcels of land at Frongoch have been sold to the benefit of the local
community. One parcel was sold to the local church to extend the community
graveyard and the other was sold to Natural Resources Wales, allowing access
to harvest an area of diseased trees, removing an eyesore from the picturesque
valley.
Mountain bike trails
The establishment of mountain bike trails at Banc Farm has commenced and
continues to progress.
Complaints handling
The Investment Manager strives to sensitively deal with any objections or
concerns that arise in relation to its woodland creation schemes. The regular
scheduling of townhall meetings and open days around the planning phase of
these schemes aims to inform the local communities of its plans and also to
provide a forum for objections to be made. When concerns or issues are raised,
the Investment Manager will seek to proactively address these concerns through
further education, engagement and, where possible, adaptations to the scheme
design.
OUR MARKETS
UK timber market
The UK timber market continues to rely heavily on imports, which account for
c.80% of all timber consumed. Further, the UK is the third largest timber
importer globally, behind only China and the USA. Total imports for the first
seven months of 2023 were 5% less than over the same period in 2022.
Timber pricing
UK timber market prices
(See full annual report on the Company website for the graph)
Timber outputs are divided into the following three categories depending on
the top diameter(1).
· Sawlog, with a top diameter(1) of 18cm and above, is the primary
timber product and fetches the highest price. This timber can be used for
construction and is often used for fencing posts and other home improvements.
· Small roundwood, with a top diameter1 between 6-18cm. This is
largely used in fencing panels and pallet construction. It is processed at a
separate mill to sawlog, that is specifically designed to process the smaller
pieces of timber.
· Chipwood, with a minimum top diameter1 of 6cm, is essentially too
small, too large or not straight enough to be processed in a sawlog or fence
wood mill. This product is chipped, rather than sawn. The largest use of
chipwood is in the manufacturing of versatile panels such as Medium Density
Fibreboard ("MDF"), Oriented Strand Board ("OSB") and Particleboard ("PB").
However, it can also be used in pulp mills to make paper products or in
biomass plants, generating power and heat.
The last year has seen mixed price signals. UK sawlog prices in Q3 2023
declined by c.7.5% compared to Q3 2022, while fencing prices declined by
c.1.4%. Meanwhile, chipwood prices increased by 13.1%. The overall picture
shows the blended price for timber has decreased by -4.1% during the year(2).
Of the publicly available timber indexes, the Softwood Standing Price Spruce
("SSPI") / All Conifers Index published quarterly by Forest Research is the
most comparable to the sawlog price index that is used by the Investment
Manager. From Q2 2022 a material deviation between the prices reported in both
indexes is observed, which has continued to widen. When analysed, the public
SSPI pricing suggests prices have been skewed by the significantly higher
volumes of Storm Arwen damaged timber, which has transacted at increasingly
discounted prices. Pricing of high quality and undamaged sawlog, as
represented in the Investment Manager's index, has demonstrated more
resilience.
Domestic demand
The UK's economic output has remained subdued during the year. The aftermath
of the UK Government's Mini Budget, rising debt costs and a cost-of-living
crisis have contributed to reduced demand for UK timber. The CPA forecasts
that construction output, a key driver of timber demand, is expected to fall
by 7% in 2023 but to grow by 0.3% in 2024. The Investment Manager's view is
that domestic demand for sawlog and roundwood will likely remain relatively
subdued during the rest of 2023 and 2024. In the Board's and Investment
Manager's opinion, we believe there is growing preference towards home-grown
timber.
1. Top diameter is a measurement dimension that expresses the
diameter of a log at its thinnest point, furthest from the butt.
2. Based on the Investment Manager's estimates of market data.
Domestic supply
On the domestic supply side, most of the excess storm damaged timber from
Storm Arwen in 2021, representing c.20% of the UK's annual harvest (and c.4%
of UK annual demand, given that the country imports c.80% of its needs), is
understood to have been processed through the timber supply chain. UK
originated timber supply and inventory levels are therefore gradually
readjusting to normal levels. The latest UK Forest Market Report on UK
commercial timber markets was released on 21 November 2023 and the Investment
Manager will utilise this data for future supply market forecasting.
European energy crisis and fuel demand
Chipwood prices remained more stable during the year, increasing by 13.1%
according to the Investment Manager's Chipwood Price Index. A main factor
influencing European markets during the year has been the ongoing conflict in
Eastern Europe and the ensuing energy crisis which has driven a surge in both
European and UK woodchip demand.
Bioenergy use in the EU increased by over 150% since 2000 and a further
increase between 70-150% by 2050 is predicted. Policy developments such as the
UK Government's Biomass Strategy seek to generate more bioenergy using
sustainable chipwood as fuel, ensuring incentives for sustainable biomass
energy. The Investment Manager believes that chipwood demand will remain
resilient and has a robust long-term outlook. However, prices will also be
influenced by Europe's longer-term ability to secure supplies of liquefied
natural gas.
European supply dynamics
Overall, European supply of softwood is forecast to decline in 2024 which when
combined with steady forecast demand is expected to create a slight material
supply deficit in Europe. This situation is expected to place slow but steady
upward pricing pressure on European timber through the coming year. Key
drivers of this movement include the ongoing bark beetle(1) crisis (with
current damage considered to be nearly 10x larger compared to pre‑2000
levels), climate change, and EU legislation. Key contributors to European
timber supply such as Germany and Latvia, and countries such as the US, have
proved susceptible to such factors.
UK forest climate change resilience
2023 has been a year where extreme weather patterns have influenced the
worldwide timber market. Timber supply disruptions observed in Canada and
Germany, for example, have been closely linked to climate change and are
expected to materially impact
the market. The bark beetle outbreak addressed previously in this report is
closely linked with the droughts brought on by climate change. As global
temperatures change, new emerging risks for key timber geographies will
require due attention by managers.
Positively, UK forestry has been assessed as relatively climate resilient,
with a climactically wetter and cooler climate. Looking at wildfire and
drought risk, this is viewed to be significantly lower in the UK than in much
of mainland Europe, especially in Scotland, which is marked with the lowest
fire risk indication. The Investment Manager believes that the UK's timber
supply will benefit positively from its climate resilient characteristic;
however, to mitigate potential climate-related risks, the Investment Manager
has followed a series of initiatives to create more climate resilient forests
within the portfolio (which will be detailed in full in the Company's 2023
S&ESG Report due to be published in early 2024).
International demand - American and Chinese markets on the rise again
The outlook for American construction looks particularly positive, following
the Inflation Reduction Act and the additional timber-related demand this will
likely generate. With the debt ceiling increase signed in June 2023 and the US
Government thereby avoiding default, growth in US construction has seemed to
continue undisturbed during the year. The latest report from the US Census
Bureau shows that during the first eight months of this year, construction
spending amounted to $1,284.7 billion, 4.2% above the $1,233.4 billion for the
same period in 2022.
Due to China's lifting of strict zero-COVID-19 policies and the introduction
of a 21-point plan to aid property developers with financing and debt
extensions worth up to $67 billion, the outlook for Chinese timber demand has
been positive during the period. Following the announcement of stimulus
measures, China's timber market has since picked up, which is reflected in the
country's Global Timber Index registering 53.0% in July, indicating growth in
the sector. The Chinese construction industry was expected to grow by 8.0% in
2023.
Last year, the top three largest global importers of timber were China, the UK
and the US. With global demands unlikely to decline, more European timber is
expected to reach Chinese and US markets in future years. In our view, this
could drive upward pressure on domestic UK timber prices where the
availability of, typically steady, European imports is reduced.
1. Bark beetle is a forestry pest which can cause significant damage
to the trees if left uncontrolled.
Voluntary carbon market ("VCM")
Number of companies with SBTi commitments
(See full annual report on the Company website for the graph)
Voluntary carbon credits recognise the additional and permanent capture or
avoidance of carbon dioxide from the atmosphere. Carbon credits can be retired
by companies with net zero pledges to offset unabatable emissions created
within their businesses or indirectly within their supply chains. During the
year, the number of companies setting, or committing to set, Science Based
Target Initiative ("SBTi") net zero pledges has continued to accelerate, with
an all-time yearly high of 3,120 companies committing to SBTi between Q4 2022
and Q3 2023, effectively doubling the total to 6,048.
Examples of firms making new SBTi commitments last quarter include Heineken
and Rolls-Royce. The total market capitalisation of all the companies with
SBTi targets in Q3 2023 is above $35 trillion. Companies' continued
acceleration of net zero pledges bolsters the long-term demand outlook for
voluntary carbon credits. In our view, these companies will likely require
carbon credits to offset up to 5-10% of their emissions, considered
unabatable, in line with SBTi rules.
Woodland Carbon Code carbon credits price annual increase
The Woodland Carbon Code ("WCC") has, for the first time, published a price
index of their voluntary carbon credits in collaboration with Ecosystem
Marketplace, summarised in the above chart. Over 99% of units contributing to
the index were Pending Issuance Units ("PIUs"), that have yet to mature into
Verified Carbon Units ("VCUs"), that are capable of being used for offsetting,
with less than 1% of the units contributing to the index being VCUs. The
Investment Manager therefore sees this as the best publicly available index
yet, and provides a good proxy for its own voluntary carbon credit portfolio,
which currently consists of 100% PIUs. The new index captures transactions
totalling more than half a million PIUs (since January 2021). FSF is expecting
to create 1.0-1.2 million PIUs with its current afforestation portfolio and
planting programme (based on c.4,000 hectares planted). During the 2.5 years
that the WCC index covers, the price of WCC carbon credits has grown by
69.9%., with a CAGR of 42.4% from £14.9 in 2021 to £25.4 in the first half
of 2023.
Monthly volume weighted average voluntary carbon credit price by project type
Following a Guardian article that exposed the low-integrity nature of many
avoided deforestation ("REDD+") voluntary carbon credits, we have observed a
significant shift in buyer preferences towards higher-integrity nature-based
carbon removal credits of the sort which FSF creates with its afforestation
schemes. Globally, nature restoration voluntary carbon credits, which include
the WCC credits that FSF creates with its afforestation schemes, have
increased by 63% from Q1 2023 to Q2 2023. During the same period, demand for
carbon avoidance based REDD+ voluntary carbon credits has diminished, which
has been reflected in prices falling by 17% from Q1 2023 to Q2 2023.
The Investment Manager has been encouraged by the progress made within
voluntary carbon markets this year. The combination of a near doubling of
corporate climate SBTi pledges, which further bolsters the long-term demand
outlook, combined with a material shift in buyer preferences towards scarcer,
higher-integrity, nature-based carbon removals credits of the sort which FSF
creates, currently suggests that over the medium to long term, there will be
sustained upward pressure on pricing.
FSF's afforestation carbon credits are to be issued, validated and
independently verified using the WCC's UK Standard. The WCC is well recognised
as being of high integrity and has secured International Carbon Reduction and
Offsetting Accreditation ("ICROA"). ICROA is a non-profit organisation that
promotes best practices across the voluntary carbon market. ICROA
certification is an existing badge demarking WCC's high-integrity standards.
Global update: c.£30 billion invested into carbon credit projects from 2012
to 2022
Trove Research published a paper in September 2023, which shows that
investment into carbon credit projects between 2012 and 2022 totalled $36
billion. Half of this occurred in the last three years. There is also a
further $3 billion in future investment already committed. This wave of
investment facilitates more than a thousand new carbon reduction projects.
More than $18 billion of funding came from carbon credit funds during the last
two and a half years alone. Over 80% of this funding is targeted towards
nature‑based projects such as FSF's afforestation projects and others such
as improved forest management and reducing emissions from deforestation and
forest degradation. The nature-based projects cover c.30 million hectares.
Regulatory developments
The Integrity Council for Voluntary Carbon Markets ("ICVCM"), an independent
governance body, was specifically established with the aim of setting and
maintaining global standards for quality within the voluntary carbon market.
To assist with this, the ICVCM, in March 2023, launched the Core Carbon
Principles ("CCPs"), which are intended to establish fundamental principles
for high-quality carbon credits that create a verifiable climate impact, based
on the latest science and best practice. Buyers and users of voluntary carbon
credits that are certified as aligning with the CCPs can be assured of the
high integrity of the underlying carbon credit. CCP labels for carbon credit
methodologies are expected to start being issued in late 2023. The Investment
Manager believes WCC could receive confirmation of CCP alignment during 2024
along with potentially a Carbon Offsetting Reduction Scheme for International
Aviation ("CORSIA") approval.
Demand-side integrity
During the period, as already mentioned, REDD+ has come under scrutiny. The
press articles exposed integrity issues with some avoided deforestation
voluntary carbon credits issued by Verra's REDD+ methodology. REDD+ and other
avoidance credits improve the relative balance of carbon in the atmosphere by
conserving nature and avoiding deforestation. The additionality case for REDD+
rests on the concept that without protection and conservation large areas of
natural forest (which acts as a valuable rotational natural storage system for
carbon) will be felled to make way for agriculture and development (usually
intensive livestock farming).
However, proving the additionality case for REDD+ has proved challenging as
quantifying the level of threat of natural forest destruction for specific
projects/sites is quite variable and subjective. With afforestation projects,
proving additionality and permanence, and therefore high levels of integrity
of credits, is relatively clearer and simpler as newly planted trees draw down
additional carbon from the atmosphere. In the view of the Investment Manager,
this may explain the apparent shift in buyer preference that has been observed
during the year.
On the demand side (i.e. companies seeking to make climate-related claims),
the Voluntary Carbon Markets Integrity Initiative, whose ambition is to set
the standard for high integrity use of carbon credits in organisations'
climate strategies, issued their provisional Claims Code of Practice. This
outlines clear guidance on how companies can make transparent and credible
claims regarding carbon offsetting. Leveraging the newly developed frameworks,
Bloomberg and other media outlets have criticised some corporate "carbon
neutral" claims, that are not science-based and where there is no obligation
to decarbonise (as up to 100% of emissions can be offset), as "junk carbon
neutral claims" enabled by "junk carbon offsets" such as avoidance-based
carbon credits. Unlike carbon removals-based credits, avoidance-based carbon
credits are not compatible with a SBTi net zero claim.
It has also been encouraging to see regulators increasingly pursue legal
action against companies which exaggerate their climate and environmental
credentials, with several large companies abandoning carbon neutral claims, to
instead focus on decarbonising first and only offsetting the balance. The
Investment Manager is encouraged by these developments. It provides further
evidence towards a high integrity market for voluntary carbon credits
establishing and scaling.
Whilst the nuances of how carbon credits can be used to support a
science-based climate claim have been in focus, a recent Trove Research report
finds that firms that use carbon credits, of any type and quality, reduced
their emissions twice as fast compared to companies that do not use carbon
credits at all. Further, companies that used higher‑integrity carbon credits
are decarbonising faster still.
The Company remains fully committed to investment in projects that yield
carbon credits that are compatible with internationally recognised high
integrity standards (such as ICROA and the CCPs) that can be used by companies
with a high integrity SBTi net zero claim that adheres to the Claims Code of
Practice.
INVESTMENT MANAGER'S REPORT
We are delighted to have fully deployed FSF's equity and delivered strong
capital appreciation on six planted afforestation schemes completed to date
Executive summary
In its second year, FSF made solid progress on several fronts, in the face of
a challenging market and macroeconomic headwinds. During the year, FSF has
further demonstrated that successfully developing and planting new forests
(afforestation) remains the reliable engine room of value creation. The year
saw four new forests planted, taking the total since FSF's inception to c.1.4
million trees planted across six properties. Since IPO, the value of these six
properties has increased by 85% versus acquisition costs, based on their
carrying value of £18.9 million as at 30 September 2023. During the year,
strong progress was made in the development of a further 37 properties with
afforestation potential in the portfolio. Many of these will be planted in the
current planting season, which runs from November to May. Once fully planted,
FSF's afforestation portfolio is expected to create 1.0-1.2 million carbon
credits and representing a material upside opportunity for investors.
During the year, the Woodland Carbon Code ("WCC") published new financial
additionality test rules for afforestation schemes. Whilst good for carbon
credit integrity levels, the Company has reduced the level of grant taken in
order for commercial forestry projects to pass. The Investment Manager holds a
seat on the WCC Advisory Board and has led an industry group to provide
feedback to the WCC on how the test could be improved. Through a combination
of engagement with the WCC and optimizing afforestation designs we are
confident that the Company's position can be improved overall whilst
maintaining the high integrity levels of the carbon credits.
NAV summary
In the year, the NAV declined by £11.4 million overall. FSF delivered NAV per
share gains in the first half of the year, mostly relating to the
outperformance of its afforestation portfolio, in an otherwise flat market.
The second half of the year has seen FSF's NAV decline by £17.4 million since
the 31 March 2023 valuation. These NAV losses primarily relate to the
relatively less buoyant UK forestry and agricultural land investment market,
rather than any material changes to the physical condition of FSF's forestry
assets or their long-term outlook. The Company's portfolio valuation is
dictated by the property specialist, Savills, in their capacity as independent
valuer using the Royal Institution of Chartered Surveyors ("RICS") Red Book
approach. The approach incorporates comparable market transaction evidence and
the valuer's view of market sentiment and is reflective of current conditions.
In the face of persistently high inflation and interest rates, the value of UK
forestry assets sold in the first nine-month period of 2023 (to 30 September)
represents 12% of the annual average of the value of assets sold in 2021 and
2022. Prices for land with afforestation potential declined significantly
during the year, when compared to market declines for established forestry
properties.
Whilst this has impacted FSF's NAV in the short term, it is FSF's intention to
change the land use of its afforestation properties and only exit the property
once it has been established as a new forest. Further, acquiring land with
afforestation potential at lower entry prices increases the total return
prospects that can be achieved by successfully developing it. Carbon credit
prices relating to nature restoration have remained highly resilient
throughout the year, driven by a significant shift in corporate demand towards
higher-integrity carbon credits of the sort FSF creates. We have been pleased
to add afforestation properties to the portfolio throughout the year, which
have enhanced capital appreciation prospects.
Established forestry values proved to be more resilient versus afforestation
values, but were still down on the year. Forest asset prices' relative
resilience is underpinned by the fact that trees continue to grow and add
timber value regardless of macroeconomic conditions. Their values are driven
more by investors' long-term views on future timber prices, than they are from
spot timber prices. Whilst UK forestry is well recognised for its resilient
and inflation-beating qualities over the long term, it is not completely
immune to current market conditions (elevated base rates and constrained
capital supply) in the short term. Overall, whilst it is disappointing to see
a subdued forestry investment market in the second half of the year having a
negative impact on the portfolio valuation, we are pleased by the operational
achievements and opportunistic acquisitions we have made in the period. We are
excited about the year ahead with a particular focus on successfully planting
many millions of trees and establishing multiple new forests.
Acquisitions
At the beginning of the financial year FSF had approximately £30.0 million of
cash available for further acquisitions which remained from the £45.0 million
equity placing that took place in June 2022. In January 2023, FSF had
successfully acquired 12 properties, which saw the June 2022 equity proceeds
fully deployed, ahead of the committed six-month target. The Company bought
six more properties during the period. These acquisitions have substantially
completed FSF's acquisition of land in preparation for its 2024/25 planting
programme and there are no material additions expected in the near term. The
acquisitions completed in September 2023 were funded by the RCF and repayment
of the borrowings will occur through a combination of timber harvesting and
the planned disposal of non-core or other assets.
The majority of acquisitions in the year were directly originated off‑market
and bilateral opportunities, where we continue to see better value. These
opportunities are sourced from a combination of Foresight's proprietary
market‑mapping deal procurement approach and by leveraging our extensive
network of contacts. We are also increasingly enjoying inbound approaches from
vendors who recognise FSF's strong track record as a reliable, all‑cash
counterparty that operates a highly efficient transaction process. Immediate
mark‑to-market gains on new acquisitions have been underpinned in many
instances through the realisation of marriage value with existing properties
in the portfolio. The Company has continued to acquire properties that are
either directly adjacent, or in close proximity, to existing FSF properties,
which can result in scale economies that are reflected in uplifted valuations
when combined.
Pipeline and deal procurement
Foresight sources deals and acquisition opportunities via selling agents,
on-market bids, bilateral deals, direct origination and inbound direct
approaches. Approximately 4,500 specific properties (c.900,000 hectares) which
are highly suitable for afforestation have been identified by the Investment
Manager.
OPERATIONAL REVIEW
Overview
As at 30 September 2023, the Company's portfolio comprised 68 properties
covering a total area of 12,545 hectares. An overview of the portfolio is
provided in the full annual report as well as the split of hectares by country
and by property type.
The portfolio's allocation continues to be weighted towards Scotland (85% of
FSF's portfolio by land area), which is the most forested of the UK's nations
and the least far behind in achieving its tree planting targets.
Portfolio breakdown
During the year, FSF updated the categorisation of afforestation properties
into three separate categories to help stakeholders to more clearly follow the
progression of portfolio development. Properties are now classified as
Development Stage, Planting Stage and Establishment Stage, with full
definitions provided below.
Other
Hectares Forest Area(1) Land area ² Total area Forest Area
30 September 2023 30 September 2023 30 September 2023 at time of
writing report
17 November
2023
Development Stage Afforestation 4,446 721 5,167 4,226
Planting Stage Afforestation 93 - 93 373
Establishment Stage Afforestation 937 98 1,035 937
Established Stage Forestry 5,184 1,067 6,251 5,184
Total 10,660 1,886 12,545 10,720
1. Includes commercial stocked/stockable; broadleaf
stocked/stockable; designed open ground; natural forest/woodland
regeneration zones; and other land considered part of the forest area.
2. Includes areas of land that sit outside the forest area; this
includes, but is not limited to, land leased for grazing; regenerative grazing
land; peatland/wetland; hill ground; non-core land considered for disposal;
non-core land not considered for disposal; house/farm curtilage.
Category Definition
(1) Development Stage Afforestation Area Land prior to the securing of planning permission and grant application.
(2) Planting Stage Afforestation Area Planning permission and grant application completed but initial planting of
trees not yet completed.
(3) Establishment Stage Afforestation Area Initial planting of site completed but trees establishing (typically three to
five years).
(4) Established Stage Forestry Area Trees established.
A particular area of interest for stakeholders will be the progression from
the Development Stage Afforestation to Planting Stage Afforestation, as this
will be the signal of the amount of land which has received all permissions
and grants and is ready to commence their respective planting programmes. It
can be considered an early indication of expected capital appreciation of this
area, which is recognised by FSF's valuer at the point of planting completion
and the entering of the Establishment Stage.
Portfolio breakdown by value
Development Stage Afforestation
At time of
At year end writing report
Total hectares (Forest Area) 30 September 2023 17 November 2023
Survey and design stage 2,701 2,671
Initial public consultation stage 1,416 469
Admitted to public register stage 329 1,086
Total 4,446 4,226
The Investment Manager and their contractors and advisers continue to hold
public consultations and progress the projects through to getting onto the
public register for review and further comments by the public and statutory
consultees. If the consultation with communities and statutory consultees is
well run and done in advance, it can take circa one to two months from point
of going on the register to receiving permission and grant contract, after
which point the Planting Stage can commence.
Planting Stage Afforestation
At time of
At year end writing report
Total hectares (Forest Area) 30 September 2023 17 November 2023
Development Stage Afforestation 4,446 4,226
Planting Stage Afforestation 93 373
Establishment Stage Afforestation 937 937
Total 5,476 5,536
It is anticipated that approximately 19 sites covering 2,700 hectares of
Forest Area will have completed the Development and Planting Stage and entered
the Establishment Stage by 31 March 2024, with the vast majority of the
balance of Development Stage and Planting Stage Afforestation entering the
Establishment Stage either in April/early May 2024 or in the subsequent
planting season between November 2024 and May 2025.
An afforestation progress to date and development outlook summary is provided
below.
Afforestation timeline
(Graph can be found in the full annual report on the Company's website)
Establishment Stage Afforestation
Overall, FSF has planted six woodland creation schemes since IPO. All six
planted schemes continue to establish well. A breakdown of FSF's Establishment
Stage Afforestation assets can be found below:
Newly planted Total
Establishment Stage Establishment
Afforestation Stage
(1 October 2022 - Afforestation
30 September 2023)
Properties (number) 4 6
Total Establishment Stage Afforestation creation (hectares) 702 937
Commercially stocked afforestation (%) 44% 50%
Non-commercially stocked afforestation (%) 15% 14%
Designed open ground and other land considered part of the forest area (%) 41% 36%
Number of carbon credits awaiting validation
(exclusive of 20% buffer) 107,592 143,707
Anticipated tonnes of sustainable timber to be produced from the first 190,500 283,150
rotation
Trees planted
(Graph can be found in the full annual report on the Company's website)
Planting breakdown across afforestation to date
(Graph can be found in the full annual report on the Company's website)
CASE STUDY
UPPER BARR AFFORESTATION SITE
Location Dumfries & Galloway, Scotland
Size 344 hectares
Land designated for afforestation 151.7 hectares
Date of acquisition March 2022
1. Afforestation scheme planning (summer 2022)
Surveys were undertaken and the scheme was drawn up by Scottish Woodlands, the
appointed Forest Manager ("FM"), with asset and portfolio management oversight
from EJD Forestry and Foresight's portfolio management team respectively.
2. Community consultation
The community has been at the heart of this development process and several
key initiatives were presented to a variety of community groups for feedback.
3. Planning approval
Planning approval and a woodland creation grant contract were obtained.
4. Planting scheme (completed March 2023)
Tree species type Native broadleaves, mixed conifers (Sitka Spruce, Norway Spruce, Noble Fir,
Pacific Silver Fir, Scots Pine)
Total trees planted 288,299
Gross area planted 151.7 hectares
Jobs provided 1,460 hours (0.5 FTE)
5. Establishment Stage Afforestation (ongoing)
Employment continued throughout the summer, bringing the total hours worked
for the year to 2,070 hours or 0.99 FTE. There have been no issues with the
establishment of the crops and minimal tree loss is anticipated.
6. Valuation (March 2023 valuation)
Recognition of the successful planting at the property delivered an 83%
valuation uplift to the acquisition price paid for the property.
7. Carbon credits (ongoing)
Upper Barr has been registered with the Woodland Carbon Code and is due to
benefit from carbon credits associated with the sequestration achieved by the
new planting. A total of c.40,000 Pending Issuance Units are expected to be
registered following a confirmatory inspection by the Soil Association.
8. Environmental and community benefits (ongoing)
FSF has made an agreement with the Upper Urr Environmental Trust to develop a
volunteer-led woodland planting and habitat restoration project.
9. Working with the Eden Project, FSF was able to host a wildflower seed
collection day with members of the local community and school that focused on
harvesting and protecting the local seed source. The seeds that were collected
have been transferred to the Eden Project's seed bank and are now available
for dispersion to create further areas of wildflower meadow at both Upper Barr
and potentially other properties within FSF's portfolio.
Established forestry
FSF has designed a portfolio that should supply a steady stream of potential
harvesting over the coming years. The table below gives an overview of the
quantity of standing timber in each category within the FSF portfolio. Where
gaps are present, FSF will, over time, look to infill and generate the ability
to harvest to provide the Company with cash flow each year should it be
required.
Age profile of existing forestry
The above chart excludes afforestation assets at any stage.
Harvesting overview
There has been ongoing harvesting at five sites during the year. Largely,
these harvesting operations have focused on either continued clear up of
windblow or addressing Statutory Plant Health Notifications ("SPHNs"). An SPHN
is issued by either the Forestry Commission, Scottish Forestry or Natural
Resources Wales where infected plants have been identified. In the cases seen
within the FSF portfolio, these are Larch crops at low volumes and this is not
considered by the Investment Manager to represent a material issue for the
Company or to be out of keeping with standard woodland management practice in
UK forestry. Income is still generated by this harvesting. During the year a
total of 17,000 tonnes of timber was harvested generating net income of
£750,000.
Harvesting strategy (short term)
Timber prices are yet to recover from the softening seen towards the end of
2022 and the harvesting plan has been adjusted accordingly. Harvesting is
being included in the short-term programme where it results in NAV accretion
or there is a good silvicultural reason to pursue the harvesting. It is not
currently the intention to harvest all the available timber within the
portfolio. The Investment Manager will continue to monitor prices closely,
commencing harvesting activities at the optimal time giving consideration to
timber market conditions and Company cash revenue requirements.
Across all planned harvesting activities expected in the next 12 months, a
total of 118,000 tonnes are anticipated to be harvested.
Harvesting plan (long term)
In addition to the short-term view, FSF has reviewed the long-term harvesting
plan. Harvesting does not need to be undertaken immediately and can be
delayed. Making use of the additional biological growth, it is useful to
forecast what timber will be available over the coming years. The chart below
is illustrative only and is subject to variation depending on the Company's
strategy and requirements.
Harvesting forecast
Upside opportunities
A number of upside opportunities continue to be developed across the
portfolio.
Knock Fell - Peatland restoration with the potential to create up to 20,000
peatland carbon credits.
Drumelzie - Full planning application for a three turbine wind farm
development has been submitted by a developer for this site. Negotiations
regarding felling requirements are ongoing.
Fordie Estate - A glamping project continues to be developed. This would see
eight glamping pods being constructed at Fordie in 2024.
· Re-negotiation of the existing hydro scheme onto a much improved
tariff of £485/MWh for exported electricity, good through until April 2025.
· Plans to increase water retention on the hill ground through
re-wetting projects outside the woodland creation scheme. Improving habitats
for several key bird species and also improving consistency of supply to the
hydro scheme.
Forest Stewardship Council ("FSC") and Programme for the Endorsement of Forest
Certification ("PEFC")
As at 30 September 2023, FSF has maintained compliance with its Prospectus
commitment to dual certify all forests within 12 months of either acquisition
or planting completion.
Number of projects As a %
Projects certified 34 50%
Projects requiring certification 5 7%
Projects yet to require certification 29 43%
The importance of obtaining the correct certification for timber ahead of
selling continues to increase. The largest sawmilling companies are placing
ever-more stringent restrictions on uncertified timber. Specifically, James
Jones have recently announced that they will only process dual certified
timber. Therefore, there continues to be a premium associated with certified
timber.
Quality and Environment Management Systems
ISO 9001 sets the requirements for a company's Quality Management System
("QMS") and ISO 14001 is the equivalent standard for an Environmental
Management System ("EMS"). To date a review has been completed in relation to
the two ISO standards to assess the current level of accreditation across the
companies of the Portfolio, where gaps in this exist and where the standards
should be implemented.
FSF's focus at present is on its suppliers to attain ISO accreditation to
provide an initial layer of ISO accreditation. Further details will be
provided in the Company's 2023 S&ESG Report.
Biodiversity
A biodiversity monitoring tool called Biodiversity HAB-CON Alpha has been
developed by experienced ecology consultants in collaboration with the
Investment Manager. This tool is based on the UK Habitat Classification System
and condition assessment and has the following notable key features:
Biodiversity value is ascribed to the transitional habitats that both
commercial softwood conifer forests and long term broadleaf woodland provide
during the cyclical forest process (i.e. trees grow in establishment stage,
canopy closure occurs, natural/planned thinning occurs, trees are harvested or
naturally perish, trees are re-stocked or naturally re-generate).
Time Frames have been extended from 30-years to 60-years to recognise the long
term nature of forestry management and enable managed woodlands additional
time to reach target condition (e.g. moderate or good condition).
Biodiversity HAB-CON Alpha is being pilot-tested across six FSF pilot sites.
After the pilot phase, the measurement and monitoring tool will be rolled out
over thirty FSF properties as part of the next stage. FSF is seeking to
deliver an overall biodiversity uplift across the portfolio, using the tool to
monitor the environmental status of the Company's assets and drive nature
positive management decisions within the portfolio in the future.
More information on this will be included in the Company's 2023 S&ESG
report.
Health and safety
Health and safety ("H&S") is a focus for the Company's Board and the
Investment Manager's portfolio management team. The target of the portfolio
management team is to position FSF as a market leader for forestry H&S
best practices. Regular reporting on notifiable incidents is provided to the
Company's Directors to ensure Board oversight on H&S matters.
Number during
Health and safety event the period
Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 0
("RIDDOR")
Near miss events 7
RIDDOR events are serious and must be reported to the Health and Safety
Executive, which is administered by the UK Government. The Company is pleased
to report that no RIDDORs occurred during the period.
"Near miss" events are categorised as all H&S incidents that are not
reportable under the RIDDOR framework. There were only seven events throughout
the year, which is considered low. Near miss reporting is embedded in
day-to-day forest management and the portfolio management team continually
reviews measures that can further improve the quality of reporting. For the
period these include:
· Deploying lone working devices throughout the portfolio to
prevent individuals from becoming stranded and out of communication should an
accident occur.
· Requiring Forest Managers to produce hazard maps for each site
that they manage giving an overview of all the known key identifiable hazards.
The established protocol is that these are provided to all contractors ahead
of the pre-commencement meeting and also posted on the entrances to each site
for members of the public accessing the site to view. In addition to this,
where the risk associated with each hazard can be mitigated, this will be
explored.
· Re-engaging H&S experts to conduct a third annual review of
operational H&S practices within the portfolio.
Portfolio valuation
Valuation bridge
As at 30 September 2023, the forestry portfolio, excluding additional carbon
credits held through SPVs as described on page 47, was valued at £172.2
million. Since 30 September 2022, 18 assets valued at £38.4 million
(inclusive of tax and transaction costs) were acquired and the property
revaluation in the portfolio delivered a gain of £2.7 million, representing a
weighted average (across the three investment categories) valuation loss of
5.8%.
Afforestation properties observed unrealised losses of £2.3 million,
representing a 7.5% decrease in that category, despite observing
mark‑to-market gains and recognition of the successful completion of
planting at four properties (Auchensoul, Redding Farm, Upper Barr and
Frongoch). Forestry properties observed unrealised losses of £3.2 million,
representing a 4.8% decrease in that category. Mixed afforestation and
forestry properties delivered unrealised losses of £1.0 million,
representing a 4.9% decrease in that category.
During the year to 30 September 2023, four afforestation schemes completed
planting and FSF has recognised an additional £2.1 million of value ascribed
to the creation of carbon credits, bringing the overall portfolio value to
£2.7 million. This estimate takes into consideration the verifier's 20%
buffer to ensure that the number of units offset or traded is conservative
versus the amount of carbon that will be sequestered. The four properties are
estimated to create c.108,000 voluntary carbon credits (net of the 20% buffer)
and are part of a wider afforestation programme that is expected to see the
creation of 1.0-1.2 million voluntary carbon credits in total from the
current portfolio. The methodology and treatment of the additional value
added at 30 September 2023 has remained consistent with the audited financial
statements as at 30 September 2022. The unit pricing of voluntary carbon has
increased from £17.50 at 30 September 2022 to £19.00 at 30 September
2023.
Portfolio valuation methodology
Savills Advisory Services Limited ("Savills") was engaged by the Company to
provide a fair value valuation of the portfolio in accordance with the Royal
Institution of Chartered Surveyors ("RICS") Valuation - Global Standards July
2017 (the "Red Book").
The Red Book valuation falls within the International Financial Reporting
Standards ("IFRS"), as part of the International Valuation Standards which
requires investment properties to be considered on the basis of fair value at
the balance sheet date. IFRS 13 outlines the principles for fair value
measurement which Savills' valuation is consistent with. The Red Book
valuations are undertaken on a property-by-property basis and are completed
semi-annually.
The fair value assessment of the properties has been completed by Savills on a
comparable basis by looking at transactions of similar properties. Development
Stage and Planting Stage Afforestation property comparables include the rights
to future potential voluntary carbon credit creation. Establishment Stage
Afforestation and Established Forest property comparables exclude any value
ascribed to any associated voluntary carbon credits that have been created.
In addition to the fair value, the Red Book methodology considers a number of
additional factors impacting the valuation. A reasonable view of the potential
for afforestation properties' value uplift over time is considered rather than
valuing the land in its current state. Savills also considers the stage of
each property within the forestry grant application process and may make
reassessments as to the value of properties when a new developmental milestone
occurs. Additionally, as the properties under ownership are located across the
UK (Scotland, Northern England and Wales), the external valuer accounts for
the potential differences in market interest and demand at the different
locations.
The value associated with the carbon credits attached with the Establishment
Stage Afforestation properties is excluded from the RICS Red Book valuation of
these properties. Value recognition for carbon credits is ascribed separately
using the Investment Manager's assessment based on a range of recent
comparable voluntary carbon credit transactions that occurred in the period
and observed by leading third-party carbon credit consultants and brokers.
When establishing the value of carbon credits, a conservative 25% risk
discount is applied to the average observed unit price of a validated carbon
credit. The risk discount accounts for the Woodland Carbon Code validation
process not having fully completed.
SUSTAINABILITY AND ESG
Sustainability and strong governance are fundamental to FSF's business model,
as captured in the Company's three key Sustainability and ESG objectives
Key objective 1: timber supply
To deliver and increase the supply of home-grown UK timber to reduce the
country's reliance on imports.
Key objective 2: sustainable returns
To do so in a way that combines sustainable financial returns with carbon
sequestration, biodiversity protection and other positive environmental and
social impacts.
Key objective 3: progressive industry leadership
To be a sustainability leader in the UK forestry industry whilst delivering
both traditional commercial timber products and innovative natural capital.
Services.
2023 highlights
12,545 Total hectarage of portfolio (inc. forests and open ground)
27 schoolchildren hosted from Carreg Hirfaen School to play a part in the
planting at Frongoch
Expansion of the Forestry Skills Training Programme to Scotland, with ten
placements awarded across Scotland and Wales
The publication of the Company's first dedicated S&ESG Report(1)
£2.1 million additional value ascribed towards creation of carbon credits
with 143,707 PIUs held on balance (as at 30 September 2023)
35,081 tCO(2)e sequestered
Available on the Company website:
https://media.umbraco.io/foresight/ar0gzg2h/sustainability-and-esg-report-2022.pdf
(https://media.umbraco.io/foresight/ar0gzg2h/sustainability-and-esg-report-2022.pdf)
Sustainable Development Goals impact reporting
FSF's vision and management of its assets, with a focus on its key S&ESG
objectives, are closely aligned with five of the UN Sustainable Development
Goals ("SDGs"). The SDGs represent a key consideration of the Company's
investment activities and, in the following pages, we demonstrate the progress
made by the Company in each of these core areas for the period 1 October 2022
to 30 September 2023.
Timber supply chain
UN SDG 12 (Responsible Consumption and Production) is most closely aligned
with FSF's Key S&ESG Objective 1 (Timber Supply). There is also strong
overlap with Objective 2 (Sustainable Returns) and Objective 3 (Progressive
Industry Leadership). Timber in the UK is used in a variety of ways; from a
construction material as an alternative to concrete and steel, through to
biomass to produce renewable power and heat. FSF's timber plays a role in
meeting these demands.
Goal SDG target Contribution
12.2 Achieve the sustainable management and efficient use of natural Number of m3 of sustainably grown, standing timber.
resources.
Percentage of commercial forestry projects that are dual certified within 12
months of acquisition.
1,062,325
m3 of standing commercial timber
100%
existing forestry dual FSC and PEFC certified, in line with commitment to dual
certify within 12 months
Office for National Statistics, woodland natural capital accounts, UK 2020.
Environmental impact
Pollutant removal
UN SDG 3 (Good Health and Wellbeing) is most closely aligned with FSF's Key
S&ESG Objective 2 (Sustainable Returns), specifically the delivery of
"other positive environmental and social impacts". Aside from sequestering
carbon, our trees help to actively remove pollutants from the air.
Goal SDG target Contribution
3.9 Substantially reduce the number of deaths and illnesses from hazardous Number of tonnes of pollutants(1) removed from the atmosphere, including:
chemicals and air, water and soil pollution and contamination. NO(2) (Nitrous Oxide), SO(2) (Sulphur Dioxide), PM10 (μm10 Particulate
Matter), PM2.5 (μm2.5 Particulate Matter), Ground-level Ozone, NH(3)
(Ammonia).
366.3 tonnes
of Ground-level Ozone
25.5 tonnes
of PM10 (μm10 Particulate Matter)
16.3 tonnes
of NH(3) (Ammonia)
11.7 tonnes
of SO(2) (Sulphur Dioxide)
21.6 tonnes
of PM2.5 (μm2.5 Particulate Matter)
5.2 tonnes
of NO(2) (Nitrous Oxide)
446.6 tonnes
of pollutants removed from the atmosphere
Sustainably managed watercourses
UN SDG 6 (Clean Water and Sanitation), specifically the delivery of
"biodiversity protection and other positive environmental and social impacts",
is most closely aligned with FSF's Key S&ESG Objective 2 (Sustainable
Returns). Greater focus is being placed on the interconnectedness of our
ecosystems. Watercourses and peatlands within and around FSF's portfolio
provide habitats for wildlife and support biodiversity and drainage.
Goal SDG target Contribution
6.6 Protect and restore water‑related ecosystems, including mountains, Number of kilometres of sustainably managed watercourses.
forests, wetlands, rivers, aquifers and lakes.
349(1)
kilometres of sustainably managed watercourses
Carbon sequestration
UN SDG 13 (Climate Action) is most closely aligned with FSF's Key S&ESG
Objective 2 (Sustainable Returns), specifically the delivery of "carbon
sequestration". As FSF's operations grow, the overall benefit here is twofold:
carbon sequestration is increased and simultaneously timber production is
increased.
Goal SDG target Contribution
13.3 Strengthen resilience and adaptive capacity to climate‑related hazards Total annual portfolio sequestration (tCO(2)e/annum).
and natural disasters in all countries.
Average annual sequestration per stocked ha (tCO(2)e/stocked ha).
Average annual sequestration per gross ha.
35,081 tCO(2)e
arboreal sequestration achieved over the reporting period within the portfolio
2.80 tCO(2)e/ha
average arboreal sequestration per gross hectare
7.53 tCO(2)e/stocked ha
average arboreal sequestration on a per stocked hectare basis (commercial +
non‑commercial)
1. Includes all permanent water courses and larger drains whether
wholly inside the property boundaries or located on the property boundary with
a shared responsibility for watercourse management.
Natural capital services
Biodiversity
UN SDG 15 (Life on Land), specifically the delivery of "biodiversity
protection", is most closely aligned with FSF's Key S&ESG Objective 2
(Sustainable Returns). As a natural capital fund, we believe that, when
managed responsibly, forestry and afforestation can provide a wide-ranging
flow of ecosystem services which are valuable to society in which biodiversity
plays a vital role.
Goal SDG target Contribution
15.2 By 2020, promote the implementation of sustainable management of all Number of hectares of sustainably managed forests.
types of forests, halt deforestation, restore degraded forests and
substantially increase afforestation and reforestation globally. Of which:
· Number of hectares that are long-term, mixed broadleaf carbon
sinks.
· Number of hectares that are SSSI(1)/SAC(2).
12,545 ha
total hectarage of portfolio (inc. forests and open ground)
7,884 ha
of open ground and land awaiting approval for afforestation
769 ha
of which is SSSI(1)/SAC(2)
3,819 ha
of which is sustainably managed commercial forest (excludes open ground)
843 ha
of which is long‑term, mixed broadleaf woodland (excludes open ground)
Carbon credits
Carbon credits generated:
PIUs awaiting validation held on balance 143,707
PIUs held on balance -
PIUs sold -
PIUs pipeline 897,427
WCUs held on balance -
WCUs sold -
Total carbon credits held on balance 143,707
Total carbon credits sold -
1. Site of Special Scientific Interest.
2. Special Area of Conservation.
CASE STUDY
SKILLS TRAINING
One of the major issues that faces rural communities throughout the UK is a
shortage of skills. There are fewer individuals with the necessary skills to
undertake a variety of roles. The Forestry Skills Training Programme,
sponsored by FSF and administered by Tilhill, aims at redressing the balance
of skills within the community.
In May of this year, FSF announced that following the success of the pilot of
the Forestry Skills Training Programme launched in 2022, it will repeat and
significantly expand the initiative for 2023.
The skills training programme
Fully funded three-week programme that provides candidates with the skills and
equipment needed to commence a career in forestry. The programme focuses on
three key areas:
r) Forestry skills training
s) Mentoring
t) Provision of health and safety equipment
Scope of programme
Scope of programme in 2022 Scope of programme in 2023
Geographic area covered Wales Scotland and Wales
Number of candidates 4 10
Number of candidates going onto receive paid forestry work at an FSF 4 TBC
afforestation property
Outcome
FSF has closely followed candidates from the pilot and has been proud of the
positive professional and personal impact that has had on the individuals
involved.
TCFD AND EMISSIONS REPORTING
TCFD
The Company's 2022 S&ESG Report, published in April 2023(1), provides a
comprehensive response to all 11 of the TCFD recommended disclosures and can
be found on the Company's website. For the period to 30 September 2023, the
Company will be publishing its 2023 report in the new year. However, for the
year ended 30 September 2023, the below reports on the Company's emissions
profile, using Scope 1, 2 and 3 emissions data and the TCFD Core Metrics,
calculated in accordance with the TCFD recommended methodologies(2).
Scope 1 emissions 349.8 tCO(2)e
Scope 2 emissions 0 tCO(2)e
Scope 3 emissions 863.5 tCO(2)e
Weighted average carbon intensity (tCO(2)e/£m revenue)
Portfolio's exposure to carbon‑intensive assets, expressed in tonnes
CO(2)e/£m revenue.
149.7
Total carbon emissions (tCO(2)e)
The absolute greenhouse gas emissions associated with the portfolio, expressed
in tonnes CO(2)e.
349.8
Carbon footprint (tCO(2)e/£m invested)
Total carbon emissions for a portfolio ormalized by the market value of the
portfolio, expressed in tonnes CO(2)e/£m invested
2.0
Carbon intensity (tCO(2)e/£m revenue)
Volume of carbon emissions per million pounds of revenue (carbon efficiency of
a portfolio), expressed in tonnes CO(2)e/£m revenue
183.9
Exposure to carbon-related assets (%)
The amount or percentage of carbon-related assets in the portfolio, expressed
in £m or percentage of the current portfolio value
0
Climate scenario analysis
As part of the Company's disclosures under TCFD, the S&ESG Report(1)
demonstrated the approach it has taken to conducting robust scenario analysis
using S&P Global's Climanomics platform. This integrated not only physical
and transition risks, but also climate‑related opportunities, providing a
single output reflecting the resilience of the portfolio under different
climate futures. The Company does not intend to repeat this test for future
years.
The Sustainable Finance Disclosure Regulation ("SFDR")
SFDR is a framework designed to increase transparency on sustainability
reporting with a view to facilitating sustainable investment practices and to
aid the understanding of the sustainability credentials as published by funds
and/or companies.
The Company is classified as an Article 9 fund, meeting the necessary
disclosure requirements as stipulated in the Level 2 Regulatory Technical
Standards under SFDR. FSF updated its pre-contractual and website disclosures,
both of which can be found on the Company's website and are summarised below:
Sustainable investment objective of the Company
The Company's investment objective stipulates the targeted sustainable impact
it aims to achieve through predominantly investment in sustainably managed
forestry assets (including standing forests and afforestation assets).
FSF has a climate change mitigation objective, seeking to make a direct
contribution in the fight against climate change through its forestry and
afforestation carbon sequestration initiatives.
Performance of sustainability indicators
The indicators for the portfolio are reported in the SDG tables on pages 34 to
36.
SFDR RTS Website Disclosure, Annex III and Annex V
FSF's Annex III Pre-Contractual Disclosure, RTS Website Disclosure and Article
V Periodic Disclosure are all available on the Company's website1. For the
purposes of periodic disclosure updates, the Company will be aligning its
reference period with its annual reporting period, namely 1 October to 30
September.
1. Available on the Company's website here: https://fsfc
(https://fsfc) .foresightgroup.eu/shareholder-centre
2. TCFD recommended methodologies for calculation of the Common
Carbon Footprinting and Exposure Metrics https://www (https://www)
.fsb-tcfd.org/recommendations/
RISK AND RISK MANAGEMENT
FSF has a comprehensive risk management framework overseen by the Audit and
Risk Committee, comprising the Independent Non-Executive Directors
Risk is the potential for events to occur that may result in damage, liability
or loss. Such occurrences could adversely impact the Company's business model,
reputation or financial standing. Alternatively, under a well-formed risk
management framework, potential risks can be identified in advance and can
either be mitigated or possibly converted into opportunities. Pages 41 to 45
of this report detail the risks that the Directors consider are the top ten
risks to the Company.
Risk identification and monitoring
Risks are monitored by the Audit and Risk Committee, comprising the full
Board, which is responsible for overseeing the current and potential risk
exposures of the Company, with particular focus on the principal and emerging
risks, being those with the greatest potential to influence Shareholders'
economic decisions, and the controls in place to mitigate those risks.
The identification, assessment and management of risk are integral aspects of
the Investment Manager's work in managing the portfolio on a day-to-day basis.
Mitigation actions have been developed with respect to each risk so as first
to reduce the likelihood of such risk occurring and secondly to minimise the
severity of its impact in the case that it does occur.
The risk register is reviewed and updated regularly by the Investment Manager
and the Audit and Risk Committee as new risks emerge and existing risks
change. The portfolio managers maintain strong relationships between
counterparties, contractors, third-party asset managers and other
stakeholders. This ensures effective management of potential risks.
The Audit and Risk Committee regularly seek assurances as to the resilience of
the reporting and control systems in place for both the management of the
portfolio and for the Company's investment activities. The Committee will
continue to evaluate and challenge the resilience of all key agents to the
Company.
The Board undertook a robust assessment of the Company's emerging and
principal risks during the year. More information can be found in the
Governance section on page 54.
Emerging risks and risks relevant to the year under review
The following represent the most relevant emerging risks as viewed by the
Board and the Investment Manager:
Changes in the macroeconomic environment
The UK economy has seen significant fluctuations in growth over the last two
years, predominantly due to rising debt costs, high inflation and Russia's
invasion of Ukraine. However, the Company is in a relatively strong position
to withstand changes in the macroeconomic environment as it is invested in
real assets, principally freeholds of UK land and forest stock. The forest
stock enjoys biological growth regardless of occurrences in financial markets.
UK freeholds, real assets and the value of commodities, such as timber, have a
strong track record of good performance during periods of inflation and
instability of equity markets. In the view of the Investment Manager, the
continued global supply and demand imbalance in timber markets, which is
accentuated in the UK as a net timber importer and during a period where GBP
is weak versus EUR and USD, leaves the Company well positioned to deliver
real-term value growth for Shareholders. Moreover, FSF is in a position to
mitigate the impact of any intra-quarter or intra-year falls in timber prices
by postponing parts of its harvesting programme, and allowing the trees to
continue to grow until the underlying imbalance between supply and demand
begins to be reflected in market prices again.
Financing capital
In order to achieve its growth ambitions and to ensure the Company is able to
take full advantage of the opportunities in its pipeline, additional financing
will be required in the short to medium term. The Company's borrowing policy
enables the Directors to use gearing for liquidity and working capital
purposes, or to finance acquisition of investments subject to following a
prudent approach and maintaining a conservative level of aggregate borrowings
that will not exceed 30% of Gross Asset Value, calculated at the time of
drawdown. The Company has a £30 million Revolving Credit Facility, that at
the end of the period was partially drawn by £10.4 million. The equity
levels of the Company are closely monitored by the Board and the Investment
Manager on a regular basis. The Company continues to work closely with its
broker and the Investment Manager's in-house Retail Sales team will conduct
market research ahead of any future funding rounds to gauge demand from
existing and new investors.
Timber market volatility
Timber prices can be volatile periodically. However, demand over the medium to
long term has historically created real-term pricing growth. In the context of
global under-supply and increasing demand, this reduces market risk for the
sale of the Company's key products and revenue streams. Should timber prices
be less attractive at the point of felling, the Investment Manager also has
the option to delay felling, allowing trees to continue to grow and provide
time for a recovery from short-term pricing volatility.
Community engagement
The development of afforestation assets in rural areas is sensitive for local
residents and, if managed unsatisfactorily, could result in poor relationships
developing between the Company and local communities. This in turn could
impact both its ability to obtain the necessary planning consent for planting
to commence and potentially the Company's reputation. The Investment Manager
selectively commissions an independent community risk assessment and only
pursues opportunities where the risk of not obtaining planning consent,
including for reasons relating to objections raised by the local community, is
assessed to be low.
Once afforestation properties are acquired, the Investment Manager runs a
co-ordinated programme of community engagement and seeks to respond and,
wherever possible, adapt the scheme design to meet concerns raised by
community members. In addition, in the event that planting was unable to go
ahead, the acquired land would still have inherent agricultural value.
Therefore, whilst the return generated from this would be lower, an income
stream would still be available to the Company. The Company is also working
closely with industry bodies such as Confor and Timber Development UK to
promote the merits of increased sustainable UK timber supply. For more
information on the Company's community engagement initiatives, please see the
community engagement case study on page 16.
Principal risk register
The Company is exposed to a number of risks that have the potential to
materially affect the Company's valuation, reputation and financial or
operational performance. The nature and levels of risk are identified
according to the Company's investment objectives and existing policies, with
the levels of risk tolerance ultimately defined by the Board.
The Company's risk register covers seven main areas of risk: financial,
market, forestry, legal and regulatory, operational, economic and investment,
although not all of these risks will fall into the top ten risk category.
Forestry as an asset class has its own set of unique risks which are
considered and managed by the Investment Manager's dedicated team and external
advisers. After mitigations are taken into account, most of these risks have a
low residual risk score and those that do not are covered in more detail in
the top ten risks section of this report.
Climate-specific risks are also monitored by the Board and the Investment
Manager and an extensive climate change scenario analysis has been undertaken.
The Investment Manager uses the S&P Global Climanomics platform to
undertake this work and their findings are included in the Company's most
recent Sustainability and ESG Report. After mitigations are taken into
account, physical climate risks have a low residual risk score while some
transition risks feature in the Company's top ten risks.
The Company's top ten risks are summarised on pages 41 to 45, followed by a
detailed discussion of the mitigating factors.
This risk map shows our assessment of each area of principal risk after
mitigation.
Heat map included in the full annual report on the Company website.
Economic risks
1 Interest rates
2 Inflation
3 Macroeconomic
Financial risks
4 Equity risk
5 Valuation
Market risks
6 Demand for carbon
credits
7 Demand for timber
8 Cost to transition to lower emissions
technology
Forestry risks
9 Reputational
Legal and regulatory
10 Government commitment to net zero
Economic risks
1 Interest rates
Potential impact
The risk that there will be changes in the interest expense for debt, or
interest received on deposits, as measured in the currency of that debt, due
to movements in market interest rates. Higher interest rates could also
effectively increase the risk-free rate and reduce the valuation of long-dated
forestry assets. There is a risk that rising interest rates could result in a
higher cost of debt than on the associated projects' return on equity, which
would be NAV destructive over time.
Mitigation
· Manage the cost of borrowing potentially by borrowing using fixed
rate instruments, and/or by overlaying interest rate derivatives against the
Company's debt portfolio
· In considering whether to execute hedging transactions, the costs
and benefits of hedging are to be balanced against the effects of movements in
interest rates on the debt portfolio
· The Investment Manager ensures there is a sufficient margin
between the expected rate of return on the investment portfolio and the cost
of any borrowing, to ensure there is a buffer before rising interest rates
become dilutive to overall NAV
· The Investment Manager undertakes interest rate scenario analysis
to inform the level of borrowing FSF is comfortable taking
2 Inflation
Potential impact
The risk that inflation remains at persistently high levels and this increases
future costs of developing and operating the portfolio. High inflation could
also erode the valuation of the existing portfolio.
Mitigation
· Historically, over the long term, timber and forest asset values
have been positively correlated to inflation. General recognition is for
forestry as an asset class having inflationary protection characteristics, but
it should be noted that there is no contracted link between inflation and
timber or forest asset prices
· Agricultural land with afforestation potential is less sensitive
to inflationary pressures, therefore the strategy of the Investment Manager is
to increase the amount of afforestation investment within the portfolio
3 Macroeconomic
Potential impact
Changes in economic, technological, political or regulatory environment and
market sentiment can impact the returns expected from the assets in the
Company's portfolio.
Mitigation
· Diversity of revenue streams is targeted where possible,
preventing over-concentration to specific risks
· The Company invests in forestry markets that have displayed
long-term political regulatory stability
· The Investment Manager participates in industry forums linked to
the carbon markets and the related regulation
Financial risks
4 Equity risk
Potential impact
The risk that the Company is unable to access sufficient funding to complete
its operations.
Mitigation
u) The Company's broker will conduct market research ahead of any future
funding rounds to gauge demand from existing and new investors
v) The Investment Manager and the Board have set budgets such that a
working capital buffer is held. The budgets include forecasts of timber and
grant income streams that are expected in the next 18 months
w) The Company can recycle capital through the sale of non-core assets and
could also decide to exit one or multiple forestry assets
x) In periods where the discount opens up, the Board has the option to
consider share buybacks
5 Valuation
Potential impact
The risk that valuations are prepared incorrectly by either the Investment
Manager or the valuer, leading to a publicly stated NAV that is not
representative of the value of the portfolio. There is a risk that there are
an insufficient number of comparable transactions used to inform the RICS Red
Book valuation which is less representative of FSF's actual value. This could
reduce investor confidence in the Company and could result in investors
selling FSF's shares.
Mitigation
· The Company has appointed an independent forestry valuation
specialist, Savills, to value the portfolio. Savills are highly experienced in
forestry valuations and valued over £1 billion of UK forestry assets in 2021.
Savills will use the RICS Red Book valuation approach to ensure valuations are
conducted using a consistent and well‑recognised methodology
· The Savills valuation agreement leaves it as a contractor with a
liability exposure of c.4% of the valuation figure and FSF would have recourse
up to that amount in the event of manifest error
· If the Company was concerned about the Red Book valuation it
could seek to pursue one or a number of exits above holding value, providing
additional actual transactional evidence, to provide confidence to investors
Market risks
6 Demand for carbon credits
Potential impact
The risk that demand or volume leads to a reduction in demand from the users
of carbon credits that negatively impacts profitability.
Mitigation
· As outlined in the Prospectus, the demand for carbon credits is
expected to materially increase in the run‑up to 2030 and 2050, driving
carbon price increases. Decreases in prices paid and issues with supply of
volume of carbon credits are more likely to be driven by regulatory challenges
than by overriding supply and demand dynamics
· The Investment Manager is part of the working/consultation groups
for the Woodland Carbon Code (carbon credits body/verifier in the UK) and the
LSE Voluntary Carbon Markets delivery group, with the goal of ensuring
continued additionality of carbon credits and an orderly functioning market
for trade of carbon credits
7 Demand for timber
Potential impact
The risk that a reduction in demand from the purchasers of timber would
negatively impact the Company's profitability.
Mitigation
· The fundamental under-supply of standing timber in the UK and
globally in the context of strong increasing demand reduces market risk for
the sale of the Company's key product and revenue stream and which affects the
underlying asset values (land and crop value). Timber prices can be volatile
on an intra-month, intra-quarter and sometimes intra-year basis. However,
demand over the medium to long term has historically created real terms
pricing growth over the medium to long term and in the context of global
under-supply and increasing demand this risk is reduced if a medium to
long-term investment view is applied
· The Investment Manager has set a long-term five-year rolling
average returns target for the Company in order to deter investors from a
short-term investing approach
· Due to no regular dividend yield commitments to Shareholders, the
Investment Manager will be able to postpone harvesting programmes during
periods of short‑term timber pricing volatility
8 Cost to transition to lower emissions technology
Potential impact
The risk that timber sawmills/processors could face increased energy supply
costs e.g. if biomass energy is phased out, or if the supply chain have
increased costs with mitigating their GHG emissions. Costs could be passed
onto FSF, in the form of lower prices paid for FSF's timber and in higher
prices charged for downstream timber products leading to reduced timber
demand.
Mitigation
· FSF is in a strong position where its product has a very low
carbon intensity and a long time horizon (notably only processing and delivery
costs with product going to mills approximately every 40 years)
· Downstream wood processors in Europe and North America (where the
UK sources most of its imported wood from) likely to follow a similar energy
transition pathway; risk is reduced while FSF keeps in step with its peer
group
· FSF is proactively participating with the UK wood processing
industry to engage and consult with the UK Government on policies and
incentive schemes. FSF is a member of Timber Development UK, of which FSF
Non‑Executive Director Christopher Sutton is Chairman
· Timber products are low carbon and renewable materials versus the
alternatives for the same use. If wood processors are under pressure to
decarbonise then so will the producers of the alternative materials available.
Overall, the demand for and value of timber is likely to increase as its
sustainability credentials become increasingly valued versus the alternatives
Forestry risks
9 Reputational
Potential impact
The risk that there is resistance to change of land use from the public
generating negative PR.
Negative press and media coverage could negatively impact investor sentiment,
ultimately impacting the ability to raise more capital.
Mitigation
· During the due diligence phase of afforestation investments, the
Investment Manager commissions an independent community risk assessment. This
is intended to ensure that afforestation only takes place in lower community
risk areas, where tree planting is considered unlikely to be contentious and
the expected likelihood of community resistance is considered low
· The Investment Manager has launched a Forestry Skills Training
Programme that directly enables rural farming communities to adapt to
afforestation related land use change, by providing local community members
with the skills, training, qualifications, mentoring and safety equipment
required to commence in the work and jobs created by the Company's
afforestation schemes. More information can be found on page 37.
· The Investment Manager is engaging with industry bodies such as
Confor and Timber Development UK to promote the merits of increased
sustainable UK timber supply
· The Company pursues community engagement plans and conducts
in-person community days to enable the local community to engage with and
express their views about FSF's afforestation development plans
Legal and regulatory
10 Government commitment to net zero
Potential impact
The risk that the UK Government changes its net zero strategy, leading to less
support for sustainable forestry and climate action; timber regulation changes
in favour of only broadleaf afforestation schemes to achieve net zero action;
fewer grants; commercial timber falling out of favour; WCC changing the Carbon
Credit Policy; and convoluted policy developments.
Mitigation
· Considered unlikely given the level of consensus and commitment
to achieve UK net zero by 2050
· Per hectare, planting commercial conifers makes approximately
three times the climate contribution versus planting broadleaves; this is due
to the much faster biological growth rate of conifers and to carbon remaining
locked up in timber-based products for decades in wood products
· Proactive engagement with the market around this point,
continuing to educate around the dual benefits of sustainable forestry to
tackle climate change and biodiversity loss; in particular, the argument
against broadleaf afforestation sites and monoculture risks
· Changes to planting strategy would be considered if grants are no
longer available and action taken if necessary
FINANCIAL REVIEW
Analysis of financial results
The financial statements of the Company for the year ended 30 September 2023
are set out on pages 88 to 106.
The Company prepared the audited financial statements for the year to
30 September 2023 in accordance with the UK adopted International Accounting
Standards as applicable to companies reporting under those standards. The
Company applies IFRS 10 and Investment Entities: Amendments to IFRS 10, IFRS
12 and measures all their subsidiaries that are themselves investment entities
at fair value. The Company accounts for its interest in its wholly owned
direct subsidiary FSFC Holdings Limited as an investment at fair value through
profit or loss in accordance with IFRS 13 Fair Value Measurement.
The primary impact of this application, in comparison to consolidating
subsidiaries, is that the cash balances, the working capital balances and
borrowings in the intermediate holding companies and project companies are
presented as part of the Company's fair value of investments.
The Company, its subsidiaries FSFC Holdings Limited and FSFC Holdings 2
Limited (together the "Group"), hold investments in 68 portfolio properties
held within five special purpose vehicles which intend to make distributions
in the form of interest on loans and dividends on equity as well as loan
repayments and equity redemptions.
For more information on the basis of accounting and Company structure, please
refer to the notes to the financial statements on pages 92 to 106.
Key financial metrics for the year ended 30 September 2023
As at 30 September As at 30 September
All amounts presented in £million (except as noted) 2023 2022
Gross Asset Value ("GAV")(1) 179.6 180.6
Market capitalisation 140.2 182.4
Net Asset Value ("NAV")(2) 169.2 180.6
NAV per share (pence) 98.4 105.0
Total return on investment (8.7) 11.0
Profit/(loss) before tax (11.3) 8.8
Earnings/(losses) per share (pence) (6.6) 6.2
Calculated as the sum of the NAV and total outstanding debt on page 47.
Total equity as per the statement of financial position on page 89.
Net assets
Net assets decreased 6.3% from £180.6 million at 30 September 2022 to £169.2
million at 30 September 2023.
The net assets of £169.2 million comprise £172.2 million of forestry and
afforestation assets, with an additional £2.7 million carbon credit valuation
and cash balances of £1.2 million in the Company and £2.7 million in the
project companies
Offset by the drawn Revolving Credit Facility ("RCF") balance of £10.4
million, £2.0 million of other assets in the Company and £1.2 million of
other liabilities in the project companies.
At 30 September 2023, £10.4 million of the Group's £30 million RCF had been
drawn. The GAV is equal to the sum of the NAV of £169.2 million and the
outstanding debt of £10.4 million as described in the alternative measures
table on page 50. The GAV as at 30 September 2023 was £179.6 million.
Analysis of the Group's net assets at 30 September 2023
As at As at
30 September 30 September
All amounts presented in £million (except as noted) 2023 2022
Red Book valuation(1) 172.2 144.2
Carbon credits valuation(2) 2.7 0.6
Portfolio value 174.9 144.8
Project companies' cash 2.7 2.0
Project companies' other net liabilities (1.2) (0.5)
Revolving Credit Facility (10.4) -
Investments at fair value through profit or loss 166.0 146.3
Company's cash 1.2 34.3
Company's other net assets 2.0 -
Net Asset Value 169.2 180.6
Number of shares 172,056,075 172,056,075
Net Asset Value per share (pence) 98.4 105.0
1. Classified as the fair value of the underlying forestry assets
held through the SPVs.
2. The carbon credit valuation noted is based on value ascribed to
progress towards creation of carbon credits.
Third-party debt arrangements and gearing position
As at 30 September 2023, the Company had used £10.4 million of its RCF with
£19.6 million remaining undrawn. The total outstanding £10.4 million RCF
balance represented 5.8% of GAV (30 September 2022: 0%).
Details of the debt arrangements:
Borrower Provider Facility type Outstanding Maturity Applicable rate(1)
FSFC Holdings 2 Clydesdale Bank PLC Revolving credit £10.40m July 2025 SONIA + (2.00%-2.20%)
1. The margin varies depending on the completion of defined
S&ESG targets linked to the facility. In the first year of the facility
these targets were met, and the Company achieved a margin of 2.00%.
NAV bridge
NAV bridge from 30 September 2022 to 30 September 2023
The Net Asset Value at 30 September 2023 was £169.2 million, compared to
£180.6 million at 30 September 2022. The decrease of £11.4 million is the
net impact of a reduction of the fair value of the existing afforestation and
forestry assets by £6.5 million, acquisition costs of £2.0 million, fund
operational expenditure of £3.4 million, asset-level operational expenditure
of £1.9 million and £1.3 million of capital expenditure, offset by grant and
timber income of £1.7 million and an additional £2.1 million for 107,591
carbon credits attributed to four underlying afforestation assets where
planting has been completed during the year.
Company performance
Profit and loss
The Company's loss before tax for the year to 30 September 2023 was £11.3
million, generating negative earnings of (6.6) pence per share.
For the period to 30 September 2023, the total return on investments was
£(8.7) million, which relates to £2.6 million of interest on the FSFC
Holdings loan notes and £11.3 million net losses on investments at fair
value. The interest income is from the Company's Shareholder loan to FSFC
Holdings Limited. The net loss on investment is generated by the net fair
value movement on the Company's investment in FSFC Holdings Limited.
Operating expenses included in the income statement for the period were £2.7
million, in line with expectations. These comprise investment management fees
of £1.6 million and £1.1 million of operating expenses. The details on how
the investment management fees are charged are set out in note 5 to the
financial statements.
Period from
31 August 2022
Year to
30 September to 30 September
All amounts presented in £million (except as noted) 2023 2022
Interest received on FSFC Holdings loan notes 2.6 0.9
Net (losses)/gains on investments at fair value (11.3) 10.1
Total return on investment (8.7) 11.0
Operating expenses (2.6) (2.2)
Profit before tax (11.3) 8.8
Earnings per share (pence) (6.6) 6.2
Ongoing charges
The ongoing charges ratio is an indicator of the costs incurred in the
day-to-day management of the Fund. FSF uses the Association of Investment
Companies ("AIC") recommended methodology for calculating this ratio, which is
an annual figure.
The ongoing charges ratio for the year to 30 September 2023 was 1.46% (30
September 2022: 1.43%). The ongoing charges have been calculated, in
accordance with AIC guidance, as annualised ongoing charges (i.e. excluding
acquisition costs and other non-recurring items) divided by the average
published unaudited Net Asset Value in the period. The ongoing charges
percentage has been calculated on the consolidated basis and therefore takes
into consideration the expenses of the Company, FSFC Holdings Limited and FSFC
Holdings 2 Limited.
The Investment Manager believed this to be competitive for the market in which
FSF operates and the stage of development and size of the Fund, demonstrating
that management of the Fund is efficient with minimal expense incurred in its
ordinary operation.
Ongoing charges
All amounts presented in £million (except as noted)
FSFC FSFC H2
Investment management fees 1.56
Directors' fees 0.10
Administration fees 0.15
Audit fees 0.15
Other legal and professional fees 0.33
Other ongoing fees 0.19 0.13
Total 2.61
Ongoing charges ratio 1.46%
NAV
31 March 2023 186.6
30 September 2023 169.2
Average 177.9
Cash flow
The Company held cash balances at 30 September 2023 of £1.2 million. This
amount excludes cash held in subsidiaries. The breakdown of the movements in
cash during the year is shown below.
Cash flows of the Company for the year to 30 September 2023 (£million)
Year to 31 August 2021
30 September to 30 September
2023 2022
Opening cash balance 34.3 -
Gross proceeds from IPO and fundraising - 175.0
IPO and share issuance costs - (3.2)
Investment in FSFC Holdings Limited
(equity and loan notes) (31.0) (136.2)
Loan interest receipts 0.4 -
Group movements in working capital 0.2 0.9
Directors' fees and expenses (0.2) (0.1)
Investment management fees (1.5) (1.1)
Administrative expenses (1.0) (1.0)
Company's closing cash balance 1.2 34.3
Cash flows of the Group for the year to 30 September 2023 (£million)
The Group is defined as the Company and its two intermediate holding
companies. The cash flows for the Group of £1.2 million include £0.01
million in FSFC Holdings 2 Limited .
Combined asset-level income analysis
The underlying investments generate revenue from grants, timber harvesting and
a number of isolated activities across a number of sites. Details of the
combined income at the asset level for the year to 30 September 2023 are shown
below:
Asset-level revenue type Revenue (£m) Details
Grant income 0.9 472 hectares of planting
Timber income 0.7 16,755 tonnes of harvesting
Livestock sales and agricultural rent 0.2 Includes livestock sales and land rental for livestock
Hydro power 0.1 Hydro electricity sales at Fordie
Other income 0.2 Includes sporting and hospitality rental income
Total asset-level revenue 2.1
ALTERNATIVE PERFORMANCE MEASURES ("APMs")
APM purpose Calculation APM value Reconciliation to IFRS
Net Asset Value ("NAV") A measure of the value of the Company's total assets. The sum of net assets of the Company as shown on the statement of financial £169.2 million The calculation uses the Net Asset Value as per the statement of financial
position. position on page 89.
Gross Asset Value ("GAV") A measure of the value of the Company's total The sum of total assets of the Company as shown on the statement of financial £179.6 million The calculation uses the Net Asset Value as per the statement of financial
assets. Gross Asset Value on investment basis including debt. position and the total debt of the Group. position on page 89 and total outstanding debt on page 47.
Net Asset Value per share Allows investors to gauge whether shares are trading The net assets divided by the number of Ordinary Shares in issuance. 98.4 pence As per the closing Net Asset Value per the statement of financial position on
at a premium or a discount by comparing the Net Asset Value per share with the page 89 and the closing number of Ordinary Shares as per note 13 of the
share price. financial statements on page 100.
Total NAV return since IPO A measure of financial performance, indicating the Closing NAV per share as at 30 September 2023 plus all dividends since IPO 0.3% The calculation uses the Net Asset Value as per the statement of financial
movement of the value of the Fund since IPO and expressed as a percentage. assumed reinvested, divided by the NAV at IPO, expressed as a percentage. position on page 89 and cash dividends as per the statement of cash flows on
page 91.
Market capitalisation Provides an indication of the size of the Company. Closing share price as at 30 September 2023 multiplied by the closing number £140.2 million The calculation uses the closing share price as per the key investment metric
of Ordinary Shares in issuance. table on page 44 and the closing number of Ordinary Shares as per note 13 of
the financial statements on page 100.
Ongoing charges A measure, expressed as a percentage of average net assets, of Calculated and disclosed in accordance with the AIC methodology. Annualised 1.46% Ongoing charges are detailed on page 48.
the regular, recurring annual costs of running the Company. expenses divided by average NAV.
Gearing Total debt of the Group and underlying investments as shown on page 47 as a 5.8% The calculation uses the total debt on page 47 and the Net Asset Value as per
A measure of financial risk on the balance sheet of the Group. percentage of GAV. the statement of financial position on page 89.
BOARD OF DIRECTORS
Richard Davidson
Chair of the Board, Management Engagement Committee Chair
Richard has a 20-year track record of investing in UK forestry and has been
heavily involved in the management of his own Scottish forestry investments,
including the planning and design of several new planting projects. He was
previously the chair of the investment committee of Gresham House Forestry.
Richard was formerly a Managing Director and Investment Strategist at Morgan
Stanley. He was also previously a partner of Lansdowne Partners, running the
macro fund. Richard chairs the University of Edinburgh investment committee,
overseeing the university's endowment.
External directorships
Aberforth Smaller Companies Trust Plc
MIGO Opportunities Trust Plc
Sarika Patel
Non-Executive Director, Audit and Risk Committee Chair, Senior Independent
Director
Sarika has nearly 30 years' experience in a mixture of public and private
organisations. She is a chartered accountant and a chartered marketer. Sarika
is also currently Chair of Action for Children and is a Board Member of the
Office for Nuclear Regulation where she chairs the Audit, Risk and Assurance
Committee.
External directorships
abrdn Equity Investment Trust Plc
SDCL Energy Efficiency Income Trust Plc
Office for Nuclear Regulation
Action for Children
London General Surgery Ltd
Josephine Bush
Non-Executive Director, Sustainability and ESG Committee Chair
Josephine was a senior partner at EY for 14 years, specialising in the
renewable energy sector. She is a qualified solicitor and chartered tax
adviser, as well as earning the CFA ESG investing qualification and a
sustainable finance certification. She is a fellow of the Royal Geographic
Society.
External directorships
JRB Consulting Limited
Vulcan Energy Resources
Sustineri Strategy Ltd
NextEnergy Solar Fund Plc
Christopher Sutton
Non-Executive Director, Nomination and Remuneration Committee Chair
Christopher was a director of James Latham plc, one of the UK's largest
independent trade distributors of timber, panels and decorative surfaces, for
14 years. He is currently the Chair of Timber Development UK, a Non-Executive
Commercial Director of UNWASTED and an ambassador for the National Forest
Company.
External directorships
Timber Development UK Limited
CDS Consultants Limited
UNWASTED Group Plc
BOARD LEADERSHIP AND COMPANY PURPOSE
GOVERNANCE FRAMEWORK
The Board
The role of the Board is to collectively promote the long-term success of the
Company. The Board shapes the Company's strategy, having regard to all
stakeholders within a framework of effective controls. The "Matters Reserved
for the Board" is available to view on the Company's website or by writing to
the Company Secretary at the registered office.
Section 172 statement Pages 13 and 14
Principal risks Page 41 to 45
Supporting Committees
The Board has established four Committees to focus on the specific activities
of the Company, under the chairmanship of different members of the Board, and
ultimately all reporting to the full Board.
Audit and Risk Committee Pages 56 to 59
Oversees financial reporting, maintains a constructive relationship with the
external auditor and monitors the effectiveness of the Company's risk
management systems.
Nomination and Remuneration Committee Pages 64 to 67
Ensures the Board and its Committees have the appropriate balance of skills,
knowledge, diversity, experience and independence. Establishes a remuneration
policy and ensures there is a clear link between performance and remuneration.
Sustainability and ESG Committee Pages 62 and 63
Provides oversight in relation to its Sustainability and ESG strategy.
Management Engagement Committee Pages 60 and 61
Reviews the performance of the Investment Manager, Fund Administrator, Company
Secretary and key external service providers.
The Investment Manager
The day-to-day management of the Company and in particular the management of
its forestry and afforestation portfolio
Investment Manager's Report Pages 22 and 23
Operational review Pages 24 to 32
Stakeholders
The Company's stakeholders play an important role in monitoring and
safeguarding its governance. The Board ensures that its highly experienced
third-party advisers, such as its corporate broker and legal adviser, are
consulted on appropriate matters.
Section 172 statement Pages 13 and 14
Relationships with Shareholders Pages 13 and 14
CORPORATE GOVERNANCE REPORT
Purpose and governance culture
The Company has a clear and consistent purpose, which forms the foundation of
its strategic objectives. The Company's Board embeds a strong culture of
governance, informed by a number of factors including its focus on long-term
net total return through targeting sustainable impact investments and openness
and transparency with stakeholders. This approach is at the heart of how the
Directors fulfil their duty under Section 172 of the Companies Act 2006 and
the Board feels strongly that its policies, practices and behaviours
contribute effectively to the success of the Company and its stakeholders.
Meetings and attendance
The Board meets formally on a quarterly basis and, in addition, also meets to
review and discuss the Company's strategy annually. The Board also holds ad
hoc meetings for matters such as to approve the half-yearly Net Asset Value,
receive trading updates and other general corporate matters. The Company
Secretary attends all scheduled meetings, whilst representatives of the
Investment Manager, the external auditor and other advisers are invited to
attend as required.
In addition to the scheduled Board and Committee meetings for FY23, there were
a further seven Board meetings held during the period. Attendance at all
scheduled meetings can be seen in the table below.
Richard Sarika Josephine Christopher
Davidson Patel Bush Sutton
Quarterly Board meetings 4/4 4/4 4/4 4/4
Audit and Risk Committee meetings 2/2 2/2 2/2 2/2
Nomination and Remuneration Committee meetings 1/1 1/1 1/1 1/1
Management Engagement Committee meetings 1/1 1/1 1/1 1/1
Sustainability and ESG Committee meetings 1/1 1/1 1/1 1/1
Statement of compliance with AIC Code
The Company has complied throughout the accounting period ended 30 September
2023 with the Provisions set out in Sections 5 to 9 of the AIC Code.
The Board has considered the need for an internal audit function and, as all
the day-to-day operations of the Company are outsourced, this was not deemed
necessary at this time. Due to the size of the Board and the nature of the
Company's business, the Board considers it appropriate for the entire Board,
including the Chair, to fulfil the role of the Audit and Risk Committee.
Going concern
Under the AIC Code, the Board needs to consider whether it is appropriate to
adopt the going concern basis of accounting in preparing the financial
statements. The Board continues to adopt the going concern basis and the
detailed consideration is contained on page 77.
Viability statement
The viability statement, under which the Directors assess the prospects of the
Company over a longer period, is contained on pages 77 and 78.
Assessment of principal and emerging risks
The Board undertook a robust assessment of the Company's emerging and
principal risks during the year. Particular focus was given to the liquidity
of the Company's assets and subsidiaries. Further details can be found on page
93.
DIVISION OF RESPONSIBILITIES
Board Role overview
Chair · Sets the agenda for Board meetings
· Works with the Company Secretary to manage the meeting timetable
· Facilitates open and constructive dialogue amongst Directors
during meetings
· Ensures timely flow of accurate and reliable information within
the Board
Non-Executive Directors · Work closely with the Chair and Foresight in monitoring the
Company's delivery of strategy
· Ensure internal controls are robust and that an external audit is
carried out
· Provide constructive input to the development of the Company's
strategy
· Serve on the Board's Committees
Role overview
Investment Manager · Provides portfolio and risk management services
· Ensures compliance with the Company's investment policy and the
requirements of the AIFM Directive, pursuant to the Investment Management
Agreement ("IMA")
· Fulfils the duties set out in the IMA, which sets out the matters
over which the Investment Manager has authority
· Works alongside the Board on corporate strategy, risk management
and corporate governance procedures
· Provides full information on the Company's investment
performance, assets, liabilities, projected cash flow and other relevant
information to the Board at its quarterly meetings
Administrator · Maintains the Company's books and records
· Prepares the management and financial accounts
· Calculates, in conjunction with the Investment Manager and
Savills, the Company's NAV
Company Secretary · Ensures regulatory compliance
· Supports the Board's corporate governance processes and
continuing obligations
· General secretarial functions required by the Companies Act 2006
· Provides support to the Chair in ensuring timely and accurate
information flows to the Board
AUDIT AND RISK
AUDIT AND RISK COMMITTEE REPORT
Sarika Patel
Chair of the Audit and Risk Committee
Composition
The Audit and Risk Committee comprises the full Board and is chaired by Sarika
Patel. Due to the size of the Board and the independent, non-executive nature
of the Directors, the Board considers it appropriate for all of the Directors
to be members of the Committee. The Committee's terms of reference were
reviewed during the year and are available on the Company's website.
The Board is satisfied that, in line with the recommendations of the AIC Code,
at least one member of the Audit and Risk Committee has recent and relevant
financial experience, and that the Committee as a whole has experience
relevant to the sector in which the Company operates. As the Chair of the
Board was independent on appointment, it is considered appropriate for him to
be a member of the Audit and Risk Committee and to bring his considerable
experience in the forestry sector to bear on its activities.
Responsibilities
The role of the Audit and Risk Committee is to ensure that the financial and
other reporting of the Company is accurate, complete, and appropriately
audited and reported thereon. The Committee reviews internal procedures of its
advisers and agents to ensure that the Company's significant risks have been
identified and that suitable steps have been taken to ensure that the controls
in place appropriately mitigate these risks.
The duties of the Audit and Risk Committee are, inter alia:
· To monitor the integrity of the financial statements of the
Company, including its annual and interim reports and any other formal
announcements relating to its financial performance, and review and report to
the Board on significant financial reporting issues and judgements which those
statements contain having regard to matters communicated to it by the auditor
· To review the content of the Annual Report and Accounts and
advise the Board on whether, taken as a whole, it is fair, balanced and
understandable and provides the information necessary for Shareholders to
assess the Company's position and performance, business model and strategy and
whether it informs the Board's statement in the Annual Report on these matters
that is required under the AIC Code
· To review the Company's internal financial controls and review
the adequacy and effectiveness of the Company's internal control and risk
management systems and monitor the proposed implementation
of such controls
· To review the adequacy and effectiveness of the Company's
compliance, whistleblowing and fraud‑related processes and procedures
· To consider and make recommendations to the Board to be put to
Shareholders for approval at the Company's Annual General Meeting in relation
to the appointment, reappointment and removal of the Company's auditor
· To assess annually the auditor's independence and objectivity
taking into account relevant professional and regulatory requirements and the
relationship with the auditor as a whole, including any threats to the
auditor's independence and the safeguards applied to mitigate those threats
and the provision of any non audit services
Activities during the year
In March 2023, the Committee undertook a detailed review of the Company's risk
register and emerging risks. The risk register was updated to reflect, amongst
other things, increased inflation and interest rates and the general
macroeconomic challenges in the market.
During the year, the Audit and Risk Committee has sought assurances as to the
resilience of the reporting and control systems in place for both the
management of the portfolio and for the Company's investment activities. The
Committee will continue to evaluate and challenge the resilience of all key
agents to the Company.
Although the Board has overall responsibility for preparing the Annual Report
and Financial Statements, the Audit and Risk Committee considers the form and
content of the Annual Report and Financial Statements and any significant
areas of complexity, judgement and estimation that have been applied in the
preparation of the financial statements. These areas of judgement and
estimation were discussed with the Investment Manager, Administrator and
auditor during the year and the Audit and Risk Committee reviewed and agreed
the auditor's audit plan and audit findings report following the conclusion of
its year-end audit.
Meetings
The Committee formally met twice during the year and attendance is set out on
page 54. The meetings allowed sufficient time to enable the Committee to
consider all the matters of importance and the Committee was satisfied that it
received full information in a timely manner to allow it to fulfil its
obligations. The formal Audit and Risk Committee meetings were also attended
by representatives of the Investment Manager, Administrator and Company
Secretary.
Risk management and internal controls
Risks
The Board has ultimate responsibility for the effective management of risk for
the Company including determining its risk appetite and identifying key
strategic and emerging risks. The Audit and Risk Committee serves as a
governance body to oversee, review and challenge the risk management
processes. The Committee has conducted a robust assessment of the principal
risks faced by the Company and was satisfied on the adequacy and effectiveness
of the Company's risk management systems with appropriate operational and
assurance reporting from third parties. A description of these risks,
including procedures employed to manage or mitigate them, is included in the
strategic report on pages 41 to 45.
Internal controls
The Board is responsible for the internal financial control systems of the
Company and for reviewing their effectiveness. It has contractually delegated
these services to third parties, but the Directors annually review the
internal control framework established by the Investment Manager and
Administrator to satisfy itself on the effectiveness of internal financial
control.
The Directors receive and consider quarterly reports from the Investment
Manager, giving full details of the portfolio and of all aspects of the
financial position of the Company. Additional ad hoc reports are received as
required and Directors have access at all times to the advice and services of
the Company Secretary, which is responsible for ensuring that Board procedures
are followed, and that applicable rules and regulations are complied with.
The Board has reviewed the need for an internal audit function. It has decided
that the systems and procedures adopted by the Investment Manager,
Administrator, the Audit and Risk Committee and other third-party advisers
provide sufficient assurance that a sound system of internal control, which
safeguards Shareholders' investments and the Company's assets, is maintained.
In addition, the Company's financial statements are audited by external
auditors. The Board has therefore concluded that it is not necessary to
establish an internal audit function at present but this approach will be kept
under review.
The auditor
As part of the review of auditor independence and effectiveness, Ernst &
Young LLP ("EY") has confirmed that they are independent of the Company and
have complied with the relevant auditing standards. In evaluation of EY's
performance, the Audit and Risk Committee has taken into consideration the
skills and experience of the firm and of the audit team.
The Committee assessed the effectiveness of the audit process through the
quality of the audit planning reports it received from EY, together with the
contribution which EY made to the discussion of any matters raised in these
reports or by Committee members. The Committee also took into account any
relevant observations made by the Investment Manager and Company Secretary.
The Committee is satisfied that EY provides an effective independent
challenge in carrying out its responsibilities.
EY was appointed as the Company's auditor upon its IPO in November 2021.
Having considered the effectiveness of the audit, including reviewing the
Audit Quality Inspection Reports in relation to EY published by the Financial
Reporting Council, the Audit and Risk Committee has recommended the continuing
appointment of EY to the Board. EY's performance will continue to be reviewed
annually, taking into account all relevant guidance and best practice.
All non-audit work to be carried out by EY must be approved in advance by the
Audit and Risk Committee to avoid compromising the independence of EY as
auditor. No non-audit fees were incurred during the financial year to 30
September 2023.
Service provided
(excluding VAT) 2023 fee 2022 fee
Audit services £143,775 £118,250
Non-audit services £0 £0
Total £143,775 £118,250
Significant financial reporting areas
The key areas of risk identified and considered by the Committee in relation
to the business activities and financial statements of the Company for the
year ended 30 September 2023 were as follows:
Matter Committee action
Valuation of the forestry and afforestation portfolio The Investment Manager liaises with the valuers on a regular basis to ensure
they have up-to-date management information to value the portfolio. The Board
reviewed the results of the valuation procedure at each half-year and
discussed in detail the process of producing each valuation with the
Although valued by an independent firm of valuers, Savills, the valuation of Investment Manager.
the Company's portfolio is inherently subjective, requiring significant
judgement by the valuers. Errors in the valuation could have a material impact
on the Company's NAV. Further information about the portfolio and inputs to
the valuations are set out in note 10 to the financial statements. The Investment Manager discussed with the auditor the work performed to
confirm the valuation and existence of the assets in the portfolio. The 30
September valuation was also discussed in detail with Savills to ensure that
the Board understood the assumptions underlying the valuation and
sensitivities inherent in the valuation and any significant area of judgement
Valuation of carbon credits The Investment Manager and the valuer worked closely together to consider the
process for the valuation of the Company's carbon credits. Details of the
methodology and assumptions applied can be found on page 32. The valuers also
reported directly to the Board at its strategy day in August 2023, in relation
As the sale of carbon credits is a relatively new area, support for the to both the forestry and afforestation market and the outlook for carbon
pricing and valuations prepared by the Company is more limited than its credit valuations.
forestry and afforestation assets. As carbon credits now make up a larger area
of the portfolio than the previous year, errors or an overly conservative
approach to the valuation have the potential to impact the Company's NAV in a
material way. The Board reviewed the results of the valuation procedure at each half-year
and discussed in detail the process of producing each valuation with the
Investment Manager.
ESG metrics The Audit and Risk Committee worked closely with the Sustainability and ESG
Committee and the Investment Manager to ensure that this data is reliable,
accurate and being sufficiently tested. Further detail on how these metrics
have been produced can be found in the Sustainability and ESG Committee report
Verification of the ESG metrics contained on pages 34 to 36 does not form part on pages 62 and 63.
of the scope of the external audit. Incomplete or inaccurate data contributing
to these metrics could lead to errors in reporting the Company's significant
ESG considerations to Shareholders.
Going concern assessment In assessing the Company's going concern, the Committee has taken into
consideration the current economic situation, the principal risks facing the
Company, its loan arrangements and liquidity position. The Company's going
concern statement can be found on page 93
The Directors are required to prepare the financial statements on a going
concern basis unless they intend to liquidate the Company or have no
alternative but to do so.
Conclusion
The Audit and Risk Committee has concluded that the Annual Report and
Financial Statements for the year ended 30 September 2023, taken as a whole,
are fair, balanced and understandable and provide the information necessary
for Shareholders to assess the Company's business model, strategy and
performance.
This conclusion was reached through knowledge of the Company and its
activities, a detailed review of this Annual Report and enquiries of the
various parties involved in the preparation of the Annual Report and Financial
Statements. The Audit and Risk Committee has reported to, and agreed its
conclusions with, the Board.
Committee evaluation
A detailed and rigorous evaluation of the Committee was undertaken as part of
the Board's annual performance evaluation. The skills and experience of the
members, including recent and relevant financial experience and industry
experience, were found to be appropriate. The Committee was found to be
functioning effectively and all Committee members were satisfied with the
overall workings of the Committee. Through the Nomination and Remuneration
Committee, there was also consideration of succession planning and the
continued independence of all the members of the Committee.
Sarika Patel
Chair of the Audit and Risk Committee
5 December 2023
REPORT OF THE MANAGEMENT ENGAGEMENT COMMITTEE
Richard Davidson
Chair of the Management Engagement Committee
Composition of the Management Engagement Committee
The Management Engagement Committee comprises the full Board with Richard
Davidson as Chair. The Committee's terms of reference were reviewed during the
year and are available on the Company's website.
Responsibilities of the Management Engagement Committee
The duty of the Management Engagement Committee is to review the terms of
appointment of, and the performance by, the Investment Manager, the
Administrator and the other key service providers appointed by the Company and
to decide whether it is in the best interests of Shareholders for those
appointments to continue.
The Company's auditor is not included in this review as their appointment
falls under the remit of the Audit and Risk Committee.
The following are considered particular areas of focus for the Committee:
· To monitor and evaluate the Investment Manager's performance
(and, if necessary, provide appropriate guidance) and compliance by the
Investment Manager with the Investment Management Agreement
· To reasonably satisfy itself that the Investment Management
Agreement is fair and that the terms thereof comply with all regulatory
requirements, conform with market and industry practice and remain in the best
interests of Shareholders
· To reasonably satisfy itself that systems put in place by the
Investment Manager in respect of the Company are adequate to meet relevant
legal and regulatory requirements
· To reasonably satisfy itself that matters of compliance are under
proper review
· To regularly review the composition and performance of the key
personnel performing the services on behalf of the Investment Manager and
consider whether the continuing appointment of the Investment Manager, on the
terms of the Investment Management Agreement, is in the interests of
Shareholders as a whole, and make recommendations to the Board thereon
together with a statement of the reasons for this view
· To consider and review the level and method of remuneration of
the Investment Manager pursuant to the terms of the Investment Management
Agreement, including the methodology of calculation of the annual fee and any
performance fee
· To review the performance and services provided by the Company's
other service providers and consider whether the continuing appointments of
such service providers under the terms of their agreements are in the
interests of Shareholders as a whole and make recommendations to the Board
thereon together with a statement of the reasons for their view
In addition to the Committee members drawing upon their own experiences of
working with the service providers, the Committee also had Foresight Group
complete assessments of the performance of the other service providers. This
feedback was carefully reviewed and discussed by the Committee.
Activities during the year
Investment Manager
The day-to-day management of the Company, and in particular the management of
its forestry and afforestation portfolio, is delegated to the Investment
Manager. The Committee carried out a robust assessment of the Investment
Manager during the year, including fee levels. The feedback was positive. The
Board requested a breakdown of the investment management fees, including fees
paid to EJD Forestry for asset management services, and these were presented
and discussed at the annual strategy day. It was concluded that, despite the
rate of acquisitions in the 2023 financial year being lower than the previous
year, the development of the Company's afforestation portfolio required a
considerable time commitment. The Investment Manager also employed a portfolio
manager during the year to assist with the implementation of the Company's
considerable planting programme in spring 2024. The increased resource within
the portfolio management team at Foresight is expected to allow Robert Guest
and Richard Kelly additional time to focus on the overall strategy of the
portfolio and seeking prospects for improved performance and growth. The Board
also reviewed an Investment Manager prepared fee benchmarking exercise,
comparing the Investment Manager's fees to other equivalent forestry
investment funds and alternative investment trusts. The Board was satisfied
that the investment management fees represented good value for the Company.
Therefore, no fee changes were recommended to the Board by the Committee for
this financial year.
The Committee remains firmly of the view that the Investment Manager
demonstrates the skills and commitment to perform its role. The Committee
recommended the Investment Manager's continued appointment to the Board, and
it was unanimously agreed that this is in the best interests of Shareholders.
Administrator and Company Secretary
Foresight Group LLP has served as Administrator and Company Secretary to the
Company since its IPO in November 2021.
Under the terms of the Investment Management Agreement, Foresight Group is
entitled to an annual fee in respect of administration and company secretarial
services which is calculated and payable monthly in arrears as the greater of:
(i) 0.07 per cent. of the Net Asset Value per annum; and (ii) £120,000. The
Investment Manager is also entitled to reimbursement of all out‑of‑pocket
costs, expenses and charges reasonably and properly incurred on behalf of the
Company in connection with these services. No additional fees were paid to the
Administrator and Company Secretary during the period.
Following the Committee's recommendation, the Board agreed that the continued
appointment of the Administrator and Company Secretary is in the best
interests of the Company and its Shareholders.
Other service providers
During the year, the Management Engagement Committee conducted a review of the
Company's other key service providers, as listed at the back of this Annual
Report. The Committee reviewed the performance as well as the fees charged by
each service provider and instructed the Investment Manager to provide
feedback to those providers where it was deemed appropriate. As a result of
this review and following the departure of the Company's main corporate broker
contact, who had been instrumental in the Company's IPO, the Company undertook
a formal and rigorous tender process to select a new corporate broker. A
decision was made after the year end to appoint Stifel Nicolaus Europe Limited
as the new corporate broker to the Company.
The Company appointed a new PR Adviser, SEC Newgate, during the year and has
been pleased with the results produced to date.
Committee evaluation
Following a robust review of the Committee as part of the Company's annual
performance evaluation, the experience of the Committee's members was found to
be appropriate. Committee meetings were considered effective and efficient,
and all members contributed appropriately.
Richard Davidson
Chair of the Management Engagement Committee
6 December 20232
REPORT OF THE SUSTAINABILITY AND ESG COMMITTEE
Josephine Bush
Chair of the Sustainability and ESG Committee
Composition of the Sustainability and ESG Committee
The Sustainability and ESG Committee comprises the full Board and is chaired
by Josephine Bush. It is considered appropriate that all Directors are members
of the Committee due to the central focus on sustainability of the Company and
the importance of all Board members remaining up to date with sustainability
and ESG matters.
Responsibilities of the Sustainability and ESG Committee
The Sustainability and ESG Committee is responsible for reviewing the
Company's ESG strategy and ensuring this is in line with the aims and
objectives agreed by the Board and the Investment Manager. The Committee's
terms of reference were reviewed during the year and are available on the
Company's website.
The duties of the Sustainability and ESG Committee are, inter alia:
· To guide, supervise and support the Investment Manager in
drafting and periodically reviewing the Sustainability and ESG strategy which
sets out the guiding principles, objectives, strategic actions and policies
with respect to ESG matters
· To have oversight of the overall ESG strategy of Company,
including agreeing the Company's key ESG objectives and agreeing the key
performance indicators linked to each of the Company's chosen ESG objectives,
and monitoring progress against each of these key performance indicators
· To assess and prioritise ESG risks and opportunities for the
Company, such assessment to be carried out in alignment with chosen reporting
frameworks, including assessment of climate change risks, and with relevant
input from the Audit and Risk Committee
· To receive reports and keep abreast of notable developments in
ESG-related regulation and industry trends relevant to the Company and the
sector in which it operates
· To monitor the Company's adherence to ESG objectives and KPIs and
work with the Audit and Risk Committee to oversee the reporting of these
objectives and KPIs
· To oversee the selection of non-financial reporting/ESG
disclosure frameworks by the Company
· To oversee the engagement of any external service providers or
consultants retained for the purpose of auditing the Company's performance in
relation to ESG matters
· To identify relevant ESG training and opportunities and advise
the Board and/or the Company's key service providers accordingly
Meetings
The Sustainability and ESG Committee met once during the year to oversee,
guide and discuss the Company's approach to sustainability and ESG strategy,
review progress against KPIs, and to assess the disclosures to make in this
report and the separate Sustainability and ESG Report. The Sustainability and
ESG Committee Chair also met with representatives of the Investment Manager
throughout the year to progress and evolve the approach to sustainability, and
oversee the finalisation of the standalone Sustainability and ESG Report,
which was published in April 2023. The Company Secretary attends the meetings
as Secretary to the Committee. In addition, representatives of the Investment
Manager are also invited to attend.
Activities during the year
ESG strategy
The Company has categorised its ESG commitments into a series of sustainable
business initiatives, measures and targets, with the core aim of generating
"natural capital alpha" (as defined within the standalone Sustainability and
ESG Report) through sustainable forestry management practice. This strategy is
set out on page 33 of this report and in the standalone Sustainability and ESG
Report published on 18 April 2023.
Sustainability and ESG Report
In recognition of the increasing importance of Sustainability and ESG
credentials to Shareholders, the Board prepared and published a separate
Sustainability and ESG Report on 18 April 2023, following the publication of
the 2022 Annual Report and Financial Statements. The Sustainability and ESG
Report aimed to provide additional detail on the narrative surrounding the
statistics set out on pages 62 and 63.
Following positive engagement and feedback on the content of the report, the
Committee has taken the decision to prepare an updated version for the 2023
financial year, which will build on the Company's sustainability strategy,
climate-related risk management, metrics and targets.
International Sustainability Standards Board ("ISSB")
The Committee has considered the ISSB's first sustainability-related reporting
standards, S1 and S2, released in June 2023 (the "Standards"), and is aware
that the Standards are open for voluntary adoption for annual reporting
periods commencing on or after 1 January 2024, with reporting to commence in
2025. It is the view of the Board and the Investment Manager that the
Standards adopt a wider approach to sustainability and the Company has a
strong baseline to support a move towards the ISSB recommendations. Therefore,
the Company will continue to report against TCFD for the 2024 financial year
with a view to moving to the voluntary adoption of the ISSB Standards for the
2025 financial year.
Committee evaluation
An evaluation of the Committee was undertaken as part of the Board's annual
performance evaluation. The Committee was found to be functioning well and
that its approach to Sustainability and ESG was appropriate for the Company.
Josephine Bush
Chair of the Sustainability and ESG Committee
6 December 2023
COMPOSITION, SUCCESSION AND EVALUATION
NOMINATION AND REMUNERATION COMMITTEE REPORT
Christopher Sutton
Chair of the Nomination and Remuneration Committee
Composition of the Nomination and Remuneration Committee
The Nomination and Remuneration Committee comprises the full Board and is
chaired by Christopher Sutton. The Board considers that, given its size, it
would be unnecessarily burdensome to establish a Nomination and/or
Remuneration Committee which did not include the entire Board and believes
that this enables all Directors to be kept fully informed of any issues that
arise on the Board. The Committee's terms of reference were reviewed during
the year and these are available on the Company's website.
Responsibilities of the Nomination and Remuneration Committee
The role of the Nomination and Remuneration Committee is to ensure that there
is a rigorous, formal and transparent procedure for appointments to the Board
and to determine Director remuneration levels. The Committee assists the Board
in ensuring that its composition is optimal for Board effectiveness and that
it is able to operate in the best interests of Shareholders.
The Committee has various functions, the most important of which are:
· To review the structure, size and composition (including the
skills, knowledge, experience and diversity) of the Board as a whole and make
recommendations to the Board with regard to any changes
· To give full consideration to succession planning for Directors
in the course of its work, taking into account the challenges and
opportunities facing the Company, and the skills and expertise needed on the
Board in the future
· To prepare a policy on the tenure of the Chair of the Board and
the Board
· To keep up to date and fully informed about strategic issues and
commercial changes affecting the Company and the market in which it operates
· To be responsible for identifying and nominating for the approval
by the Board, candidates to fill Board vacancies as and when they arise
· To prepare and maintain the Company's equity, diversity and
inclusion policy
· To review the results of the Board performance evaluation process
that relate to the composition of the Board
· To review annually the time required from Non‑Executive
Directors
· To review any proposed changes to the remuneration of the
Directors of the Company, in accordance with the Principles and Provisions of
the AIC Code
· To design remuneration policies and practices to support strategy
and promote long-term sustainable success and review the ongoing
appropriateness and relevance of the remuneration policy
Meetings
The Nomination and Remuneration Committee meets formally at least once a year.
At this meeting, the Committee discusses succession planning, Board
composition and also reviews the results of the annual evaluation of the
effectiveness of the Board and its Committees. The Company Secretary attends
the meetings as Secretary to the Committee and representatives of the
Investment Manager are invited to attend as required.
Activities during the year
Succession planning
The Committee has adopted a policy for succession planning and Board tenure,
and this was reviewed during the year. Each Director has indicated their
preference and intentions with regard to their length of service on the Board,
with consideration being given to the AIC Code's recommendation of a maximum
term of nine years. In acknowledgement of all Directors having the same
appointment date, in the event that all current Directors are still in place
within the next few years, the Board will agree provisional timings for the
recruitment of new Board members. Any new Board members who will replace the
Chair of the Board or the Chair of the Audit and Risk Committee will be
appointed prior to the existing Director's resignation to ensure an effective
handover is delivered. There are no expected Board changes for the year ending
30 September 2024.
Board composition and diversity
The Board consists solely of Non-Executive Directors under the chairmanship of
Richard Davidson. All the Directors are considered by the Board to be
independent of the Investment Manager.
Richard Davidson was independent on appointment and is still considered to be
independent. The Company is subject to the AIC Code and therefore there is no
requirement to limit the Chair's tenure. The Directors' feedback during the
2023 Board evaluation process showed that the Chair effectively promoted a
culture of openness and debate, facilitated constructive Board dynamics and
ensured all Board members contributed effectively.
The Board supports the recommendations issued by the FTSE Women Leaders
Review, the Parker Review and the Listing Rule requirement introduced in April
2022 for listed companies to target at least 40% female Board representation
and at least one member of the Board from an ethnic minority background by
December 2024. This information is set out in the tables below.
Number of
senior positions
Number of Percentage
Board members of the Board on the Board
Men 2 50% N/A(1)
Women 2 50% N/A(1)
Other categories None None N/A(1)
Number of
senior positions
Number of Percentage
Board members of the Board on the Board
White British or other White (including minority white groups) 3 75% N/A(1)
Mixed/multiple ethnic groups None None N/A(1)
Asian/Asian British 1 25% N/A(1)
Black/African/Caribbean/Black British None None N/A(1)
Other ethnic group None None N/A(1)
1. Inapplicable as the Company is externally managed and does not
have executive management functions, including the roles of CEO and CFO.
All current Board members have been drawn from diverse working and social
experience with no prior connections between the individual Board members.
Board evaluation
During the year, a formal and rigorous evaluation of the performance of the
Board, its Committees and the individual Directors was carried out through an
assessment process led by the Nomination and Remuneration Committee Chair and
the Company Secretary. Areas of particular strength included the balance of
skills on the Board and the level of engagement and commitment shown by all
members. The Board's close working relationship with the Investment Manager
and detailed knowledge of the Company's strategy and the issues the Company
faces were also noted.
The Committee acknowledges the AIC Code's recommendation for an independent
Board evaluation to be carried out every three years. As the Company has only
been operating for two years and no significant concerns were raised during
the Board evaluation process, it is the Board's view that an external
evaluation is not currently required. However, this will be kept under review
throughout the upcoming year.
Potential areas of consideration from the 2023 Board evaluation are as
follows:
Key recommendations Actions agreed
Legal and corporate governance
· Increase the Board's understanding of the views and desires of · Increased feedback from the Fund Managers regarding interactions
the Company's Shareholders and stakeholders with Shareholders
· Encourage all Shareholders to attend the Company's second AGM in
February 2024
· All Board members to remain open to discussions with Shareholders
at any time
Meetings and communication
· Feedback from the Board to the Investment Manager on timeliness · The Committee felt that these issues had largely been resolved
of information and time frames for Board approval during the second half of the year and the upward trajectory should continue
Training and induction
· Acknowledgement of the need for continued professional · Periodic training, increased attendance at site visits and the
development on the Board maintenance of a training log to be implemented
Our Board evaluation process
1 Document Preparation
The Company Secretary considers the content of the review questionnaire,
ensuring that this is tailored to suit the nature of the Company and the
requirements of the AIC Code
2 Agree process and timetable
The Company Secretary and the Nomination and Remuneration Committee Chair
agree a timetable for the review to take place and the content of the
questionnaire to be sent to Directors
3 Board and Committee observation
Each Director provides their feedback to the Company Secretary through the
questionnaire
4 Results
The full responses are provided to the Nomination and Remuneration Committee
Chair
5 Reporting
An anonymised version of the consolidated scores and comments is included in
the Nomination and Remuneration Committee meeting pack and a discussion lead
by the Nomination and Remuneration Committee Chair
6 Feedback
Any specific feedback relevant to an individual Director is provided to them
privately by the Nomination and Remuneration Committee Chair
Remuneration policy
The Company's remuneration policy can be found in the Directors' remuneration
report on page 68 to 70. The remuneration policy was last put to a vote at the
Company's first AGM in February 2023 and will be re‑tabled every three years
hereafter.
Board remuneration
A detailed review of Board emolument levels was undertaken by the Committee
during the year. This was supported by a peer group and fee analysis and
taking into account the general macroeconomic environment and inflation
levels. During this evaluation in the 2022 financial year, the Board's fees
were found to be c.£10k below market rate for an investment trust of this
size. Therefore, in addition to the increases implemented as at 1 October
2022, the Board decided to increase its base remuneration by a further £3,000
in order to more accurately reflect the current market and time commitment
required of the Directors. Further, an additional fee of £1,000 per annum was
awarded to Sarika Patel for her new role of Senior Independent Director. Both
increases became effective on 1 October 2023. Additional fees for the roles of
Chair of the Board and Committee Chairs remain unchanged. Full Director salary
details can be found in the Directors' remuneration report on page 68 to 70.
Committee evaluation
An evaluation of the Committee was undertaken as part of the Board's annual
performance evaluation. The Committee was found to be functioning well and the
diversity of skills and experience of its members were considered appropriate
and sufficient to ensure informed debate and constructive challenge.
Christopher Sutton
Chair of the Nomination and Remuneration Committee
5 December 2023
REMUNERATION
DIRECTORS' REMUNERATION REPORT
Directors' remuneration report
The Board considers annually the level of fees paid to each Director. Whilst
the Board has final determination of the level of Directors' fees, the
Nomination and Remuneration Committee is responsible for assessing whether the
current fee levels are appropriate. This review takes into account the
individual responsibilities of each Board member under the Committee
structure, anticipated input required to oversee the Company's activities in
the future and how Board remuneration is structured for the Company's peers.
Board remuneration
Remuneration policy
The Company's policy is that the remuneration of Directors should be
determined with due regard to the experience of the Board as a whole, the time
commitment required and to be fair and comparable to that of other
Non-Executive Directors of similar companies. The Company may also
periodically choose to benchmark Directors' fees with an independent review to
ensure they remain competitive, fair and reasonable.
The fees for the Directors are determined within the limits set out in the
Company's Articles of Association which states that the Directors'
remuneration for their services in the office of director shall, in the
aggregate, not exceed £300,000 per annum or such higher figure as the
Company, by ordinary resolution, determines. The Directors may elect to apply
the cash amount equal to their annual fee to subscribe for or to purchase
Ordinary Shares. Directors' fees will be reviewed at least annually.
The Directors are entitled only to their annual fee and to be reimbursed for
any expenses properly and reasonably incurred by them in and about the
business of the Company or in the discharge of his or her duties
as a Director.
Any Director who performs services which in the opinion of the Directors are
outside the scope of the ordinary duties of a Director, may be paid such
reasonable additional remuneration to be determined by the Directors or any
committee appointed by the Directors and such additional remuneration shall be
in addition to any remuneration provided for by way of their annual fee and
their reasonable expenses.
No element of the Directors' remuneration is performance related, nor does any
Director have any entitlement to pensions, share options or any long-term
incentive plans from the Company.
The Directors hold their office in accordance with the Articles of Association
and their appointment letters. No Director has a service contract with the
Company, nor is any such contract proposed. The Directors' appointments can be
terminated in accordance with the Articles of Association and their
appointment letters and without compensation.
Directors' emoluments for the year
The Directors who served during the year received the following emoluments
(excluding employers' National Insurance contributions) in the form of fees:
Taxable Basic Committee Additional Total
benefits fees Chair fee fees(1) fees
2023 2023 2023 2023 2023
Richard Davidson (Chair) - £48,000 - £2,500 £50,500
Sarika Patel £357 £33,000 £7,500 £2,500 £43,000
Josephine Bush £1,617 £33,000 £3,000 £2,500 £38,500
Christopher Sutton £362 £33,000 £2,500 £2,500 £38,000
Total £2,336 £147,000 £13,000 £10,000 £170,000
1. An additional fee of £2,500 per Director was agreed during the
financial year ended 30 September 2022, but paid in December 2022, in
acknowledgement of the time commitment required of Board members surrounding
the placing programme undertaken in June 2022.
Note - members of the Board were reimbursed for travel and accommodation
expenses incurred in connection with their duties for the Company, which in
aggregate amounted to £2,336.
Future Board emoluments
As detailed in the Nomination and Remuneration Committee report, the Board has
elected to increase Directors' fees by £3,000 per annum, plus an additional
fee of £1,000 for Sarika Patel for her role as Senior Independent Director,
effective 1 October 2023. Based on this, and the Directors appointed as at the
date of this report, Board remuneration for the year ending 30 September 2024
is expected to be as follows:
Committee
Basic fees Chair fee Additional fees Total fees
2024 2024 2024 2024
Richard Davidson (Chair ) £51,000 - - £51,000
Sarika Patel £36,000 £7,500 £1,000¹ £44,500
Josephine Bush £36,000 £3,000 - £39,000
Christopher Sutton £36,000 £2,500 - £38,500
Total £159,000 £13,000 £1,000 £173,000
For Senior Independent Director role.
Relative importance of spend on pay
The table below shows the actual expenditure during the year in relation to
Directors' remuneration and Shareholder distributions in the financial year:
Total
2023
Aggregate Directors' remuneration £170,000
Aggregate dividends paid to Shareholders -
Directors' shareholdings
The Directors who held office at the year end and their interests in the
Ordinary Shares of the Company as at [publication date] and 30 September 2023
were as follows:
6 December 2023 30 September 2023
Richard Davidson (Chair) TBC 100,000
Sarika Patel TBC 24,000
Josephine Bush TBC 19,000
Christopher Sutton TBC 25,000
Total TBC 168,000
Management shareholdings
Although not forming part of this report, it is also noted that the senior
personnel of the Investment Manager held in aggregate 78,804 Ordinary Shares
of the Company as at 30 September 2023. As at 6 December 2023, these aggregate
holdings were 78,804 Ordinary Shares.
In addition, 51,003,762 (29.64%) of the Company's shares are held by Blackmead
Infrastructure Limited, an investee company of the Foresight Inheritance Tax
Fund, which is also managed by the Investment Manager.
Voting at Annual General Meeting
An ordinary resolution for the approval of the Directors' remuneration policy
is proposed every three years and will therefore be put to Shareholders next
at the AGM to be held in February 2026. An ordinary resolution for the
approval of this Directors' remuneration report will be put to Shareholders at
the forthcoming AGM in February 2024.
On behalf of the Board
Christopher Sutton
Nomination and Remuneration Committee Chair
5 December 2023
DIRECTORS' REPORT
The Directors present their report and financial statements of the Company for
the year ended 30 September 2023. The corporate governance statement on page
86 forms part of their report.
Information contained elsewhere in the Annual Report
Information required to be part of this Directors' report can be found
elsewhere in the Annual Report as indicated below and is incorporated into
this report by reference:
Key performance indicators Page 11 and 12
Principal risks and risk management Page 41 to 45
Board of Directors Page 52
Report of the Audit and Risk Committee Page 56 to 59
Report of the Nomination and Remuneration Committee Page 64 to 67
Report of the Management Engagement Committee Page 60 to 61
Report of the Sustainability and ESG Committee Page 62 to 63
Remuneration report Page 68 to 70
Principal activities and status
Foresight Sustainable Forestry Company Plc (the "Company") is registered as a
public limited company in terms of the Companies Act 2006 (number: 13594181).
It is an investment company as defined by Section 833 of the Companies Act
2006
The Company was incorporated on 31 August 2021 and listed on the premium
segment of the Official List for trading on the London Stock Exchange's Main
Market on 24 November 2021. The Company has a single share class of Ordinary
Shares in issue.
The Company is a member of the Association of Investment Companies ("AIC"),
Timber Development UK and Scottish Land & Estates.
Dividend policy
The Company invests in forestry assets with cash flow typically reinvested for
further accretive growth.
The Company intends to pay dividends in order to satisfy the ongoing
requirements under the Investment Trust (Approved Company) (Tax) Regulations
2011 save that, in the medium term, the Company's forestry assets may also
generate free cash flow which the Company may decide not to reinvest. In such
case(s), the Company currently intends to distribute these amounts to
Shareholders.
Distributions made by the Company may take either the form of dividend income
or may be designated as interest distributions for UK tax purposes. The UK tax
treatment of the Company's distributions may vary for a Shareholder depending
on the classification of such distributions. In accordance with regulation 19
of the Investment Trust (Approved Company) (Tax) Regulations 2011, the Company
will not (except to the extent permitted by those regulations) retain more
than 15% of its income (as calculated for UK tax purposes) in respect of an
accounting period.
In addition, the Company intends to explore the possible distribution of
carbon credits "in specie" to Shareholders in the future.
Investors should note that references in this paragraph to "dividends" and
"distributions" are intended to cover both dividend income and income which is
designated as an interest distribution for UK tax purposes and therefore
subject to the interest streaming regime applicable to investment trusts.
In accordance with the above policy, there have been no dividends paid to
Shareholders during the year and the Directors are not recommending a final
dividend.
Investment objective
The Company will seek to generate an attractive net total return for
Shareholders over the longer term, comprising capital growth and aperiodic
dividends, targeting sustainable impact through investment predominantly in
sustainably managed forestry assets (including standing forests and
afforestation assets). The Company will seek to make a direct contribution in
the fight against climate change through forestry and afforestation carbon
sequestration initiatives. The Company will seek to preserve and proactively
enhance natural capital and biodiversity across its portfolio. It is expected
that the Company will achieve, and aim to exceed, the requirements of
compliance with the EU Green Taxonomy and Article 9 of the Sustainable Finance
Disclosure Regulation ("SFDR").
Investment policy
The Company's investment policy was updated during the year following approval
at a General Meeting of the members held on 21 December 2022. The amended
policy is set out below.
The Company intends to achieve its investment objective by predominantly
investing in a diversified portfolio of sustainable Forestry Assets,
predominantly located in the UK.
"Forestry Assets" are land assets where stands of trees have a canopy cover of
at least 20% of land area ("Standing Forests"), or have the potential to
achieve this through new planting ("Afforestation") initiatives. These
Forestry Assets may be used for planting, maintaining and growing trees for
commercial production of timber or other forest products ("Commercial
Forestry") or for non-commercial purposes ("Non-Commercial Forestry") and in
both cases may include areas where a community of naturally occurring tree
species regenerate by natural (i.e. without intervention) means ("native
woodland") and areas that are left unplanted with trees ("open ground").
The Group will seek to acquire a mixture of cash flow generating sustainable
Forestry Assets representing a mixture of Standing Forests (of varying age
classes) together with land suitable for Afforestation projects (representing
both Commercial Forestry projects and Non-Commercial Forestry projects) to
achieve a balanced portfolio with an optimal harvesting and capital growth
profile.
Diversification within the Group's portfolio will be achieved by:
(i) Investing in a range of individual underlying Forestry Assets, each
of which will be capable of separate disposal
(ii) Investing in different types of Forestry Assets (both Standing
Forests and Afforestation projects) with a range of age classes and harvesting
profiles
(iii) Where possible, seeking diversification in tree species and a blend of
Commercial Forestry and Non-Commercial Forestry (including native woodland and
open ground) across the overall portfolio
(iv) Engaging with a range of different off-takers for the Group's harvested
timber
(v) Achieving a geographic spread across the underlying Forestry Assets
Although the Group's revenues will primarily be generated by the sale of
harvested timber and, in due course, the sale of carbon credits, where
appropriate and practicable, the Group will also seek to generate ancillary
non-core revenue streams from its Forestry Assets, including, but not limited
to, the leasing or licensing of land to third parties for agricultural,
sporting and tourism activities, the leasing of land to third parties for
renewable energy and/or energy storage and/or telecommunications development
projects (such as the erection of wind turbines or mobile telecommunications
towers) and, if a future market develops, the sale of biodiversity credits.
The Company will gain exposure to Forestry Assets indirectly through its
holding of equity interests in underlying asset holding companies. The Company
will invest via equity or debt interests in such asset holding companies. The
asset holding companies will use the funds received by the Company to acquire
Forestry Assets directly or indirectly through intermediate holding companies.
Returns generated by the asset holding companies (either from the sale of
harvested timber, the sale of carbon credits or from ancillary non-core
revenue sources) will either be retained by the relevant asset holding
companies and reinvested or paid to the Company in the form of dividends,
distributions or the payment of interest on intra-group debt.
The Group may acquire freehold or leasehold interests in Forestry Assets or
may acquire the shares in corporate entities holding such Forestry Assets.
Investments in Forestry Assets will typically entail 100% ownership by the
Group. The Group may, however, enter into joint venture arrangements alongside
one or more co‑investors where the Investment Manager, in consultation with
the Board, believes it is in the Group's best interests to do so (such as
where an investment opportunity is too large for the resources of the Group on
its own, to share risk or where a joint venture arrangement will optimise
returns for the Group). In the case of such co-investments, the Group will
target retaining a control position, where this is possible, or, where this is
not possible, will have strong minority investor protections and governance
rights.
In addition, as part of a transaction to acquire Forestry Assets, the Group
may end up owning ancillary non-forestry related assets, including, but not
limited to, residential land and buildings, vehicles, equipment, agricultural
outbuildings and small-scale renewable energy assets (together "Non-Core
Assets"). Where appropriate and beneficial to the overall strategy, the Group
will look to realise the value of any Non-Core Assets over time for the
benefit of Shareholders.
The Investment Manager will have overall responsibility for asset managing the
Group's Forestry Assets (including any ancillary non-core revenue streams) and
Non-Core Assets. The Group will also appoint appropriate specialist
third-party forestry management companies who will be responsible for the
day-to-day physical management of the Group's Forestry Assets, including
harvesting and planting activity.
The Group's Forestry Assets will, where commercially appropriate, be operated
with a view to generating carbon credits. Save where the sale of carbon
credits is required to meet the working capital needs of the Group, the
Company intends to realise the value of carbon credits for the direct benefit
of Shareholders. Generally, the Company intends, when appropriate, to sell
carbon credits and make aperiodic distributions to Shareholders of the net
proceeds of such sales. As an alternative to receiving a cash distribution,
the Company intends, where practicable, to offer Shareholders the option to
elect to receive distributions "in kind" of carbon credits. The method and
process for the distribution of any carbon credits "in kind" will be
determined by the Board from time to time. The Company currently does not
intend to retire carbon credits on behalf of Shareholders. The Company may, in
the future, if considered appropriate, retire certain carbon credits generated
from the Group's Forestry Assets for the purposes of meeting the Group's own
net zero targets.
Investment restrictions
The Company will invest and manage its assets with the objective of spreading
risk and, in doing so, will maintain the following investment restrictions:
y) No single Forestry Asset will represent more than 15% of Gross Asset
Value (with two or more Forestry Assets which are directly adjacent being
treated as a single asset), save that the Board may approve the increase of
this limit up to 25% of Gross Asset Value on an exceptional basis where
considered appropriate to cater for a larger-scale strategic Forestry Asset
investment
z) At least 90% of Gross Asset Value shall be invested in Forestry Assets
located in the United Kingdom
aa) No more than 10% of Gross Asset Value may be invested in Forestry Assets
located in EEA countries
bb) The maximum exposure to Afforestation projects will not exceed, in
aggregate, 50% of Gross Asset Value
cc) The maximum exposure to Non-Core Assets will not exceed, in aggregate,
10% of Gross Asset Value
dd) The Company will not invest in other listed investment companies
In accordance with the requirements of the Listing Rules, the Company will not
undertake any trading activity which is material in the context of the Company
as a whole.
Compliance with the above investment limits is measured at the time of
investment and non-compliance resulting from changes in the price or value of
assets following investment will not be considered as a breach of the
investment limits.
Financial risk management
Details of the financial risk management objectives and policies followed by
the Directors can be found on pages 103 to 104.
Future developments
The likely future developments of the Company are contained in the strategic
report on pages 9 to 50.
Directors
Biographical details of the Directors, all of whom are non‑executive, can be
found on page 52.
The Directors do not have service contracts, but each new Director is provided
with a letter of appointment. The Directors' letters of appointment are
available on request at the Company's registered office during business hours.
The Articles of Association require that each Director retires by rotation and
be re-elected every three years. The Board has agreed that, in accordance with
governance best practice and the Provisions of the AIC Code, Directors will
stand for election annually at each AGM.
The Directors' appointment dates are shown below:
Date of original appointment
Richard Davidson (Chair) 31 August 2021
Sarika Patel 31 August 2021
Josephine Bush 31 August 2021
Christopher Sutton 31 August 2021
The Directors believe that the Board has an appropriate balance of skills,
experience, independence and knowledge of the Company and the sector in which
it operates to enable it to provide effective strategic leadership and proper
guidance to the Company. The Board confirms that, following the evaluation
process set out in the report of the Nomination and Remuneration Committee on
pages 66 and 67, the performance of each Director is and continues to be
effective and demonstrates commitment to the role. The Board believes
therefore, that it is in the interests of Shareholders that each of the
Directors be re-elected.
Conflicts of interest
Under the Companies Act 2006, a Director must avoid a situation where he or
she has, or could have, a direct or indirect interest that conflicts, or
possibly may conflict, with the Company's interests. This could also apply
where a Director becomes a director of another company or trustee of another
organisation. The Companies Act 2006 allows directors of public companies to
authorise conflicts and potential conflicts, where appropriate, where the
Articles of Association contain a provision to this effect.The Company's
Articles of Association give the Directors authority to approve such
situations.
The Company maintains a register of Directors' conflicts of interest which
have been disclosed and approved by the other Directors. This register is kept
up to date and the Directors are required to disclose to the Company Secretary
any changes to conflicts or any potential new conflicts.
Investment Manager
The Company's Investment Manager, Foresight Group LLP, is responsible for the
acquisition and management of the Company's assets, including the sourcing and
structuring of new acquisitions and advising on the Company's borrowing
strategy. Foresight Group is authorised and regulated by the Financial Conduct
Authority.
Foresight Group was founded in 1984 and is a leading listed infrastructure and
private equity investment manager. With a long-established focus on ESG and
sustainability-led strategies, it aims to provide attractive returns to its
institutional and private investors from hard‑to-access private markets.
Foresight manages over 400 infrastructure assets with a focus on solar and
onshore wind assets, bioenergy and waste, as well as renewable energy enabling
projects, energy efficiency management solutions, social and core
infrastructure projects and sustainable forestry assets. Its private equity
team manages 11 regionally focused investment funds across the UK and an SME
impact fund supporting Irish SMEs. This team reviews close to 2,500 business
plans each year and currently supports more than 250 SMEs. Foresight Capital
Management manages four listed strategies across seven investment vehicles.
Foresight operates in eight countries across Europe, Australia and the United
States with AUM of £12.1 billion (unaudited as at 30 September 2023).
Foresight Group Holdings Limited listed on the Main Market of the London Stock
Exchange in February 2021.
Foresight's Infrastructure team consisted of 160+ full‑time employees as at
30 September 2023. The team is comprised of:
a) An investment management team of professionals responsible for
originating, assessing and pricing assets, managing due diligence and
executing transactions
b) A portfolio management team with expertise across electrical and
civil engineering, finance and legal disciplines
The Foresight Group Infrastructure team has substantial experience in sourcing
and executing all required elements of the capital structure of an investment
across geographies, including project-level debt finance and other required
forms of finance.
The key strengths of the infrastructure investment team include:
a) Sourcing and execution of asset acquisitions
b) Experience of pricing complex revenue streams
c) Pricing wholesale power exposure
d) Managing construction projects
e) Finance and structuring, including bank debt and project finance
The Foresight portfolio management team consists of individuals with
engineering, accountancy, consulting and operations backgrounds and is
responsible for the process of "on-boarding", managing and reporting on the
acquired assets. Members of these teams work closely with the Investment
Manager together throughout the investment lifecycle.
The portfolio management services provided ensure the day-to-day operation of
the forestry assets is robust, with commercial and strategic decisions clearly
communicated to the various counterparties involved.
The services also include:
· Health and safety compliance
· Oversight of third-party asset managers and forest managers
· Portfolio optimisation including negotiation of project
contracts, harvesting, insurance policies, and evaluation of innovative
technologies to enhance forestry assets
· Accounting and financial management from SPV to Fund level
· Management of in-house portfolio management platforms
· Providing a focus on ESG and upside opportunities across the
forestry assets
· Contractual compliance of all contracts
Alternative Investment Fund Management Directive ("AIFMD")
The AIFMD was implemented across the EU on 22 July 2013 and aims to harmonise
the regulation of Alternative Investment Fund Managers ("AIFMs"). It imposes
obligations on managers who manage or distribute Alternative Investment Funds
("AIFs") in the EU or who market shares in such funds to EU investors.
Foresight Group LLP acts as AIFM to the Company and ensures compliance with
regulation under the UK AIFMD and the UK National Private Placement Regime.
Share capital
Information on the Company's share capital, including voting rights, as at 30
September 2023 can be found in note 13 to the financial statements.
Substantial interests in share capital
As at 30 September 2023, the Company had received notification of the
following holdings of voting rights (under the Financial Conduct Authority's
Disclosure Guidance and Transparency Rules):
30 September 2023
Number
of Ordinary
Investor Shares held Percentage held(1)
Blackmead Infrastructure 51,503,762 29.93
Aviva Investors 14,876,607 8.65
Rathbones 13,382,175 7.78
East Riding of Yorkshire 13,238,318 7.69
Equilibrium Asset Management 11,802,000 6.86
West Yorkshire PF 11,000,000 6.39
Cantor Fitzgerald Ireland 8,852,145 5.14
Privium Fund Management 7,896,299 4.59
Hargreaves Lansdown stockbrokers (EO) 6,105,288 3.55
1. Based on 172,056,075 Ordinary Shares in issue as at 30 September
2023. The Company has only one class of share.
There have been no changes notified to the Company in respect of the above
holdings, and no other new holdings notified, since the year end.
Related party transactions
Related party transactions during the year to 30 September 2023 can be found
in note 21 to the financial statements.
Directors' shareholdings
Information on the Directors' shareholdings as at 30 September 2023 can be
found in the Directors' remuneration report on page 69.
Directors' indemnity
The Company has maintained a Directors' and Officers' liability insurance
policy on behalf of the Directors, indemnifying them in respect of certain
liabilities that may be incurred by them in connection with the activities of
the Company. This policy does not provide cover for fraudulent or dishonest
actions by the Directors.
Other Companies Act 2006 disclosures
· There are no significant restrictions concerning the transfer of
securities in the Company (other than certain restrictions imposed by laws and
regulations such as insider trading laws); no agreements known to the Company
concerning restrictions on the transfer of securities in the Company or on
voting rights; and no special rights with regard to control attached to
securities.
· There are no significant agreements which the Company is a party
to that might be affected by a change of control of the Company following a
takeover bid.
· There are no agreements between the Company and the Directors
providing for compensation for loss of office that occurs because of a
takeover bid or other corporate events.
Articles of Association
These are available on the Company's website or by application to the Company
Secretary. Any amendment to the Company's Articles of Association may only be
made by passing a special resolution of the Shareholders of the Company.
Branches outside the UK
The Company does not have any branches outside the UK.
Political donations
No political donations were made during the year.
Employees
The Company has no employees and therefore no employee share scheme or
policies for the employment of disabled persons or employee engagement.
Additional information
There are no disclosures required in accordance with Listing Rule 9.8.4R.
Relations with stakeholders
The Board recognises the importance of regular and effective communication
with the Company's stakeholders. Further information on engagement with
stakeholders during the year can be found in the Section 172 statement on
pages 13 to 15.
2024 AGM
Shareholders are invited to attend the Company's AGM to be held at The Shard,
32 London Bridge Street, London SE1 9SG on 21 February 2024. The AGM notice is
contained in the circular dated 6 December 2023 which was published alongside
this Annual Report.
Those Shareholders who are unable to attend the AGM in person are encouraged
to raise any questions in advance with the Company Secretary at
fsfc@foresightgroup.eu (please include "FSF AGM" in the subject heading).
Questions must be received by 5.30pm on 7 February 2024. Any questions
received will be replied to by either the Investment Manager or the Board via
the Company Secretary before the AGM. A Shareholder presentation will be made
on the day and later made available on the Company's website updating
Shareholders on the activities of the year.
Resolutions to be proposed at the AGM
Ordinary Resolutions
Resolution One
To receive the Annual Report and Accounts of the Company for the year ended
30 September 2023.
Resolution Two
To approve the Directors' Remuneration Report included in the Annual Report
for the year ended 30 September 2023.
Resolution Three
To re-elect Richard Davidson as a Director of the Company
Resolution Four
To re-elect Sarika Patel as a Director of the Company
Resolution Five
To re-elect Christopher Sutton as a Director of the Company
Resolution Six
To re-elect Josephine Bush as a Director of the Company
Resolution Seven
To re-elect Ernst & Young LLP as external auditor to the Company.
Resolution Eight
To authorise the Directors to fix the auditor's remuneration until the
conclusion of the next Annual General Meeting of the Company.
Resolution Nine
That, in addition to all existing authorities, the Directors be generally and
unconditionally authorised to allot shares in the Company. Read more in the
Circular dated 6 December 2023.
Special Resolutions
Resolution Ten
To adopt the Amended Investment Policy. Read more in the Circular dated 6
December 2023.
Resolution Eleven
That, in addition to all existing authorities, the Directors be generally and
unconditionally authorised to allot equity securities in the Company. Read
more in the Circular dated 6 December 2023.
Resolution Twelve
To authorise the Company to make market purchases of its own shares. Read more
in the Circular dated 6 December 2023.
Resolution Thirteen
That a general meeting, other than an AGM, may be called on not less than 14
clear days' notice.
Recommendation on resolutions to be proposed at the AGM
The Directors consider the passing of the resolutions to be proposed at the
AGM to be in the best interests of the Company and its Shareholders and likely
to promote the success of the Company for the benefit of its Shareholders as a
whole. Accordingly, the Directors unanimously recommend that Shareholders
should vote in favour of the resolutions, as they intend to in respect of
their own beneficial shareholdings.
Business ethics
As an investment vehicle the Company does not provide goods or services in the
normal course of business and does not have customers. Accordingly, the
Directors consider that the Company does not fall within the scope of the
Modern Slavery Act 2015 and is not, therefore, obliged to make a slavery and
human trafficking statement. The Company's SPVs which hold its assets have
their own policies in place related to modern slavery, as well as anti-bribery
and corruption, sustainability and ESG, and health and safety. In any event,
the Company considers its supply chains to be low risk for modern slavery.
In line with the requirements of The Criminal Finances Act 2017, the Directors
confirm that the Company has a commitment to zero tolerance towards the
criminal facilitation of tax evasion.
In order to ensure compliance with the UK Bribery Act 2010, the Directors
confirm that the Company has zero tolerance towards bribery and a commitment
to carry out business openly, honestly and fairly.
In considering the appointment of Directors, the Company will continue to show
no bias for age, gender, race, sexual orientation, marital status, religion,
nationality, ethnic or national origins, or disability.
Going concern
The Directors, in their consideration of going concern, have reviewed
comprehensive cash flow forecasts prepared by the Company's Investment
Manager, Foresight Group, which are based on prudent market data, a reasonable
worst case and a stress test scenario and believe, based on those forecasts
and an assessment of the Company's subsidiary's banking facilities, that it is
appropriate to prepare the financial statements of the Company on the going
concern basis.
In arriving at their conclusion, the Directors assessed the current
macroeconomic situation, the RCF, liquidity position and the potential impact
of the principal risks documented in the strategic report. In addition to
these principal risks, the Directors have also considered the
sustainability-related risks covering environmental, social and governance
factors, including climate change (in line with the recommendations of the
Task Force on Climate-related Financial Disclosures ("TCFD")), outlined on
page 38. The Investment Manager has reviewed the portfolio's exposure to these
risks in the period under review and has concluded that it is currently not
material to the Fund, although it continues to monitor the market attentively.
The Directors have also considered scenario analysis on the impact of
different levels of harvesting across the portfolio, over varying timescales,
on the Company's financial position and the Company's ability to reduce
outflows were liquid resources to be required.
The Directors also considered that the Company has adequate financial
resources, and were mindful that the Group had unrestricted cash of £1.2
million as at 30 September 2023 and a revolving credit and accordion facility
(available for investment in new or existing projects and working capital) of
£30 million. As at 30 September 2023, the Company's wholly owned subsidiary
FSFC Holdings 2 Limited had borrowed £10.4 million under the facility,
leaving £19.6 million available to draw. All key financial covenants under
this facility are forecast to continue to be complied with for the duration of
the going concern assessment period.
The Investment Manager and Directors have assessed the headroom available to
meet the revolving credit covenants. The covenants have been tested on
downside risk scenarios and in all scenarios run, including the combined
downside case, the Company remained compliant with its key covenants.
The Directors are satisfied that the Company has sufficient resources to
continue to operate for the foreseeable future, a period of not less than 12
months from the date of this report. Accordingly, they continue to adopt the
going concern basis in preparation of these financial statements.
Viability statement
In accordance with the UK Corporate Governance Code, the Board of Directors
has assessed the viability of the Company over a five-year period to 30
September 2028, taking account of the Company's current position, the
long-term nature of the assets in the portfolio and the potential impact of
the principal risks documented on pages 41 to 45.
In addition to the principal risks, the Directors have also considered the
sustainability-related risks covering environmental, social and governance
factors, including climate change (in line with the recommendations of TCFD,
outlined on page 38).
Sensitivity analysis has also been undertaken to consider the potential impact
of principal and emerging risks that could threaten the business model, future
performance, solvency and liquidity over the period. In particular, this has
considered the inability to access sufficient funding in the debt and equity
markets and deploy capital to complete growth expectations, timber price
volatility and a reduction in demand for users of timber, continued government
support for voluntary carbon credits market and the impact of a proportion of
the portfolio not harvesting due to adverse weather conditions.
The Directors have determined that a five-year look forward to September 2028
is an appropriate period over which to provide its viability statement. This
is consistent with the outlook period used in economic and other medium-term
forecasts regularly prepared for the Board by the Investment Manager and the
discussion of any new strategies undertaken by the Board in its normal course
of business. These reviews consider both the market opportunity and the
associated risks, principally the ability to raise third-party funds and
invest capital, or mitigating actions taken, such as sale of forestry assets
and utilisation of additional borrowings available under the RCF.
The Group's risk management processes outlined on pages 39 to 45 set out the
key risks for the next five years and beyond. These include rising debt costs
and persistently high inflation, financing capital risks and timber market
volatility. Risks presented by the current macro environment also include
Russia's invasion of Ukraine. Whilst these risks are deemed significant to the
Group's ability to operate its projects, generate revenue and to the value of
the Company's investments, the Directors believe that this has had limited
impact on the business to date as it is invested in real assets, principally
freeholds of UK land and forest stock. The forest stock enjoys biological
growth regardless of fluctuations in financial markets. UK freeholds, real
assets and commodities like timber have a track record of good performance
during periods of inflation and instability of equity markets. Risk mitigating
activities (as outlined on pages 39 to 45) have also aided in the reduction of
the impact.
Timber prices can be volatile periodically and demand over the medium to long
term has historically created real-term price growth. In the context of global
under-supply and increasing demand, this reduces market risk for FSF's key
revenue streams. Should timber prices be less attractive at the point of
felling, FSF is in a position to mitigate the impact by postponing parts of
its harvesting programme and delay felling, allowing trees to continue to grow
until the underlying imbalance between supply and demand begins to be
reflected in market prices again.
FSF is focused on growing its portfolio as a newly listed entity and will
require additional financing to take full advantage of opportunities in its
pipeline. The existing borrowing policy enables the use of gearing that must
not exceed 30% of Gross Asset Value.
There is a risk that FSF will be unable to access sufficient funding to
complete operations. This is mitigated by using brokers to conduct market
research ahead of any future funding rounds to gauge demand from new and
existing investors. FSF has also set budgets with sufficient cash buffers to
ensure liquidity.
There is a risk of reputational damage due to negative PR generated by the
resistance to change of land use by the public. This could in turn negatively
impact investor sentiment and ultimately the ability to raise more capital.
This is mitigated by independent community risk assessments during the due
diligence phase of afforestation investments. This ensures that afforestation
only takes place in low community risk areas where the likelihood of community
resistance is low. FSF also actively pursues a co-ordinated programme of
community engagement and recently launched a Forestry Skills Training
Programme.
The risk of changing weather patterns and more extreme weather events can
cause direct damage to the portfolio, leading to a market flooded with
windblow timber and the subsequent price depreciation. This is mitigated by a
prudent acquisition strategy for sheltered area, silviculture management and a
diverse portfolio to create natural resilience. Where appropriate, windthrow
insurance cover is taken out.
The Company's wholly owned subsidiary FSFC Holdings 2 Limited has a
three-year £30 million RCF (agreed in July 2022) with two one-year extension
options, increasing the liquidity of the Group, of which a proportion can be
deployed as working capital. It also has an accordion feature that allows for
another £30 million. The Company utilises the investments' cash flows from
operations and proceeds from equity fundraises to repay the RCF.
In order to repay the RCF at the maturity date (July 2025 or 2027 with
extensions), the Company would be required to renew the RCF and/or perform an
equity raise, under the base case assumptions included in the viability
forecasts. In conjunction with this, the Company could consider strategic
disposals as appropriate.
Based on this assessment, the Directors have a reasonable expectation that FSF
will be able to continue in operation and meet its liabilities as they fall
due over the five-year period to September 2028. In making this statement, the
Directors have considered and challenged the reports of the Investment Manager
in relation to the resilience of the Group, taking into account its current
position, the principal risks facing it in reasonable downside scenarios, the
effectiveness of any mitigating actions and the Group's risk appetite.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a
single identifiable section of the Annual Report or a cross-reference table
indicating where the information is set out. The Directors confirm that there
are no disclosures required in relation to Listing Rule 9.8.4.
By order of the Board
Foresight Group LLP
Company Secretary
6 December 2023
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing the strategic report, the
Directors' report, the Directors' remuneration report and the financial
statements in accordance with applicable laws and regulations.
These financial statements have been prepared in accordance with UK-adopted
International Accounting Standards ("IAS") in conformity with the requirements
of the Companies Act 2006 and in accordance with International Financial
Reporting Standards ("IFRS"). Company law in the United Kingdom requires the
Directors to prepare financial statements for each financial year. Under this
law the Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs and
profit or loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
· Select suitable accounting policies and then apply them
consistently
· Make judgements and accounting estimates that are reasonable and
prudent
· State whether applicable IFRSs have been followed, subject to any
material departures disclosed and explained in the financial statements
· Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions, disclose with
reasonable accuracy at any time the financial position of the Company, and
enable the Directors to ensure that the financial statements and the
Directors' remuneration report comply with the Companies Act 2006 and Article
4 of the IAS Regulation. They are also responsible for safeguarding the assets
of the Company and thus for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Directors' responsibility statement in respect of the Annual Report and
financial statements
The Directors are responsible for preparing the Annual Report in accordance
with applicable law and regulations. The Directors consider the Annual Report
and financial statements, taken as a whole, provide the information necessary
to assess the Company's performance, business model and strategy and are fair,
balanced and understandable.
Directors' responsibility statement under the Disclosure Guidance and
Transparency Rules
To the best of our knowledge:
· The Company's financial statements have been prepared in
accordance with UK-adopted International Accounting standards. They give a
true and fair view of the assets, liabilities, financial position and profit
or loss of the Company and the undertakings.
· The Annual Report, including the strategic report and the
Directors' report, includes a fair review of the development and performance
of the business and the position of the Company and the undertakings together
with a description of the principal risks and uncertainties they face.
Disclosure of information to the auditor
The Directors confirm that:
· So far as each Director is aware, there is no relevant audit
information of which the Company's auditor is unaware
· The Directors have taken all the steps that they ought to have
taken as Directors in order to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information
Richard Davidson
Chair
5 December 2023
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2023
Period from
Year ended 31 August 2021
30 September to 30 September
2023 2022
Revenue Capital (Audited) (Audited)
Notes £'000 £'000 £'000 £'000
Return on investment 4 2,605 (11,279) (8,674) 11,042
Total income 2,605 (11,279) (8,674) 11,042
Investment management fees 5 (1,562) - (1,562) (1,071)
Operating expenses 6 (1,102) - (1,101) (1,166)
Total expenses (2,664) - (2,663) (2,237)
(Loss)/profit before tax (59) (11,279) (11,338) 8,787
Tax 8 - - - -
(Loss)/profit for the period (59) (11,279) (11,338) 8,787
Earnings per share (pence) 9 - (6.6) (6.6) 6.2
All results are derived from continuing operations.
The supplementary revenue and capital columns are presented for information
purposes in accordance with the Statement of Recommended Practice issue by the
Association of Investment Companies ("AIC").
There are no items of other comprehensive income in the current period, other
than the profit for the period, and therefore no separate statement of
comprehensive income has been presented.
The accompanying notes on pages 92 to 106 form an integral part of the
financial statements.
STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED 30 SEPTEMBER 2023
30 September 30 September
2023 2022
(Audited) (Audited)
Notes £'000 £'000
Non-current assets
Investments at fair value through profit or loss 10 166,039 146,291
Total non-current assets 166,039 146,291
Current assets
Trade and other receivables 11 2,796 852
Cash and cash equivalents 16 1,217 34,326
Total current assets 4,013 35,178
Total assets 170,052 181,469
Current liabilities
Trade and other payables 12 (803) (886)
Total current liabilities (803) (886)
Total liabilities (803) (886)
Net assets 169,249 180,583
Equity
Called up share capital 13 1,721 1,721
Share premium 13 43,820 170,075
Revenue reserve (2,550) (1,333)
Capital reserve 14 126,258 10,120
Shareholders' funds 14 169,249 180,583
Net assets per share (pence per share) 15 98.4 105.0
The accompanying notes form an integral part of the financial statements.
The financial statements were approved by the Board of Directors and
authorised for issue on 5 December 2023.
They were signed on its behalf by:
Richard Davidson
Chair
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2023
Called up share Share Capital Revenue Total
capital premium reserve reserve £'000
£'000 £'000 £'000 £'000
Notes
Balance at 31 August 2021 - - - - -
Gross proceeds from share issue 1,721 173,279 - - 175,000
Share issue costs 13 - (3,204) - - (3,204)
Dividends 7 - - - - -
Total comprehensive income for the period 14 - - 10,120 (1,333) 8,787
Net assets attributable to Shareholders at 30 September 2022 1,721 170,075 10,120 (1,333) 180,583
Called up share Share Capital Revenue
capital premium reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 1 October 2022 1,721 170,075 10,120 (1,333) 180,583
Gross proceeds from share issue - - - - -
Share issue costs 13 - 3 - - 3
Dividends 7 - - - - -
Share premium cancellation 13 - (126,258) 126,258 - -
Total comprehensive income for the period 14 - - (11,279) (58) (11,338)
Net assets attributable to Shareholders at 30 September 2023 1,721 43,820 125,099 (1,391) 169,249
The Company's reserves consist of the capital reserve attributable to fair
value unrealised gains on the Fund portfolio's valuation.
There have been no realised gains or losses at the reporting date.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 SEPTEMBER 2023
Period from
Year ended 31 August 2021 to
30 September 30 September
2023 2022
(Audited) (Audited)
£'000 £'000
(Loss)/profit for the period from continuing operations (11,338) 8,787
Adjustments for:
Net (loss)/profit on investments at fair value through profit and loss 11,279 (10,120)
Operating cash flows before movements in working capital (59) (1,333)
Cash flows from operating activities
Increase in trade and other receivables (1,944) (852)
(Decrease)/increase in trade and other payables (83) 886
Net cash outflow from operating activities (2,086) (1,299)
Cash flows from investing activities
Investing activities
Purchase of investments (15,513) (114,350)
Loans to subsidiaries (15,513) (21,821)
Net cash used in investing activities (31,026) (136,171)
Cash flows from financing activities
Financing activities
Gross proceeds from share issue - 175,000
Share issue costs 3 (3,204)
Net cash inflow from financing activities 3 171,796
Net (decrease)/increase in cash and cash equivalents (33,109) 34,326
Cash and cash equivalents at beginning of period 34,326 -
Cash and cash equivalents at end of period 1,217 34,326
The accompanying notes form an integral part of the financial statements.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 SEPTEMBER 2023
1. Company information
(a) Statutory information
Foresight Sustainable Forestry Company Plc (the "Company" or "FSF") is a
public limited company limited by shares and was incorporated and registered
in England and Wales on 31 August 2021 with registered number 13594181
pursuant to the Companies Act 2006. The Company's registered address is The
Shard, 32 London Bridge Street, London, United Kingdom, SE1 9SG.
(b) Corporate structure
The Company has one investment, FSFC Holdings Limited, and FSFC Holdings
Limited in turn has one investment, FSFC Holdings 2 Limited; together this is
the "Group".
FSFC Holdings 2 Limited has three investments: FSFC Company 1 Limited,
Blackmead Forestry Limited and Blackmead Forestry II Limited. Blackmead
Forestry Limited has two investments: Coull Forestry Limited and Fordie
Estates Limited. These five entities together are the special purpose vehicles
or "SPVs".
The Group's principal activity is investing in UK forestry, afforestation and
natural capital assets.
The financial statements of the Company are for the year to 30 September 2023
and have been prepared on the basis of the accounting policies set out below.
The financial statements comprise only the results of the Company, as its
direct investments in FSFC Holdings Limited, FSFC Holdings 2 Limited, and all
underlying SPVs thereafter, are measured at fair value as detailed in the
significant accounting policies below.
2. Significant accounting policies
(a) Basis of preparation
This set of financial statements has been prepared in accordance with UK
adopted International Accounting Standards. The financial statements have been
prepared under the historical cost convention as modified by the revaluation
of certain assets and on a going concern basis. The accounting policies set
out below have, unless otherwise stated, been applied consistently to the
period presented in these financial statements.
These annual financial statements have also been prepared in accordance with
the Statement of Recommended Practice: Financial Statements of Investment
Trust Companies and Venture Capital Trusts ("SORP") issued in April 2021 by
the Association of Investment Companies ("AIC").
The same accounting policies and standards have been observed in these annual
financial statements as were applied in the last annual financial statements,
with no change to the nature or effect of these standards' application.
These financial statements are presented in sterling (£) and rounded to the
nearest thousand unless otherwise stated. They have been prepared on
accounting policies, significant judgements, key assumptions and estimates set
out below.
These financial statements intend to constitute statutory accounts as defined
in Section 434(3) of the Companies Act 2006. As such, these statutory
accounts in respect of the year to 30 September 2023 have been audited and
reported on by the Company's auditors and delivered to the Registrar of
Companies and included the Report of Auditors.
No statutory accounts in respect of any period after 30 September 2023 have
been reported on by the Company's auditors or delivered to the Registrar of
Companies.
Any estimates and underlying assumptions are reviewed on a regular basis and
revisions to accounting estimates are recognised in the period when they occur
and in any future period affected. The significant estimates, judgements or
assumptions are set out in note 10.
These annual financial statements comprise the results for the year to 30
September 2023 as well as comparatives to the audited period ended 30
September 2022.
Foresight Sustainable Forestry Company Plc
FSFC Holdings Limited
FSFC Holdings 2 Limited
FSFC Company 1 Limited Blackmead Forestry Limited Blackmead Forestry II Limited
Coull Forestry Limited Fordle Estates Limited
(b) Going concern
The Directors have adopted the going concern basis in preparing the financial
statements. In their assessment of going concern they have reviewed
comprehensive cash flow forecasts prepared by the Investment Manager and
believe, based on the forecasts and an assessment of the Company's cash
position and liquidity of the investment portfolio, that the Company will
continue in operational existence for at least 12 months from the date of
approval of the financial statements and therefore consider it appropriate to
prepare the financial statements on a going concern basis. As at 30 September
2023, the Company had net current assets of £3.2 million, including £1.2
million of cash; it also had access to £19.6 million that remained undrawn on
the Revolving Credit Facility, held by its indirect subsidiary, which can be
utilised for the Company's working capital requirements. As such, with all
factors mentioned above, the Company's cash position is considered sufficient
to meet all current obligations as they fall due.
The Directors have also assessed the impact of significant potential risks to
the operations of the Company since incorporation and the principal risks in
the UK forestry and afforestation markets including the various risk
mitigation measures in place and do not consider this to have a material
impact on the assessment of the Company as a going concern.
Market risk
The Company has assessed its potential exposure to being negatively impacted
by a sudden loss of revenue stream. The relevance of this risk has been
significant given the recent impacts of the Ukraine‑Russia conflict on the
forestry industry.
The Company has assessed these risks alongside the potential risk of similar
events having a negative impact on revenue recoverability. The potential
impacts of such market risks include, but are not limited to:
i. Material reductions in timber prices recoverable from the SPVs
ii. Material reductions in demand for timber in the United Kingdom
iii. Material reductions in forecasted revenues earned from the sale of
carbon credits
iv. Change to the UK Woodlands Grant scheme
·
Each of the above potential impacts could have a direct influence on the
amount that can be distributed to the Company by its subsidiaries. Foresight
has reviewed the portfolio's exposure to these risks and has concluded that
if, even in the unlikely case, these adverse impacts on revenue recoverability
are material, the Company should still have sufficient funds to continue
operations for the foreseeable future. If such impacts were to continue on a
long-term basis, continued monitoring processes would need to be actioned.
Liquidity risk
Due to the nature of the Company's operation and deployment strategy, there
could be potential exposure to liquidity risk, whereby the entity would
encounter difficulties in paying its financial liabilities. The Directors have
considered this risk and are satisfied that FSF has adequate financial
resources to settle its recurring expenses for the foreseeable future, based
on evidence provided from cash flow forecasting and sensitivity testing to
satisfy both the Investment Manager and the Directors that the Company has
sufficient funds available.
The Directors are satisfied that FSF has sufficient resources to continue to
operate for the foreseeable future, a period of no less than 12 months from
the date of this report. Accordingly, they have adopted the going concern
basis in preparation of these financial statements.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being an investor in UK forestry and afforestation
assets, to generate real returns for investors as well as capital
appreciation. The financial information used by the Board to allocate
resources and manage the Company presents the business as a single segment
comprising a homogeneous portfolio.
(d) Key estimates and judgements
Key judgements
Investment entity status
The Company conducts a judgement in relation to its status as an investment
entity by satisfying the three criteria below:
i. It must obtain funds from multiple investors for the purpose of
providing its investment management services to those investors
ii. It must commit to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both. Similarly, the entity must ensure there is also an exit strategy for
such investments
iii. It must measure and evaluate the performance of its investments on
a fair value basis
The Company assesses its compliance with the requirements of being an
investment entity in note 3 in more detail.
Key accounting estimates
Fair valuation of investment assets - Red Book valuation
The market value of the Company's underlying investment portfolio held through
its SPVs consisting of forestry, afforestation and non‑core assets
(investment portfolio/properties) is determined by an external valuer (see
note 10) to be the estimated amount for which an asset should exchange on the
date of the valuation in an arm's‑length transaction. Properties have been
valued on an individual basis. The external valuer prepares their valuations
in accordance with the RICS Valuation - Global Standards July 2017 (the "Red
Book"). Factors reflected comprise current market conditions, including the
comparable market value of similar freehold forestry assets, the potential
uplift in land value above current in‑use value (relevant to planting land),
the location and situation of individual assets, potential vulnerability to
winter storms and the developmental status of properties (if afforestation).
The market conditions stated are assessed on a bi-annual basis. These are also
subject to an accounting estimate that the Directors are satisfied with. The
significant methods and assumptions used by the external valuers in estimating
the fair value of investment assets are set out in note 10.
Fair value of investment assets - carbon credit valuation
The carbon credit valuations are not determined by an external valuer but are
currently based on the Ecosystem Marketplace collected trade data from UK
Woodland Carbon Code and Peatland Code market participants who are project
developers and resellers through the Ecosystem Marketplace Global Carbon
Markets Hub. These are also subject to an accounting estimate that the
Directors are satisfied with.
(e) Taxation
Income taxes
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the statement of
comprehensive income, except where it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year. This
may differ from the profit included in the statement of comprehensive income
because it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable or
deductible. To enable the tax charge to be based on the profit for the year,
deferred tax is provided in full on temporary timing differences, at the rates
of tax expected to apply when these differences crystallise.
Deferred tax assets are recognised only to the extent that it is probable that
sufficient taxable profits will be available against which temporary
differences can be set off. In practice, some assets that are likely to give
rise to timing differences will be treated as capital for tax purposes. Given
capital items are exempt from tax under the Investment Trust Company rules,
deferred tax is not expected to be recognised on these balances.
All deferred tax liabilities are offset against deferred tax assets, where
appropriate, in accordance with the provisions of IAS 12. The carrying amount
of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profits will
be available to allow all or part of the asset to be recovered.
(f) New, revised and amended standards applicable to future reporting periods
There were no new standards, amendments or interpretations effective for the
first time for periods beginning on or after incorporation that had a material
effect on the Company's financial statements. The Company has explored to what
extent these new standards have an immaterial impact on the financial
statements, as below.
IFRS 17 Insurance Contracts
The standard requires an entity to reasonably identify and recognise any
contract in which an entity accepts significant insurance risk from another
party as a combination of a financial instrument and a service contract, in
order to help users of the financial statements to assess the effect on the
Company's financial position. The Company does not deem this standard to have
a material effect on its financial statements as the Company is not party to
any such contract in which it accepts any insurance risk from or for another
party.
Amendments to definition of accounting estimates - Amendments to IAS 8
The standard now defines an accounting estimate as "monetary amounts in
financial statements that are subject to measurement uncertainty". Despite the
Company using accounting estimates (see note 2(d) Key judgements and
estimates) in its assessment of carbon credit validation and Red Book
valuation, the Directors would not deem this amendment to have any material
effect on the Company's results for the current or prior period(s). The
Company maintains that, at each reporting date, the latest available and
reliable information was used to arrive at its accounting estimates, with no
instances requiring a restatement of information due to error.
The Disclosure Initiative - amendments to the accounting policy disclosure
The IASB issued amendments to IAS 1 Presentation of Financial Statements in
which they require disclosure of "material" accounting policies, instead of
what was "significant" accounting policies. The aim of this amendment is to
enhance the usefulness of financial statements for users and in turn to
enhance their effectiveness overall. The Company has not chosen to apply an
early adoption of this standard as the threshold of materiality needs to be
considered in more depth. The Company, however, plans to adopt this standard
in its next reporting cycle.
3. Basis of consolidation
The Company's objective is to invest in UK forestry and afforestation assets
through its holding companies, which will typically issue equity and loans to
finance the investments.
Assessment as an investment entity
IFRS 10 Consolidated Financial Statements sets out the following essential
criteria, necessary for a company to be considered as an investment entity.
Definition of an investment entity/trust:
i. It must obtain funds from multiple investors for the purpose of
providing its investment management services to those investors
ii. It must commit to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both. Similarly, the entity must ensure there is also an exit strategy for
such investments
iii. It must measure and evaluate the performance of its investments on
a fair value basis
In assessing whether the Company meets the definition of an investment entity
set out in IFRS 10, the Directors note that:
i. The Company is an investment company that invests funds obtained
from multiple investors in a diversified portfolio of UK forestry and
afforestation assets and has appointed Foresight Group as the Investment
Manager to manage the Company's investments
ii. The Company's purpose is to invest funds with the intention of
providing real returns to investors and capital appreciation driven by global
demand for timber. The Company's exit strategy will depend on factors of
portfolio balance and/or profit
iii. The Board evaluates the performance of the Company's investments on
a fair value basis as part of the quarterly management accounts review and the
Company values its investments on a fair value basis driven by a RICS Red Book
valuation provided by Savills (the "external valuer") using various
assumptions to reflect current market conditions. This includes, amongst other
factors, the comparable market value of similar freehold forestry assets.
These fair value assessments happen on a bi-annual basis and are included in
the Company's annual and interim financial statements, with the movement in
the valuations taken to the statement of comprehensive income and is therefore
measured within its earnings
The Directors have concluded that the Company meets the definition of an
investment entity in accordance with IFRS 10 after evaluation of the relevant
criteria.
The Directors continue to consider the Company demonstrates the
characteristics and meets the requirements to be considered an investment
entity.
IFRS 10 states that investment entities are required to hold subsidiaries at
fair value through profit or loss rather than consolidation on a line-by-line
basis; this means that the Group's cash, debt and working capital balances are
included in the fair value of the investment instead of in the Company's
assets and liabilities. The Company has one investee, namely FSFC Holdings
Limited, which invests the funds of the FSF investors on its behalf and is
effectively performing investment management services on behalf of several
unrelated beneficiary investors.
4. Return on investment and interest income
Period from
Year ended 31 August 2021
30 September to 30 September
2023 2022
(Audited) (Audited)
£'000 £'000
Unrealised fair value movement of investments (11,279) 10,120
Interest income - Loans to direct subsidiary 2,364 852
Interest income - Bank 241 52
Total (8,674) 11,024
5. Investment management fee
Period from
Year ended 31 August 2021
30 September to 30 September
2023 2022
(Audited) (Audited)
£'000 £'000
Investment management fee 1,562 1,071
Total 1,562 1,071
Foresight Group LLP was appointed as the Investment Manager for the Company
under an Investment Management Agreement. Under the terms of the agreement,
the Investment Manager is entitled to a management fee from the Company, which
is calculated quarterly in arrears at 0.85% per annum of NAV up to £500
million and 0.75% per annum of NAV in excess of £500 million.
The Company paid £1.2 million during the period. A further £0.4 million
investment management fees were accrued and remained unpaid at the year end.
6. Operating expenses
Period from
Year ended 31 August 2021 to
30 September 30 September
2023 2022
(Audited) (Audited)
£'000 £'000
Administration services fee 129 104
Directors' fees 191 140
Other expenses(1) 782 922
Total 1,102 1,166
1. Other expenses include adviser fees, independent valuer fees,
audit fees, broker fees, depositary fees and other Fund-related costs.
Details of Directors' fees are set out in note 22
7. Dividends
The Company did not pay any dividend in the year to 30 September 2023
(30 September 2022: £nil).
8. Taxation
The Company received notice on 11 November 2021 confirming it is an approved
investment trust for accounting periods commencing on or after 23 November
2021. The approval is subject to the Company continuing to meet the
eligibility conditions of Section 1158 Corporation Taxes Act 2010.
Furthermore, there are also ongoing requirements for approved companies in
Chapter 3 of Part 2 Investment Trust (Approved Company) (Tax) Regulations 2011
(Statutory Instrument 2011/2999). To maintain its ITC status, the Company must
adhere to the following conditions throughout an accounting period:
i. The Company must not be a closed company at any time in an
accounting period
ii. An investment trust must not retain in respect of an accounting
period an amount which is greater than 15% of its income for the accounting
period, and the relevant distribution must be distributed before the filing
date for the investment trust's company tax return for the period
iii. An investment trust must notify HMRC of a revised investment policy
before the filing date for its tax return for the accounting period in which
the investment policy was revised
iv. An investment trust must notify HMRC in writing of a breach of any
of the conditions in Section 1158 or any of the requirements in the
regulations as soon as possible after the investment trust becomes aware of
the breach
The Company regularly monitors the conditions required to maintain ITC status.
30 September 30 September
2023 2022
£'000 £'000
Income taxes - -
30 September 30 September
2023 2022
£'000 £'000
(Loss)/profit before tax (11,338) 8,787
(Loss)/profit before tax multiplied by the rate of corporation tax in the UK (2,154) 1,670
of 19.0%
Effects of:
Non-taxable capital profits due to UK approved investment trust company status 2,143 (1,923)
Non-taxable dividend income - -
Dividend designated as interest distributions - -
Prior period deferred tax - -
Temporary differences on which deferred tax is not recognised 11 253
Total income tax charge in the statement of comprehensive income - -
Reconciliation of income taxes in the statement of comprehensive income
The tax charge for the period is different from the standard rate of
corporation tax in the UK, currently 19.0% (2022: 19.0%), and the difference
is explained below:
The Company's affairs are directed so as to allow it to meet the requisite
conditions to continue to operate as an approved investment trust company for
UK tax purposes. The approved investment trust status allows certain capital
profits of the Company to be exempt from tax in the UK and also permits the
Company to designate the dividends it pays, wholly or partly, as interest
distributions. These features enable approved investment trust companies to
ensure that their investors do not ultimately suffer double taxation of their
investment returns, i.e. once at the level of the investment fund vehicle and
then again in the hands of the investors.
Analysis of tax expense
There was no corporation tax payable during the year to 30 September 2023. As
a result, the tax charge for the period is £nil. Investment gains are exempt
from tax owing to the Company's status as an investment trust.
Factors that may affect future total tax charges
Under the UK Finance Act 2021, the UK corporation tax rate increased for large
companies from the current rate of 19.0% to 25.0% with effect from 1 April
2023. Should the Company recognise any deferred tax assets and liabilities, a
rate of 19.0% or 25.0% would be used depending on when the assets and
liabilities are expected to be crystallised. The Company is recognised as a UK
investment trust and is taxed at the main rate of 19.0%, prevalent at the
reporting period end.
At the period end, there is a potential deferred tax asset of £264,320
carried forward (30 September 2022: £253,194). The deferred tax asset is
unrecognised at the period end in line with the Company's stated accounting
policy.
9. Earnings per share
Capital reserve Revenue reserve Total
£'000 £'000 £'000
Revenue and capital profit attributable to equity holders of the Company (11,279) (59) (11,338)
Average number of Ordinary Shares 172,056 172,056 172,056
Earnings per share at 30 September 2023 (pence) (6.6) 0.0 (6.6)
Capital reserve Revenue reserve Total
£'000 £'000 £'000
Revenue and capital profit attributable to equity holders of the Company 10,120 (1,333) 8,787
Average number of Ordinary Shares 142,847 142,847 142,847
Earnings per share at 30 September 2022 (pence) 7.1 (0.9) 6.2
10. Investments at fair value through profit and loss
30 September 30 September
2023 2022
£'000 £'000
Fair value at start of the period 146,291 -
Loans to intermediate holding companies 15,513 21,821
Equity investment in holding companies 15,513 114,350
Unrealised gain on investments at fair value (11,278) 10,120
Total 166,039 146,291
As at 30 September 2023, there was a loan between Foresight Sustainable
Forestry Company Plc and FSFC Holdings Limited for £37,334,413. The loan is
repayable on demand. The rate of interest on the loan has been set at 7% per
annum. Interest accrued at the year end was £2,796,336.
The Company owns 12,986,337,835 shares in FSFC Holdings Limited at a nominal
value of £0.01 each.
Fair value investments
The Investment Manager has carried out fair value market valuations of the
underlying SPV investments as at 30 September 2023 independently administered
by Savills. The Directors have approved the methodology used, as well as
confirming their understanding of all underlying key assumptions applicable.
All SPV investments are at fair value through profit or loss and are valued
using the IFRS 13 framework for fair value measurement.
Savills includes all investments under ownership by FSF in their portfolio
valuation, for both afforestation and forestry properties. The valuations have
been prepared in accordance with the RICS Valuation - Global Standards July
2017 (the "Red Book") and incorporate the recommendations of the International
Valuation Standards which are consistent with the principles set out in IFRS
13.
Savills, in forming its opinion, makes various assumptions on the basis of
current market conditions; the following are the key assumptions made:
Fair value of assets
ee) Savills employs a "comparable approach" by analysing comparable market
value(s) of similar freehold forestry and afforestation assets from recent
transactions, when assessing what fair value is reasonable to attribute to
assets with similar features, held by subsidiaries of FSF.
Planting land value
· Savills includes a reasonable view of the potential for
afforestation sites' value uplift over time, rather than viewing the current
value of these sites as only attributable to their current use as grazing
land.
· Savills takes account of the relevant stage each site is
currently at of the forestry grant application process when reaching a
judgement.
Location and situation
· Due to the assets under ownership being located across the UK
(Scotland, Northern England and Wales), Savills accounts for the potential
differences in market interest associated in different locations.
Winter storm vulnerability
· Savills makes assessments on the basis of the extent of damage
suffered by sites due to extreme windblow incidents. Where damage is
extensive, Savills will make prudent adjustments to the value of the site, if
it is evident that some of the affected timber may be challenging to recover.
Developmental status of afforestation sites
· Due to the nature of operations for the afforestation assets,
Savills applies reassessments as to the value of an asset when a new
developmental milestone occurs.
The value associated with the carbon credits attached with the Establishment
Stage Afforestation properties is excluded from the RICS Red Book valuation of
these properties. As previously mentioned in the report, value recognition for
carbon credits is ascribed using the Investment Manager's assessment. For
further detail, please see an explanation of the methodology on page 32.
Fair value hierarchy
The Group considers that all of its investments fall within Level 3 of the
fair value hierarchy as defined by IFRS 13. There have been no transfers
between Level 1 and Level 2 during any of the periods, nor have there been
any transfers between Level 2 and Level 3 during any of the periods.
The valuations have been prepared on the basis of market value ("MV"), which
is defined in the RICS Valuation Standards as: "The estimated amount for which
an asset should exchange on the date of valuation between a willing buyer and
a willing seller in an arm's-length transaction after proper marketing wherein
the parties had each acted knowledgeably, prudently and without compulsion."
Market value as defined in the RICS Valuation Standards meets the requirements
of fair value defined under IFRS.
11. Trade and other receivables
30 September 30 September
2023 2022
£'000 £'000
Interest receivable from subsidiaries 2,796 852
Total 2,796 852
12. Trade and other payables
30 September 30 September
2023 2022
£'000 £'000
Creditors 455 477
Accruals 348 385
Intercompany account - 24
Total 803 886
13. Called up share capital
Allotted share capital, issued and fully paid Number of shares
Opening balance at 1 October 2022 172,056,075
Allotted/redeemed (since 1 October 2022)
Ordinary Shares issued -
Total number of Ordinary Shares at 30 September 2023 172,056,075
30 September 30 September
Share capital Share premium 2023 2022
£'000 £'000 £'000 £'000
Opening balance 1,721 170,075 171,796 -
Shares issued - - - 175,000
Costs associated with share issuance - 3 3 3,204
Cancellation of share premium - (126,258) (126,258) -
Total 1,721 43,820 45,541 171,796
At the beginning of the period, the total number of Ordinary Shares in issue
was 172,056,075. Each Ordinary Share has equal rights to dividends and has
equal rights to participate in a distribution arising from a winding up of the
Company. The Company has not issued any further Ordinary Shares.
On 28 February 2023, there was a special resolution to cancel the share
premium account which was confirmed by court order and registered by Companies
House. The amount cancelled was £126,258,589, with the objective of creating
distributable reserves.
14. Retained earnings
30 September 30 September
Revenue Capital 2023 2022
£'000 £'000 £'000 £'000
Opening balance (1,333) 10,120 8,787 -
(Loss)/profit for the period (58) (11,279) (11,337) 8,787
Dividends paid - - - -
Closing balance (1,391) (1,159) (2,550) 8,787
The nature and purpose of each of the reserves within the Retained Earnings as
at 30 September 2023 are as follows:
· Capital reserve: This is a non-distributable reserve of the
cumulative net gains and/or losses recognised in the Statement of
Comprehensive Income.
· Revenue reserve: This represents a distributable reserve of all
profit and loss recognised in the revenue account of the Statement of
Comprehensive Income.
15. Net Asset Value per Ordinary Share
The total Net Asset Value per Ordinary Share is based on the net assets
attributable to equity Shareholders as at 30 September 2023 of £169.2 million
and Ordinary Shares in issue of 172,056,075.
30 September 30 September
2022 2023
NAV (£m) 169.2 180.6
Number of Ordinary Shares issued (million) 172.1 172.1
Net Asset Value per Ordinary Share (pence) 98.4 105.0
16. Cash and cash equivalents
At the period end, the Company held cash and cash equivalents of £1.2
million. This balance was held by HSBC Bank plc.
30 September 30 September
2023 2022
Cash and cash equivalents:
HSBC Bank plc - current account 855 4,283
HSBC Bank plc - liquidity fund 362 30,043
Total cash and cash equivalents 1,217 34,326
17. Financial instruments
Financial instruments by category
The Company held the following financial instruments at 30 September 2023.
There have been no transfers of financial instruments between levels of the
fair value hierarchy. There are no non-recurring fair value measurements.
Financial assets
Financial assets at fair value Financial
Cash and held at through profit liabilities at
bank amortised cost or loss amortised cost Total
balances £'000 £'000 £'000 £'000
Non-current assets
Investments at fair value through profit or loss (Level 3) - - 166,039 - 166,039
Current assets
Trade and other receivables - 2,796 - - 2,796
Cash and cash equivalents 1,217 - - - 1,217
Total financial assets 1,217 2,796 166,039 - 172,052
Current liabilities
Trade and other payables - - - (803) (803)
Total financial liabilities - - - (803) (803)
Net financial instruments 1,217 2,796 166,039 (803) 169,249
The Company holds its portfolio of assets at fair value. These assets are held
through the Company's underlying subsidiaries/intermediate holding companies
(the "Group"). The assets in the Group are valued in accordance with RICS
Valuation - Global Standards July 2017 (the "Red Book") methodology, with
inspections conducted by an independent valuer ("Savills") at the end of the
period.
Savills' fair value assessment of the assets has been completed on a
comparable basis by looking at recent transactions of similar assets, to
assess current market value, outlined in note 10. As a management review
control, the Investment Manager applies a discounted cash flow approach
("DCF") to value the assets and provide a precision level for validation of
the fair value presented by Savills. Whilst the two methodologies differ, the
Investment Manager has recorded an immaterial difference between the
respective portfolio valuation results in both the interim period and the
year-end period.
The Directors consider the DCF methodology used by the Investment Manager to
validate the Red Book valuation to be appropriate. The Board and Investment
Manager annually review the valuation inputs and, where possible, make use of
observable market data to ensure valuations reflect fair value of the assets.
A broad range of assumptions are used in the valuation, which are based on
long-term forecasts and are not affected by short-term fluctuations in inputs,
be it economic or operational.
For management control purposes of comparing the two valuations on a
like-for-like basis, neither the DCF valuation nor RICS valuation conducted by
Savills include explicit recognition of Verified Carbon ("VC") value. The
Manager has therefore calculated an estimated value on the progress made on
obtaining the rights to PIUs. To date, no PIUs have been authorised by the
Woodland Carbon Code.
Sensitivity analysis of the portfolio
The sensitivity of the portfolio to changes in mature forestry asset valuation
is as follows:
The portfolio valuation of mature forestry and afforestation assets is based
on the RICS Red Book valuation approach. The Directors consider the Red Book
market value of the assets, which is a combination of several factors,
including timber growth rates, weighted age distribution and yield class, to
be the most important unobservable input underpinning the valuation
methodology described on page 32. The Directors believe that the provision of
market value sensitivity analysis of mature forestry, afforestation and mixed
forestry and afforestation assets is appropriate to align with the Company's
portfolio composition.
Mature forestry asset valuation
The sensitivity of the portfolio to changes in mature forestry asset valuation
is as follows:
The independent valuer conducts inspections of all mature forestry assets on a
semi‑annual basis, then provides a valuation based on RICS methodology. The
base case used for forestry asset value as at 30 September 2023 was £75.5
million. Due to this asset class forming significantly more than 10% of the
current portfolio valuation, this was deemed an appropriate sensitivity to
sample.
Changes in Changes in
portfolio NAV
Forestry assets sensitivity valuation per share
Forestry assets value increases by 10% +£7.53m/+4.3% +4.4p
Forestry assets value decreases by 10% -£7.53m/-4.3% -4.4p
Afforestation asset valuation
The sensitivity of the portfolio to changes in afforestation asset valuation
is as follows:
The independent valuer conducts inspections of all afforestation assets on a
semi‑annual basis, then provides a valuation based on RICS methodology. The
base case used for afforestation asset value as at 30 September 2023 was
£67.1 million. Due to this asset class forming more than 10% of the current
portfolio valuation, this was deemed an appropriate sensitivity to sample.
Changes in Changes in
portfolio NAV
Afforestation assets sensitivity valuation per share
Afforestation assets value increases by 10% +£6.71m/+3.8% +3.9p
Afforestation assets value decreases by 10% -£6.71m/-3.8% -3.9p
Mixed forestry and afforestation asset valuation
The sensitivity of the portfolio to changes in mixed forestry and
afforestation asset valuation is as follows:
The independent valuer conducts inspections of all mixed assets on a
semi-annual basis, then provides a valuation based on RICS methodology. The
base case used for the asset value of mixed forestry and afforestation assets
as at 30 September 2023 was £23.9 million. Due to this asset class forming
more than 10% of the current portfolio valuation, this was deemed an
appropriate sensitivity to sample.
Changes in Changes in
portfolio NAV
Mixed forestry and afforestation assets sensitivity valuation per share
Mixed assets value increases by 10% +£2.39m/+1.4% +1.4p
Mixed assets value decreases by 10% -£2.39m/-1.4% +1.4p
Non-core asset valuation
Due to the relatively small size of the non-core assets in the Company's
valuation, the sensitivity to movement in this part of the portfolio is deemed
immaterial, so no sensitivity analysis has been conducted.
Capital management
The Group, which comprises the Company and its non-consolidated subsidiaries,
manages its capital to ensure that it will be able to continue as a going
concern while maximising the return to Shareholders through the optimisation
of the debt and equity balances. The capital structure of the Group
principally consists of the share capital account and retained earnings as
detailed in notes 13 and 14. The Group aims to deliver its objective by
investing available cash and using leverage whilst maintaining sufficient
liquidity to meet ongoing expenses.
Gearing ratio
The Company's Investment Manager reviews the capital structure of the Company
and the Group on a semi-annual basis. The Company and its subsidiaries intend
to make prudent use of leverage for financing acquisitions of investments and
working capital purposes. Under the Company's Articles, and in accordance with
the Company's borrowing policy, the Company's outstanding borrowings,
excluding the debts of underlying assets, will be limited to 30% of the
Company's Gross Asset Value.
As at 30 September 2023, the Company had no outstanding debt. The Company's
subsidiary FSFC Holdings 2 Limited has a £30 million Revolving Credit
Facility, of which £10.4 million had been drawn at 30 September 2023.
Financial risk management
The Group's activities expose it to a variety of financial risks: capital
risk, liquidity risk, market risk (including interest rate risk, inflation
risk and power price risk) and credit risk. The Group's overall risk
management programme focuses on the unpredictability of financial markets and
seeks to minimise potential adverse effects on the Group's financial
performance.
For the Company and the intermediate holding companies, financial risks are
managed by the Investment Manager, which operates within the Board-approved
policies. All risks continue to be managed by the Investment Manager. The
various types of financial risk are managed as follows:
Financial risk management - Company only
The Company accounts for its investments in its subsidiaries at fair value; to
the extent there are changes as a result of the risks set out below, these may
impact the fair value of the Company's investments.
Capital risk
The Company has implemented an efficient financing structure that enables it
to manage its capital effectively. The Company's capital structure comprises
equity only (refer to the statement of changes in equity). As at 30 September
2023, the Company had no recourse to debt, although as set out above in the
Company structure chart, the Company's subsidiary FSFC Holdings Limited is a
guarantor for the Revolving Credit Facility of FSFC Holdings 2 Limited.
Liquidity risk
The Directors monitor the Company's liquidity requirements to ensure there is
sufficient cash to meet the Company's operating needs. The Company's liquidity
management policy involves projecting cash flows and forecasting the level of
liquid assets necessary to meet these. Due to the nature of its investments,
the timing of cash outflows is reasonably predictable and, therefore, is not a
major risk to the Company. The Company was in a net cash position and had no
outstanding debt at the balance sheet date.
Market risk - foreign currency exchange rate risk
All the cash flows and investments are denominated in pounds sterling.
Financial risk management - Company and non-consolidated subsidiaries
The following risks impact the Company's subsidiaries and in turn may impact
the fair value of investments held by the Company.
Market risk - interest rate risk
Interest rate risk arises in the Company's subsidiaries on the Revolving
Credit Facility borrowings and floating rate deposits. Borrowings issued at
variable rates expose those entities to variability of interest payment cash
flows. Interest rate hedging may be carried out to seek to provide protection
against increasing costs of servicing debt drawn down by the holding company
as part of its Revolving Credit Facility. This may involve the use of interest
rate derivatives and similar derivative instruments.
Each investment hedges their interest rate risk at the inception of a project.
This will either be done by issuing fixed rate debt or variable rate debt
which will be swapped into fixed rate by the use of interest rate swaps.
Market risk - inflation risk
Some of the Company's investments will have part of their revenue and some of
their costs linked to a specific inflation index at inception of the project.
In most cases this creates a natural hedge, meaning a derivative does not need
to be entered into in order to mitigate inflation risk.
Market risk - timber price risk
Timber revenue forms a significant majority of forecasted revenues for the
Company's investments. Whilst projections suggest a steady income flow through
the sale of timber, there is a risk that timber prices will drop due to market
forces and minimise the revenues the Fund will receive. This risk is mitigated
by the ability of the Company and underlying investments to sustain its
liquidity, even in the event of withholding from timber sales, given
sub‑optimal pricing.
Credit risk
Credit risk is the risk that a counterparty of the Company or its subsidiaries
will default on its contractual obligations it entered into with the Company
or its subsidiaries. Credit risk arises from cash and cash equivalents,
derivative financial instruments and deposits with banks and financial
institutions, as well as credit exposures to customers.
The Company and its subsidiaries place cash in authorised deposit takers and
are therefore potentially at risk from the failure of such institutions. In
respect of credit risk arising from other financial assets and liabilities,
which mainly comprise of cash and cash equivalents, exposure to credit risk
arises from default of the counterparty with a maximum exposure equal to the
carrying amounts of these instruments. In order to mitigate such risks, cash
is maintained with major international financial institutions. During the
period and at the reporting date, the Company maintained relationships with
HSBC Bank plc.
Moody's 30 September 30 September
credit 2023 2022
rating £'000 £'000
HSBC Bank plc P1 1,217 34,326
Total cash and cash equivalents 1,217 34,326
18. Subsidiaries
The following subsidiaries have not been consolidated in these financial
statements as a result of applying the requirements of "Investment Entities:
Applying the Consolidation Exception (Amendments to IFRS 10)". The Company is
not contractually obligated to provide financial support to the subsidiaries
and there are no restrictions in place in passing monies up the structure.
Proportion
Direct or of shares
indirect Country of Registered Principal and voting
Name holding incorporation address activity rights held
FSFC Holdings Limited Direct UK C/O Foresight Group LLP, Holding company 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
FSFC Holdings 2 Limited Indirect UK C/O Foresight Group LLP, Holding company 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
FSFC Company 1 Limited Indirect UK C/O Foresight Group LLP, SPV 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
Blackmead Forestry Limited Indirect UK C/O Foresight Group LLP, SPV 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
Blackmead Forestry II Limited Indirect UK C/O Foresight Group LLP, SPV 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
Coull Forestry Limited Indirect UK C/O Foresight Group LLP, SPV 100%
The Shard, 32 London Bridge Street, London, England, SE1 9SG
Fordie Estates Limited Indirect UK C/O Foresight Group LLP, Clarence House, 133 George Street, Edinburgh, SPV 100%
Scotland, EH2 4JS
19. Employees and Directors
The Company is governed by an independent and non-executive Board of
Directors. There are four Non-Executive Directors. Please refer to the
Directors' remuneration report for details of the Directors' emoluments.
20. Contingencies and commitments
The Company has no guarantees or significant capital commitments as at
30 September 2023.
21. Related party transactions
Following admission of the Ordinary Shares (refer to note 13) the Company and
the Directors are not aware of any person who, directly or indirectly,
jointly, or severally, exercises or could exercise control over the Company.
As per the Director's report on pages 71 to 78, it is however noted that
Blackmead Infrastructure Limited's substantial interest in share capital
(29.93%) constitutes a party with significant influence on the Company. The
Company does not have an ultimate controlling party.
The transactions between the Company and its subsidiaries, which are related
parties of the Company, and fair values, are disclosed in note10. Details of
transactions between the Company and related parties are disclosed below
This note also details the terms of the Company's engagement with Foresight
Group LLP, the Investment Manager.
Transactions with the Investment Manager
The Investment Manager, Foresight Group LLP, is entitled to a base fee on the
following basis:
(a) 0.85% per annum of the Net Asset Value of the Fund up to and
including £500.0 million
(b) 0.75% per annum of the Net Asset Value of the Fund in excess of
£500.0 million]
The investment management fees incurred during the year to 30 September 2023
were £1,561,930, of which £399,781 remained unpaid as at 30 September 2023.
Additionally, the Company incurred fees during the year to 30 September 2023
of £128,623, which related to administration services provided by the
Investment Manager, in its capacity as Administrator for the Company. £32,564
of the fees incurred remained unpaid as at 30 September 2023.
Other transactions with related parties
The amount incurred in respect of Directors' fees during the year to 30
September 2023 was £160,000. The Directors also received £2,336 in relation
to miscellaneous Director expenses. These amounts had been fully paid as at 30
September 2023. The amounts paid to individual Directors were as follows:
Taxable Basic and
benefits Committee fees Total
Director £ £ £
Richard Davidson (Chair) - 48,000 48,000
Sarika Patel 357 40,500 40,857
Christopher Sutton 1,617 35,500 37,117
Josephine Bush 362 36,000 36,362
Total 2,336 160,000 162,336
The Directors held the following shares in the Company:
% of issued
Number of Ordinary Shares
Director Ordinary Shares capital
Richard Davidson (Chair) 100,000 0.06
Sarika Patel 24,000 0.01
Christopher Sutton 25,000 0.01
Josephine Bush 19,000 0.01
The above transactions were undertaken on an arm's-length basis.
22. Events after the balance sheet date
The Directors have evaluated the need for disclosures and/or adjustments
resulting from post balance sheet events through the financial statements were
available to be issued.
On 19 October 2023, one of the Company's SPVs, FSFC Company 1 Limited,
completed the acquisition of a site in Scotland for £0.7million.
On 1 December 2023, one of the Company's SPVs, Fordie Estates Limited,
completed the acquisition of a site in Scotland for £0.5million.
There are no other significant events since period end which would require to
be disclosed. There were no adjusting post balance sheet events and, as such,
no adjustments have been made to the valuation of assets and liabilities as at
30 September 2023.
COMPANY SUMMARY
Below are the Company key facts, advisers and other information (which have
not been audited).
Company information
Foresight Sustainable Forestry Company Plc ("FSF") is the first and only UK
listed investment trust focused on UK forestry, afforestation and natural
capital (registered number 13594181) with a premium listing on the London
Stock Exchange.
Registered address
The Shard, 32 London Bridge Street, London, SE1 9SG
Ticker/SEDOL
GB00BMDPKM71
Company year end
30 September
Investment Manager, Company Secretary and Administrator
Foresight Group LLP, No OC300878, registered in England and Wales and
authorised and regulated by the Financial Conduct Authority
Market capitalisation
£140.2 million at 30 September 2023
Investment Manager fees
0.85% per annum of the NAV up to £500 million, falling to 0.75% per annum of
NAV in excess of £500 million.
ISA, PEP and SIPP status
The Ordinary Shares are eligible for inclusion in PEPs and ISAs (subject to
applicable subscription limits) provided that they have been acquired in the
market, and they are permissible assets for SIPPs.
AIFMD status
The Company is classed as an externally managed Alternative Investment Fund
under the Alternative Investment Fund Managers Regulations 2013 and the
European Union's Alternative Investment Fund Managers Directive.
Non-mainstream pooled investment status
Approved UK Investment Trust subject to the Company continuing to meet the
eligibility conditions in Section 1158 of the Corporation Taxes Act 2010 and
the ongoing requirements for approved companies in Chapter 3 of Part 2
Investment Trust (Approved Company) (Tax) Regulations 2011 (Statutory
Instrument 2011/2999).
FATCA
The Company has registered for FATCA and has a GIIN number 191P2V.99999.SL.826
Investment policy
The Company's investment policy is set out on pages 71 and 72.
Website
https://fsfc.foresightgroup.eu/ (https://fsfc.foresightgroup.eu/)
ADVISERS
Investment Manager, Administrator and Company Secretary
Foresight Group LLP
The Shard
32 London Bridge Street
London
SE1 9SG
Registrar and Receiving Agent
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS99 6AH
Depositary
NatWest Trustee and Depositary Services Limited
250 Bishopsgate
London
EC2M 4AA
Financial advisor and corporate broker
Stifel Nicolaus Europe Limited
150 Cheapside
London
EC2V 6ET
Public Relations
SEC Newgate
14 Greville Street
London
EC1N 8SB
Solicitors to the Company
Gowling WLG (UK) LLP
4 More London Riverside
London
SE1 2AU
Independent Auditor
Ernst & Young LLP
25 Churchill Place
London
E14 5EY
Valuation Adviser
Savills Advisory Services Ltd
Earn House
Broxden Business Park
Perth
PH11 1RA
GLOSSARY OF TERMS
AGM Annual General Meeting
AIC The Association of Investment Companies
AIFs Alternative Investment Funds
AIFMs Alternative Investment Fund Managers
AIFMD Alternative Investment Fund Managers Directive
APMs Alternative Performance Measures
Asset Manager The Company's underlying investments have appointed Foresight Group LLP, a
subsidiary of Foresight Group CI, to act as Asset Manager
Company Foresight Sustainable Forestry Company Plc
EJDF E.J. Downs Forestry, who have significant experience in the forestry
management space and advise the Company on silvicultural decisions
Ernst & Young LLP Ernst & Young is the Company's auditor
ESG Environmental, Social and Governance
FCA Financial Conduct Authority
FITF Foresight Inheritance Tax Fund
Foresight Foresight Group LLP
FSC Forest Stewardship Council
FSF Foresight Sustainable Forestry Company Plc
FTE Full-time equivalent
Fund Foresight Sustainable Forestry Company Plc
Fund Managers Richard Kelly and Robert Guest
GAV Gross Asset Value on investment basis including debt held at Company and
subsidiary level
H&S Health and safety
HMRC HM Revenue & Customs
IAS International Accounting Standard
ICVCM Integrity Council for Voluntary Carbon Markets
IFRS International Financial Reporting Standards as adopted by the EU
Intermediate holding companies Companies within the Group which are used to invest in afforestation and
forestry assets, namely FSFC Holdings Limited and FSFC Holdings 2 Limited
Investment Manager Foresight Group LLP, appointed by Foresight Group CI Limited
IPO Initial Public Offering
ITC Investment Trust Company
KPI Key performance indicator
LSE London Stock Exchange
Main Market The main securities market of the London Stock Exchange
NAV Net Asset Value
PEFC Programme for the Endorsement of Forest Certification
PIU Pending Issuance Units
Portfolio The 68 assets in which FSF had a shareholding as at 30 September 2023
RCF Revolving Credit Facility
Red Book Valuation or the Red Book the Royal Institution of Chartered Surveyors Valuation - Global Standards July
2017
RICS Royal Institution of Chartered Surveyors
RIDDOR Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
RNS Regulatory News Services
RPI The Retail Price Index
S&ESG Sustainability and ESG
SAC Special area of conservation
Savills Savills Advisory Services Limited
SDGs United Nations Sustainable Development Goals
SDR UK Green Taxonomy and UK Sustainable Disclosure Requirements
SFDR The EU Sustainable Finance Disclosure Regulation
SORP Statement of Recommended Practice: Financial Statements of Investment Trust
Companies and Venture Capital Trusts
SPHN Statutory plant health notifications
SPV The special purpose vehicles which hold the Company's investment portfolio of
underlying operating assets
SSSI Sites of special scientific interest
tCO(2)e Tonnes of carbon dioxide equivalent
TCFD Task Force on Climate-related Financial Disclosures
UK The United Kingdom of Great Britain and Northern Ireland
VCM Voluntary Carbon Market
VCU Verified carbon units
WCC UK Woodland Carbon Code
Appendix One: Voluntary Carbon Market Designation, Schedule 8, Clause 9:
Continuing Obligations of the Eligible Issuer
Reference period: 01 October 2022 - 30 September 2023 (noting the Company was
awarded the Voluntary Carbon Market designation in December 2022).
As an Eligible Issuer under the LSE's Voluntary Carbon Market designation, the
Company confirms that this audited annual report and financial statements
include:
VCM Designation Disclosure Issuer comment
a a statement confirming that there has been no change in the investments held During the year to 30 September, the Company has made 18 investments, adding a
by the Fund or the funding arrangements of the Operating Company (as the case total of 2,929 hectares to its portfolio. In addition, it disposed of five
may be) in the Proposed Projects and/or Qualifying Projects or, in the event properties within its portfolio. Please refer to pages 22 to 23 for full
that there has been a change, details of the change details on investment activity during the year.
The Company confirms that beyond its investment activity, in pursuit of its
investment and sustainable investment objectives, there have been no changes.
b in respect of a Fund, which is not fully invested, confirmation of the The Company announced that it completed the investment of its June 2022
expected timing of any further investments in Proposed Projects and/or fundraise in January 2023. Please refer to page 25 for a forecast of when
Qualifying Projects afforestation schemes in development are expected to achieve planting
completion.
C an update in respect of the stage of each Proposed Project in relation to the Please refer to pages 24 to 25 for a forecast of when the Company's
standards of the relevant Qualifying Body including, without limitation: i. afforestation schemes in development are expected to achieve planting
the expected timing of achieving key milestones to achieve the status of a completion milestones.
Qualifying Project; or ii. a statement of the likelihood that the relevant
Proposed Project will or will not become a Qualifying Project
D a restatement of its expected Carbon Credit target yield and a description of Please refer to pages 11 and 12 for details on the Company's objectives for
how the Eligible Issuer has performed in relation to the previously stated 2023/24.
expected target Carbon Credit yield
As at 30 September the Company's current afforestation portfolio is expected
to create up to 1.0-1.2 million voluntary carbon credits.
E a statement confirming the percentage of the Eligible Issuer's gross assets, Please refer to pages19 to 32 for a breakdown of the Company's portfolio and
which are invested (directly or indirectly) in Qualifying Projects and progress towards the creation of carbon credits.
Proposed Projects
At 30 September 2023, the Company's afforestation portfolio comprised a c.45%
allocation (by value).
F for a Fund, confirmation that, to the extent the Fund is not invested in As part of transactions to acquire forestry assets, the Company may end up
Proposed Projects and/or Qualifying Projects, the revenues from its owning ancillary non-forestry related assets such as residential land and
investments (other than in cash or cash equivalents) can be mapped to the Tier buildings and small-scale renewable energy assets. The Company classifies
1 or Tier 2 micro sectors within FTSE Russell's Green Revenues Classification these as "non-core" and at any point these will account for no more than 10%
System; of the Company's assets (by value).Where appropriate and beneficial to the
overall strategy, the Company will look to realise the value of any Non-Core
Assets over time for the benefit of Shareholders.
As at 30 September 2023 non-core assets, not expected to align with FTSE
Russell's Green Revenues Classification System accounted for 3.52% of the
Company's Gross Asset Value ("GAV"). The remaining 96.48% of the Company's GAV
as at 30 September 2023, was invested into sustainable forestry and
afforestation assets that can be mapped onto Tier 1 or Tier 2 micro sectors
within FTSE Russell's Green Revenues Classification System.
G for an Operating Company, confirmation that the revenues from any other N/A
business activity conducted can be mapped to the Tier 1 or Tier 2 micro
sectors within FTSE Russell's Green Revenues Classification System
H details (including the number) of any Carbon Credits received by the Eligible In the period to 30 September 2023, the Company has not received or owned any
Issuer in the period, including: i. the Qualifying Body and the Voluntary Carbon Credits.
Carbon Industry Body; ii. certification standard name; iii. type (reduction
and/or removal); iv. project name; v. identification number; vi. issuing
Registry for each Carbon Credit issued; vii. host country; viii. Carbon Credit
vintage; ix. methodology/project type; and; whether or not the Carbon Credit
is associated with corresponding adjustments (as evidenced by authorisation
and authorised use) by the host and/or buyer country
i details (including the number) of any Carbon Credits that have been retained, N/A
retired on behalf of shareholders, distributed or sold onwards by the Eligible
Issuer in the period
J in respect of cash equivalents, how such investments are compatible with the The Company may hold cash reserve for the purposes of ancillary liquidity and
principle of climate change mitigation; and ongoing portfolio management to enable the continued attainment of the
Company's sustainable investment objective. At any point, this cash reserve
will account for no more than 5% of the Company's assets. As at 30 September,
cash reserves comprised 0.72% of the Company's GAV.
The Company utilises the following responsible bank reserves:
HSBC Sterling Liquidity Fund Class F; and
HSVC Sterling ESG Liquidity Fund Class F
These are aligned with the principles of climate change mitigation and
sustainable investment.
k an update in respect of the disclosure required pursuant to paragraph 6(e) in Please refer to the Company's sustainable impact reporting on pages 33 - 36.
respect of the United Nation's Sustainable Development Goals ("SDGs") This outlines the specific SDG indicators used for the FSF portfolio.
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