Posted by France Valley on 02 June 2026
Natural assets: Can they offer more than sustainability?
For several years now, natural capital has been gradually making its way into institutional investors' portfolios. The primary drivers for this increased interest are sustainability-related factors, particularly carbon and biodiversity. However, a growing appetite for the purely financial characteristics of these assets is also becoming apparent.
Lacking their own dedicated category, investments in natural assets are often classified within real estate or infrastructure. Should we consider creating a dedicated category for forestry and agricultural investments within portfolios? The answer is, clearly, yes, given what these assets can contribute in terms of diversification.
What are the main characteristics of forestry investments?
First and foremost, they are tangible assets, extensively present across Europe (178 million hectares). Despite that, supply remains constrained: although forest cover continues to increase in Europe, its expansion is limited by competing land uses from agriculture and urbanisation.
Secondly, the timber market is supported by rising demand for wood products, to the point where demand currently exceeds supply (construction, replacement of petrochemical-derived products with wood cellulose, etc.).
Finally, investing in forestry brings a wide range of ecosystem services not yet reflected in per-hectare valuations – most notably the fact that forests are home to 75% of terrestrial biodiversity (both animal and plant life), act as carbon sinks, filter water, and moderate extreme temperatures.
The main obstacle to the development of this asset class, however, remains a perceived lack of performance. In 2025, following several months of work in collaboration with the leading approved French forestry asset managers (ASFFOR), the Institut de l'Épargne Immobilière et Foncière (IEIF) published a benchmark index validated by the French regulator (AMF). This index covers five management companies and 42 funds, with a combined market capitalisation of €1.5 billion. It is weighted by the capitalisation of each fund, making it a transaction-based index.
The creation of this index therefore gives institutional investors greater visibility into this alternative asset class.
Over the past 20 years, the index’s performance and volatility figures reflect the defensive nature of forestry investment.
The table below summarises the annualised returns of the index over various periods, along volatility:
| (As of 31/12/2025) | Annualised Return | Annualised Volatility |
| 3 years | 4.69% | 2.15% |
| 5 years | 5.85% | 3.48% |
| 10 years | 5.29% | 3.09% |
| 15 years | 5.64% | 3.79% |
| 20 years | 5.07% | 3.92% |
Past performance is not indicative of future results. Investment in Forestry Funds carries a risk of capital loss. The data used is collected on a monthly basis. ASFFOR and IIEIF hold all ownership rights relating to the IEIF ASFFOR Fonds Forestiers France® index. However, ASFFOR and IEIF cannot be held liable for its use. "IEIF ASFFOR Fonds Forestiers France®" is a registered trademark of ASFFOR and IEIF.
What has been driving natural assets’ performance?
Since forest valuation is based primarily on timber stock, the organic growth of trees (between 3% and 5% in timber volume per year) partly explains the stability of returns (the forward-looking value of the forest relative to anticipated timber stock). Returns are also driven by the fact that a growing number of institutional investors are beginning to allocate a portion of their portfolios to forests, mechanically pushing up prices in more recent years.
Taking a step back and looking at these indicators for forestry investment, it is worth having a look at its diversification benefits:
| Asset Class | Reference Index | Correlation with IEIF-ASFFOR Index |
| Euro Government Bonds (10Y) | Euro MTS Index | -2.1% |
| IG Corporate Bonds | ICE BofA Investment Grade Euro Corporate | -5.2% |
| Global Equities | MSCI World | -15.4% |
| European Private Debt | S&P European Leveraged Loan Index | -0.2% |
| Private Equity | MSCI PE Europe Index | -16.3% |
| Real Estate | MSCI PEPFI | -1.1% |
| Infrastructure | MSCI Infra Equity | +23.4% |
All asset classes, with the exception of infrastructure, show a negative correlation to the forestry index over the study 2005-2025 period. Furthermore, the IEIF ASFFOR index exhibits the lowest volatility of all the asset classes presented.
These indicators clearly reveal the diversifying role played by forestry investments.
How to construct a portfolio with natural assets?
Consider an institutional portfolio (excluding money market), with the following allocation:
| Asset Class | Weighting |
| Euro Government Bonds (10Y) | 36% |
| Euro IG Corporate Bonds | 36% |
| European Private Debt | 6% |
| Global Equities | 6% |
| European Private Equity | 4% |
| European Real Estate | 8% |
| European Infrastructure | 3% |
By introducing a 10% allocation to forestry assets, while retaining 90% of the initial allocation, the 20-year performance would have been broadly similar (4.3% per annum for the portfolio with 10% forestry, versus 4.2% for the initial portfolio). However, overall volatility would have been 10% lower (4.9% versus 5.4%). Adding a forestry allocation significantly reduces the portfolio's overall risk without compromising the target return.
From this theoretical exercise, it is clear that the creation of the forestry index now provides investment teams with meaningful benchmarks as they seek both optimal diversification and alignment with sustainability factors. It is worth noting that available forestry funds are classified as Article 9 under SFDR. It should also be highlighted that forestry investment represents an excellent hedge in an inflationary environment, given that forests consist primarily of timber – a raw material in its own right.
Sources: S&P Partners, IEIF, ASFFOR, MSCI, S&P, ICE
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