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(Runtime: 6 min, 42 sec; size: 3.84 MB)
Dominique Barker, CIBC Asset Management. I’m a Portfolio Manager.
Lumber and how lumber could meet some of the United Nations sustainable development goals. First, let me just explain what the United Nations sustainable development goals are. This is a set of 17 goals that were set by global leaders in 2015, really to address how we could make the world a better place.
The sustainable development goals, or SDGs, represent gray areas when we think about investment decisions. That’s why I think it’s important to look at certain sectors under the sustainable development goal lens, or SDGs.
Today, I want to discuss forest products. I think this is a great area for investment, but I do think there are some positives, in that, forest products, or lumber, can meet some of the sustainable development goals. Namely, some of those SDGs include climate action, industry innovation, infrastructure, and responsible consumption and production.
Let me explain. Today, timber is mostly used in the home building sector, but we also see lumber being used in home remodeling and repair. However, I think that lumber could, and should, be seen in more commercial real estate construction, and we are seeing some changes to construction methods to allow for large buildings made of wood.
Here’s why I think it’s important, and here’s how I think it ties into the sustainable development goals. Did you know that the cement industry produces more than 5% of global greenhouse gas emissions, and steel represents about 3%? Under today’s construction methods we mostly use cement and steel, so those buildings are creating a lot of greenhouse gases just under their construction.
However, if we think about forest products, when a tree grows it is capturing carbon. It is growing because carbon is a food product for the trees, and as it grows, it’s absorbing carbon. If we can use timber, or lumber, in commercial real estate construction, we can actually capture and store that carbon for long periods of time, which would be an immense benefit from a climate action perspective.
We can see how forest products fulfill several of the sustainable development goals, including the climate action through the carbon capture and longterm storage of carbon through industry innovation, which is tall buildings made of timber, which I think we are going to continue to see more innovation. In fact, Google Sidewalk Project in Toronto is one that is going to be made mostly out of wood, which is fantastic. It represents the SDG of infrastructure, and of course it represents responsible consumption and production.
Wood, I think, has tremendous opportunities to make the world a better place by capturing that carbon and storing it over long periods of time, and building beautiful buildings that, if you think about it, when you walk into a building made of wood, probably makes you feel better as well, versus something like steel or concrete.
One such company that produces lumber in Canada, would be West Fraser. I think that’s an appropriate investment from that theme of sustainable investments that I’ve just described. In addition, I think it’s attractively valued and has a double digit free cash-flow yield. It’s a very attractively valued company with practically zero debt on its balance sheet, and it continues to buy back shares. So it’s a nice investment from a financial perspective, but it also is helping to solve some of the sustainable development goals that we’ve set for ourselves.
Governance is an important topic that we look at when we’re looking at ESG, or environmental, social and Governance. We think that good Governance means that a company’s board and management is properly recognizing and managing its human capital, its environmental capital, and its social capital. When you have good Governance, you tend to be managing some of those environmental and social risks better.
As investors, the first thing we look at is the Board of Directors. We’re looking at its composition and its skillset, and we’re looking at management and board ownership. Do they own shares in the company? We’re looking at business ethics, we’re looking at legal and regulatory compliance, we’re looking at compensation. We’re looking at diversity, and that’s important both at the management level and at the board level, and we’re looking at disclosure, financial disclosure, and of course corporate social responsibility, a type of disclosure.
I want to just key in on one point and that’s on board diversity, because that’s a topic that is topical right now as we’re members of the 30% Club. 30% Club is a global organization that is looking to have at least 30% gender diversity on Boards of Directors.
Our entire team at CIBC has been engaged with a number of companies that currently have no females on their board, and we have been actively engaged with the companies, along with other investors in Canada, to add more women onto the boards. We are seeing success in that, and we are starting to see some advancement of that.
When we look at Governance, like I said, one of the things that we’re looking at is going to be business ethics, and legal and regulatory compliance. One of the things that we can measure is how much a company lobbies the government. Lobbying a government can be a red flag to investors, because it could mean that they are trying to change the laws to benefit them, and if they’re not successful, it could have negative repercussions, for example.
There’s some real live examples of that happening, and that’s why we think that looking at lobbying as one thing that’s easy to ask the company, or to measure through their corporate disclosure, we can identify a potential problem.