QUADRIS Environmental Investments Limited. Sustainable Returns With Social Responsibility

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1 QUADRIS Environmental Investments Limited Sustainable Returns With Social Responsibility

2 Our Mission To provide a positively green, transparent alternative investment, which reflects our investors desire to achieve sustainable returns from a low-risk asset in a sustainable, socially responsible and environmentally sound way.

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4 QUADRIS at a Glance QUADRIS Environmental Fund launched in the UK in May 2001 ISO and ISO 9001 certified company engaged in attracting investment funds for alternative investments a niche market leader in the development of positive SRI criteria in the UK solid investment vehicle which has steadily risen in value month on month powerful combination of forestry and a positive investment policy adhering strictly to four key investment criteria - ethical, sustainable, environmentally sound, socially pro-active pro-active approach to the Investment Fund s investments exercising substantial influence over the projects in which the Fund has an interest selection of share classes to allow personal choice with regard to risk and reward an Investors in People recognised company

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6 Contents Welcome to QUADRIS Environmental Investments Limited 2 Who are QUADRIS? 3 QUADRIS Mission ISO 9001 and ISO Certification 4 Investors in People QUADRIS Alternative Investment Proposition 6 Our Investment Principles Engagement 7 QUADRIS Share Classes 8 Performance of the Assets What Makes Forestry Unique? 10 How do I Make Money From Investing in Forestry? 11 Who Should Invest? The Historical Performance of Forestry 12 Building a Risk Efficient Portfolio 13 Current Investment Trends What Does This Mean? 14 Monitoring Teak Prices Why QUADRIS Chose Brazil 15 Why QUADRIS Chose Brazilian Teak Where QUADRIS Invests - About Floresteca Agroflorestal Ltda. 18 Ethical Considerations Sustainability Environmentally Sound 19 Social Standards Certification and Monitoring 20 Floresteca s Accreditations to Date 21 The Forest Stewardship Council 22 ISO14001 Certification for Environmental Management Systems 23 The Growing Need for Sustainable Wood Plantations 25 The Rising Demand for Wood 27 Satisfying Increased Demand 28 The Role of Plantations in Satisfying Demand 29 What Area of Plantations Might the World Require? 30 What is Floresteca s Contribution? 31 Frequently Asked Questions 33 Credits & Acknowledgements 36

7 Welcome to QUADRIS Environmental Investments Limited If you are serious about ethical investments in positively green, socially responsible activities, whilst looking to invest in a high performing, low-risk asset-backed project, then let us introduce you to QUADRIS Environmental Investments Ltd. Perhaps you thought it wasn t possible to combine all three criteria in one investment? At QUADRIS, we believe it is and we can offer our investors an unique proposition - a low-risk alternative investment with a proven performance track record, in FSC certified, fully sustainable commercial teak plantation projects. Since establishing its modern roots in the 1980s, the Socially Responsible Investment (SRI) market has developed into a sector estimated to now be worth approaching 9 billion. As increasing numbers of like-minded investors look for more socially responsible alternatives to mainstream stocks and shares, the SRI market continues to grow. We have been lucky enough to visit Floresteca in Brazil and see for ourselves that all QUADRIS ethical claims are as promised, both in the care of Floresteca s workers and their families, and of the environment. Also our shares make steady growth despite the world financial climate. Mike & Maryan Giddings, QUADRIS Investors

8 Who are QUADRIS? QUADRIS UK was established in We are engaged in attracting investment funds for Alternative Investments and this is currently being achieved through the QUADRIS Environmental Fund PLC. This form of alternative investment offers a number of key advantages over traditional investments: low volatility uncorrelated to performance of stocks and shares consistent, absolute returns asset-backed investment QUADRIS Mission QUADRIS Mission is simple: To provide a positively green, transparent alternative investment, which reflects our investors desire to achieve sustainable returns from a low-risk asset in a sustainable, socially responsible and environmentally sound way. 3

9 ISO 9001 and ISO Certification QUADRIS Environmental Investments Limited is both ISO 9001 : 2000 and ISO : 2004 certified. This followed a period of consultation with and assessment by, QMS Quality Management Systems, a division of QMS International plc. The purpose of meeting the criteria laid down by these internationally recognised standards is to provide a framework for quality service standards to our investors and their intermediaries and reinforce our commitment to provide these services in a manner which minimises any environmental cost associated with providing them. ISO 9001 certification provides the framework for our commitment to develop and improve our Quality Management System and its effectiveness. ISO specifies the requirements for an Environmental Management System to enable the formulation and implementation of a policy and objectives, taking into account legal and other requirements to which an organisation subscribes. The ISO standard applies to those environmental aspects that the organisation can control and over which it can be expected to have an influence. The objective of our Environmental Management System is to carry out all measures reasonably practicable to develop, meet, or exceed all necessary or desirable benchmarks and to continually improve environmental performance. Investors in People In May 2008, QUADRIS was recognised as an Investor in People. The aim of Investors in People is to acknowledge the positive efforts a company is making to ensure a business is successful, both financially, and, crucially, in the results it can achieve through its staff members. Investors in People assists a business in identifying its strengths and the areas in which improvements can be made to further enhance the way business is conducted and the contribution that staff members make both personally and as a team. It is an ongoing process of improvement and development, and reassessments are carried out at 3 yearly intervals to monitor this and enable recognition to continue. 4

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11 QUADRIS Alternative Investment Proposition In May 2001, we launched our first alternative investment. This investment, and subsequent offerings made by QUADRIS, invests directly in the plantations managed by Floresteca Agroflorestal Ltda., or corporate bonds issued, to finance their operations. Floresteca is a largescale sustainable teak forestry business, operating in accordance with leading international guidelines for sustainability. Certification and ongoing monitoring of investment projects is crucial to QUADRIS, as it serves to assure our investors that their money is being invested in accordance with the strict ethical, social and ecological principles in which QUADRIS believes. QUADRIS has demonstrated that the common belief that investment in ethical or sustainable ventures reaps a lower financial reward than conventional investments is not necessarily true. Through an ongoing commitment to the most stringent investment criteria, QUADRIS is able to show that financial compromises need never be made in striving to offer the most positively green investments in the market place. Specifically, studies have shown that high standards of forestry management are beneficial both to commerce and the environment and this has been borne out through the success of the QUADRIS Environmental Fund. Since the launch of this Fund in 2001, share prices have continued to steadily rise and will offer an anticipated return on investment that matches best of class. Since QUADRIS was established in the UK, we have succeeded in creating and building on a solid investment vehicle which has steadily risen in value month on month. The powerful combination of forestry and strict, positively green and socially responsible investment criteria, enables us to offer our investors complete confidence and peace of mind that their investment is in the best possible hands both now and in the future. Our Investment Principles A niche market leader in the development of positive SRI criteria in the UK, QUADRIS pursues a positive investment policy by adhering strictly to four key investment criteria - that all investments are: Ethical Sustainable Environmentally sound Socially pro-active Sustainability is a crucial element in QUADRIS business, as we recognise that no business can be viable in the long term if sustainability is not considered within its long-term strategy. In addition, we believe that financial success can only be achieved through a policy of complete transparency at every level. 6

12 At QUADRIS, we commit to focus only on investment projects or businesses which cumulatively: Are related directly or indirectly, to the production, processing, marketing and selling of hardwood. Fulfil internationally recognised principles and guidelines of sustainable forestry such as those currently drawn up and implemented by the Forest Stewardship Council (FSC), and which may in the future be drawn up and implemented by other multinational organisations. Offer an anticipated return on investment that at least matches best of class. Provide a secure long-term investment for participants in our fund. Engagement QUADRIS Environmental Investments Ltd takes a proactive approach to the Fund s investments, consequently it can exercise substantial influence over the projects in which the Fund has an interest. In selecting projects as being suitable for investment, QUADRIS ensures that that the management of the investment project is independently monitored and assessed. In addition, QUADRIS recognises that the management of such businesses requires specialist knowledge, and ensures that the necessary expert organisations are utilised in the appropriate areas.

13 QUADRIS Share Classes QUADRIS offers a range of investment options to suit your personal requirements. Select from a choice of sterling, Euro, or US$ classes of shares in the QUADRIS Environmental Fund, providing varying levels of return and risk. Due to the nature of this investment, all are intended as long-term investment options. Choices include (but are not limited to): Variable Rate Growth Shares Fixed Rate Shares Specialist investment options The value of shares can fall as well as rise and you may not get back the amount you invested. For a more in depth explanation of QUADRIS share classes and how to invest, please refer to your local IFA, or contact QUADRIS for a copy of our latest Offering Document and details of an IFA who can advise you. Performance of the Assets Since Floresteca s teak plantations were established in 1994, their value has increased year on year. This reflects the strong long term performance of forestry investments as a whole. In addition, as forests grow, so does their value. Upon reaching maturity, the timber is sold on the world market, where quality hardwoods will achieve the highest prices due to the demand for such woods and their diminishing availability from natural forest sources. 8

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15 What Makes Forestry Investments Unique? Since the days of Robin Hood and King John, the wealthy and powerful have owned woodland. However, about 30 years ago, a few forward looking insurance companies and pension funds started investing in forestry as a hedge against inflation. As a result, economists began evaluating timber in terms of total returns and risk / reward ratios. The experience of the early investors and a raft of recent academic studies indicate that timber is a near perfect asset. Research results show that a forestry portfolio would have returned 13.3% annually over the past 40 years, compared with 11.6% from the S&P 500. This alone is a powerful indicator of the strength of forestry investments, but is only part of the equation. Forestry is also remarkably low-risk, with volatility more akin to bonds than stocks. It also tends to perform best when stocks and bonds are depressed, making it an ideal counterbalance in a spread portfolio. The best reason to invest in forestry is simple - trees grow! Silently, and without the majority of the attendant costs which accompany other production processes. If you are interested in growth - consider Forestry - it has been outperforming the Standard & Poors 500 for decades! However, forestry is not just a low-cost production line, it is also a profit-generating, low maintenance warehouse. As trees grow larger, their value increases. If we consider teakwood: Based on the valuation model for the forestry assets of Floresteca, wood from the commercial thinning of an 8-10 year old hardwood plantation can sell for around US$260 per cubic metre. At the second thinning at 15 years, this increases to around US$420 per cubic metre. When the same trees are mature at years they yield considerably more timber, which commands a price of up to US$600 per cubic metre (2008 price levels). These figures are impressive, but the arguments for investing in forestry are further endorsed by the long-term record of world timber prices. Whilst timber prices fluctuate, the real prices for timber have steadily risen for more than 100 years, a better performance than any other commodity. Why? Timber isn t like oil, gas or coal. There are no hidden deposits to be discovered to expand supply. Despite substitutes as diverse as steel, plastic and stone, people still want and need wood. Furthermore, unlike any other building material, timber is renewable and its use sustainable. In the traditional markets it is necessary to accept a higher than market risk in order to outperform the indices. Forests are a real asset, with a long history of preserving and increasing wealth over the long term. Investors are increasingly attracted to absolute returns, which are not market driven and commercial sustainable forestry is an ideal means to fulfil this need.

16 How do I Make Money From Investing in Forestry? Investors make money investing in forests in two ways. First, income is generated from the sale of harvested timber; the balance is attributable to appreciation, which is heavily influenced by market conditions and forest management activities. Investing in strictly managed, sustainable timber plantations such as those owned by Floresteca Agroflorestal, is vital to the security of forestry investments. Quality seedling selection, timber thinning, pest control, fire prevention measures and sustainable planting, to name just some examples, are crucial to the long-term economic success of a forestry plantation operation and therefore the overall value of the investment. Who Should Invest? Forests are long-term assets, and sit well within the demographic profile of many superannuation funds or insurance companies. For example, for a superannuation fund with an overabundance of members ranging from ages 40 to 50, one would expect high demands for retirement income in 15 to 25 years. Forestry is one of the few alternative assets that can be bought and held for this length of time. Forests have had a negative correlation in the year-to-year variation in their returns with other major asset classes such as listed stocks, corporate bonds, and property. At the same time, forestry assets have been positively correlated with inflation. Therefore, investors could find that the overall volatility of their portfolio would be reduced by the addition of forestry assets. Assets that tend to increase in value when markets fall, including gold, oil futures, and some types of hedge funds, are characterised as defensive. The difference between these and forestry, however, is that the performance of forestry assets is not market driven, and so is much less volatile over long periods of time than other commodities. 11

17 Overall, forestry investment attributes should make it a staple in any portfolio that is being managed for investors who have long-term, value orientations within balanced portfolios. This includes investments managed on behalf of: Defined Benefit Pension Schemes (e.g. superannuation funds) Defined Contribution Pension Schemes (which have now all but replaced final salary schemes) Individual retirement account owners (such as SIPPs) University savings plan participants University endowments Charitable foundations Diversified Personal Investment Portfolios The Historical Performance of Forestry Research results show that a forestry portfolio would have returned 13.3% annually over the past 40 years, compared with 11.6% from the S&P 500. Despite large peaks and troughs in the world s stock markets during this time, forestry has remained relatively stable and is one of only three commodities that has actually increased in value in real terms over this time. The other two commodities, oil and gold, do not demonstrate the same stability as timber and have close correlations with other investments. This impeccable track record makes forestry very attractive as a long-term, low-risk investment. 12

18 Building a Risk Efficient Portfolio Possibly an even greater reason for including forestry as part of a larger investment portfolio is its ability to lower the prospective volatility of that portfolio without compromising on potential returns. Rather than simply identifying superiorperforming classes of assets, an investor should select the combination of different asset classes that, given the investor s risk tolerance, generates the optimum expected rate of return. Research shows that by adding forestry to the portfolio, much higher returns can be expected - without taking any more risk. Alternatively, investors could achieve the same sort of returns but with far less risk. Using the chart compiled by Hancock Timber Research Group (HTRG) as an example, if an investor is prepared to accept a standard deviation of say 8% (the amount by which the volatility of the individual portfolio deviates from investment portfolios as a whole), they could expect returns from their original portfolio (i.e., without forestry) of about 9%. By adding forestry to the portfolio, returns could be boosted to almost 12%. Comparison of Portfolio With and Without Forestry Source: HTRG with Forestry without Forestry Conversely investors could still achieve a 9% return by adding forestry to the portfolio, but the expected level of volatility would be less than half the previous measure - about 3%. Current Investment Trends Recent changes to the financial service regulations and the more fundamental changes to pension regulations which came into effect on 6 th April 2006, have sparked increased interest in the forestry sector and investors are seeking ever more diverse alternatives, including property investments. Casual observation also suggests that forestry returns have not tracked returns for commercial real estate. Indeed, forestry returns were relatively high when returns for private property investment bottomed in the early 1990s, and have been relatively low as performance has recovered during the late 1990s. Historical results suggest that a property portfolio with a timber component would have generated both higher and more stable returns than a pure property bricks and mortar portfolio without forestry. For example, HTRG demonstrated that by investing 30% of the original property portfolio in forestry, returns could be boosted from about 7.2% to over 10.5%. At the same time the level of volatility (standard deviation) could be reduced from 5.5% to less than 4%. We have been using the variable growth QUADRIS Fund for over a year now for more sophisticated investors and have been extremely happy with the significant outperformance with reference to its major asset class counterparts. My clients have particularly benefitted from its lack of correlation with property and equities and the recent benefit provided by the strengthening dollar. Dr Markas A T Gilmartin BSc (Hons) PhD. Chartered Financial Planner, Director, AWD Chase de Vere Wealth Management 13

19 What Does This Mean? Whilst there is no data which specifically analyses the performance of plantation grown teak, and, whilst it would be prudent not to place too much emphasis on historical statistics, research carried out on historical timber performance is a useful indicator of how teak would perform when considered in conjunction with the returns of the QUADRIS Variable Rate Growth shares. It would seem logical to conclude from the research carried out to date that the correlation between investment in sustainable teak forestry and the main UK asset classes is unlikely to be positive. It should, however, be evident that there would still be a positive correlation with inflation, as timber values are more than likely to keep pace with inflation. Furthermore, it may also be the case that there is little correlation at all between the fortunes of timber investment and other investments as a whole. To be sure that an investor s shares perform in this manner, the Fixed Rate Share Class can achieve just that - regardless of how the markets are performing at any given time, this class will continue to perform at a pre-determined rate of return. The Variable Rate Class will, of course, track the performance of forestry as an investment and as a consequence may fluctuate in value over the investment term. Research shows that investments in forestry have outperformed all the alternative asset classes for the past 15 years, while remaining relatively stable. Clearly, if one is looking for a balanced spread of investment options, with reduced volatility and potentially higher returns than traditional investments, forestry is an ideal addition to a longterm investment portfolio. Monitoring Teak Prices Whilst teak is traded in a number of countries the most closely monitored market by the International Tropical Timber Organization (ITTO) is the market in Burma (Myanmar), which is one of the longest established sources of teak, both from plantations and natural forests. The most complete data on prices, therefore, comes from this market. The price of teak is determined by its grade, which is assessed by its quality and the length and diameter of the logs. There are 10 different grades of teak ranging from top quality veneer grades to quality which is not considered appropriate for export. The quality of timber produced by plantations with the year rotation period being pursued by our forestry mangers produces a median grade wood of SG4 (sawn grade 4). 14

20 Why QUADRIS Chose Brazil The assets in which the Fund invests are commercial sustainable teak plantations in Brazil. The forestry industry in Brazil is one of the largest and most well established in the world. The international rating agency Coface places Brazil in the A rankings in respect of country risk. Furthermore, Standard & Poors have recently revised their assessment of the country to Investment Grade. This is a reflection of the strength of the economy which is underpinned by self-sufficiency in energy resources and some of the most substantial natural resources in the world, including 40% of the globe s iron ore deposits. The strength of Brazil s economy continues to reinforce the value of their currency (R$ - Real) and improve their balance of payments. The forestry sector continues to grow in importance in Brazil, accounting annually for some 2.3 billion, or 4.5% of GDP. In 2002 it represented 7 per cent of exports and employed 6.5 million (9 per cent) of the Brazilian workforce. In 2003 the country s Plantation Forestry Base occupied 5.1 million hectares of land (Source: ABIMCI and other Industry Groups, 2003). This forestry base enables Brazil to be the major Southern Hemisphere supplier of lumber to the US and European markets and the major wood-based panel producer in South America. Why QUADRIS Chose Brazilian Teak Teak is known for its exceptional qualities in terms of durability, stability and aesthetic value and is, therefore, one of the world's most highly appreciated types of wood, the use of which is limited only by its small supply and resultant high price. Although over two million hectares of teak have been planted worldwide, demand can hardly be met. This is due to, for example, the relatively low productivity of traditional plantations and the introduction of export-limiting taxes on unprocessed timber. Thus the timber yields a high price per m 3. Teak was specifically chosen for several reasons including its suitability for large-scale developments, its worldwide appeal and its proven track record as being the most resilient and hardy species. Short rotations (20-25 years), also make it profitable in a relatively short period of time. Brazil s climatic conditions lend themselves particularly well to the cultivation of teak and there are good soils in ample supply. The south of Mato Grosso was specifically chosen for its wet monsoon climate and ample room for expansion. 15

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23 Where QUADRIS Invests - About Floresteca Agroflorestal Ltda. Established in 1994 in the State of Mato Grosso, Brazil, Floresteca Agroflorestal Ltda. (Floresteca), is the management company which owns the assets into which the QUADRIS Environmental Fund invests. Specifically, the assets consist of more than 30,000 hectares of sustainable teak plantations, within an overall management area in excess of 60,000 hectares of land. Teak (Tectona Grandis L) has been grown successfully in this region since the beginning of the 1970s. Floresteca is a large-scale efficient plantation forestry business which operates in accordance with FSC guidelines and meets ISO standards for Environmental Management Systems. In order for Floresteca to meet the criteria contained within the FSC guidelines, which makes them eligible for investment by QUADRIS, they are required to operate according to specific ethical, sustainable, environmental and social standards. This is achieved by the adoption and committed implementation of appropriate ecological, technical and organisational guidelines and policies. Ethical Considerations All Floresteca s activities are related only to the agricultural and forestry sectors and do not involve any business outside of these industries. Furthermore, Floresteca precludes involvement in any activity that results in the depletion of rain forest, natural hard wood forests and the displacement of indigenous people, flora or fauna. Sustainability The plantations currently occupy a management area in excess of 60,000 hectares, of which 30,000 hectares of land constitute 26 teak plantations. This makes Floresteca the largest sustainable teak wood project in Latin America. Furthermore, by 2014, Floresteca aims to be managing 50,000 ha of planted teak - an expansion of 2, ha of teak annually, with a 5% global market share in certified plantation teak. Floresteca employs a comprehensive programme of ongoing research and development. As a result, the production cycle, to produce optimum yield and the highest quality of expertly managed teak wood, has been reduced to years. To achieve sustainable production, in the region of 3,000 hectares of land are planted every year, using Floresteca s own nursery stock of approximately 3,500,000 seedlings annually. These are cultivated to an exceptionally high standard and once the cycle is complete, this will result in a sustainable and renewable source of high quality timber, which will be suitable for the international market. 18

24 Environmentally Sound During the past 12 years, Floresteca has brought over 16,000 hectares of forest under permanent protection. Existing forests are protected and transitional zones created into which plants and animals can migrate undisturbed. Ecologists and biologists from the region help in identifying and monitoring rare and threatened species. As a result, of this effective protection policy, including a general ban on hunting and fishing, these species can reproduce undisturbed. Within its confines, one would encounter an impressive array of wildlife including the Forest Wolf (Chrysocyion Brachyurus), the South American Ostrich (Rhea Americana) and the Giant Otter (Pteronura Brasiliensis). To date, 28 species of medium to large mammals alone have been identified within the nature reserves. Floresteca has also put a comprehensive water monitoring system in place which not only tracks how the water is utilised, but the quality of the water at every stage of its life-cycle. Social Standards The location of the plantations has been carefully chosen with a view to accessibility for personnel and the inward and outward transportation of goods and products. They are deliberately situated in an area where the main economic activity is extensive livestock farming. Low development and consequently few job opportunities exist, which prompt a series of social problems in these areas. Currently Floresteca provides jobs for more than 1,200 local workers, all of whom either live on the farms or commute from the local towns by chartered bus each day. By giving priority to employing regional workers, Floresteca promotes local development and welfare, whilst discouraging a rural exodus due to the lack of local employment opportunities. Floresteca provides a social infrastructure within which many activities can be undertaken in addition to work. This is an exceptional situation for a company of this size in a tropical region and whilst the facilities and services provided do initially increase costs, they pay for themselves many times over with increased employee security and motivation, which results in increased productivity and efficiency. The business has also been able to improve the quality of life in the community and contributes directly to the development of the region. In addition to their forestry operation, Floresteca also extend their support through numerous local community initiatives. Floresteca s forestry operation is successful as it acknowledges that every stage of the teak production process is equally important and that every dedicated worker plays a vital part within the overall operation. Floresteca is not merely planting trees, but is creating wealth and values for future generations. 19

25 Certification and Monitoring As a result of increased scrutiny of forestry operations there has been exponential growth in the development and use of forest certification over the past 5 years. This takes the form of numerous performance level or environmental management requirements and the aim is to promote ecologically and socially sustainable forest management. Floresteca Agroflorestal Ltda. is proud of its achievements in this area, demonstrating that such an operation can be sustainable and operate with the greatest respect for the environment and the local community at all levels. To date, Floresteca has been awarded the following accreditations: FSC certification, FSC Chain of Custody certification and ISO accreditation. Most recently they were recognised as being the Agribusiness of the Year

26 Floresteca s Accreditations to Date Floresteca continually strives to achieve the very highest standards of workmanship in every area of the business, from the laboratories in which the teak saplings are selected to the sawmills in which the teak wood is processed. Certification is an ongoing process which must be monitored regularly to ensure that these high standards are maintained. Forest Stewardship Council (FSC) Certification Achieved: 1997 In 1997, Floresteca Agroflorestal Ltda. became the first sustainable teak plantation business in the world to receive certification by the FSC, achieved through the adoption and committed implementation of appropriate ecological, technical and organisational guidelines and policies. FSC-GBR-684 FSC Trademark 1996 Forest Stewardship Council A.C. FSC Chain of Custody Certificate Achieved: March 2005 Floresteca was granted the full Chain of Custody certificate for processing, storage and transport by the FSC in March 2005, under number SGS-COC It applies to all harvesting and processing by Floresteca and is the consumer s guarantee that products carrying the FSC logo originate from a well-managed forest, certified in accordance with the rules of the Forest Stewardship Council. ISO : 2004 Certification for Environmental Management Systems Achieved: December 2004 Floresteca s forestry operation was formally approved for the internationally recognised ISO : 2004 accreditation for Environmental Management Systems, by the independent Dutch certifier DNV, in December Agribusiness of the Year 2005 Achieved: May 2006 As a result of Floresteca s unwavering efforts to reach the highest standards, in May 2006 they were proud to be announced as the winner of this highly prestigious award by the State Agronomist Association of São Paulo (AEASP). 21

27 The Forest Stewardship Council Founded in the early 1990s, The Forest Stewardship Council (FSC) is a non-profit making organisation with an international presence. FSC-GBR-684 FSC Trademark 1996 Forest Stewardship Council A.C. The FSC s approach to environmentally appropriate forest management ensures that the harvest of timber and nontimber products maintains the forest s biodiversity, productivity and ecological processes. Their Mission Statement endorses this approach and also recognises that socially beneficial forest management helps local people to enjoy the long-term benefits that this will have, as well as providing an incentive to sustain forest resources in the future. Finally, it acknowledges the economical benefits. Forestry operations are structured in such a way as to be sufficiently profitable, but without having a negative impact on the forest resource, the ecosystem or affected communities. The FSC employs independent certification bodies to carry out impartial assessments of forest operations on their behalf and a certificate is then awarded if the operation is found to be operating within the principles and criteria laid down by the FSC. In the case of Floresteca, these assessments are carried out by Jaakko Pöyry Consulting on behalf of the FSC. In accordance with the QUALIFOR Forest Management Certification Programme, Pöyry conduct their assessments of Floresteca on behalf of the FSC to ensure that not only the Principles and Criteria of the FSC are adhered to, but that the systems and processes used, both maintain and continue to improve performance. Major audits of Floresteca s teak plantations are conducted every five years, but the monitoring process is ongoing, with additional annual audits and random audits which can be carried out at any time. The FSC system also has a monitoring and tracking system in place at every stage in the supply chain, known as a Chain of Custody. This is the consumer s guarantee that products carrying the FSC logo originate from a well-managed forest, certified in accordance with the rules of the Forest Stewardship Council. Floresteca was granted the full Chain of Custody certificate by the FSC in March All QUADRIS investments are based on positive selection criteria, to ensure that they are ethical, sustainable, environmentally sound and socially pro-active. These criteria match those laid out by the Forest Stewardship Council and as a result, FSC certification is an important accreditation to QUADRIS. These principles determine whether a particular project is suitable for investment by QUADRIS and provide a meaningful measure by which to gauge the commitment and success of QUADRIS and its investment projects in implementing these criteria. 22

28 ISO Certification for Environmental Management Systems FSC certification is fully compatible with the Environmental Management System standard from ISO (ISO series), which can provide the framework and control mechanisms for the management system, within which the FSC standards serve as the target performance level. The FSC accreditation system is based upon the relevant ISO guidelines. ISO specifies the requirements for an Environmental Management System to enable the formulation and implementation of a policy and objectives, taking into account legal and other requirements to which an organisation subscribes. The ISO standard applies to those environmental aspects that the organisation can control and over which it can be expected to have an influence. In accordance with Floresteca s policy for nature conservation and sustainable development, Floresteca has adapted to meet all the current ISO : 2004 guidelines, including an evaluation of environmental impact, ensuring compliance with all the legal environmental requirements and compliance with the guidelines which minimise environment impact. To gain the ISO certificate, Floresteca has also adapted several production methods, including the implementation of internal safety procedures, which will be assessed continuously, and environmental awareness training for its employees. Floresteca must continue to ensure that all environmental impacts and associated aspects are identified and then take action to improve their processes in prioritised areas. As these impressive credentials demonstrate, Floresteca can prove that it is possible to achieve the highest standards of commercial wood production, without compromising quality and with complete respect for the environment, its biodiversity and its people. This company has set the benchmark in commercial teak plantation management and QUADRIS is proud to be involved in this highly successful operation on behalf of our investors. 23

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30 The Growing Need for Sustainable Wood Plantations Deforestation is one of several of man s destructive activities which is being increasingly blamed for climate change. With this is mind, it seems more important than ever to secure the world s timber supplies and preserve what remains of the world s precious primary forests. To this end, sustainable, well-managed plantations will play a vital role in supplying the world with its growing demand for wood and its products in the future. Man will always need wood. It is very energy efficient, requiring a tenth or less of the energy needed to make wood substitutes such as steel and concrete. It is also one of the least polluting of all products and one of the world's very few renewable raw materials. However, since cultivation begin 11,000 years ago, man has taken advantage of the many resources that forests have to offer including timber, fertile land and forest products such as spices, resins and medicines. As a result, nearly 4 billion hectares (or approaching half the world s total forest cover) have now been lost forever and they are being destroyed more quickly than they can be regenerated. More than 95% of Northern Europe s primary forest cover has been decimated since large scale exploration began in the Middle Ages. The most alarming current losses are in countries such as Brazil, where figures show that more than 26,000 square kilometres of Amazon forest - an area approaching the size of Belgium, disappeared in 2004, due primarily to a large expansion in cattle ranching and industrial-scale farming, to meet the export market for beef and soya. Worldwide, more than 200 million hectares of forests have been lost in the past 15 years. Consequently there now exists a massive shortfall in the quantity of wood that can be supplied by the remaining forests in relation to the rising global population, which currently stands at 6.5 billion. The world market for teak in the future is expected to increase as high quality hardwoods in excess of 20 years old become scarce. Cycles and rotations will become shorter and the production and consumption of all woods will increase. After nearly 25 years in financial services I have encountered numerous funds. I was fortunate to discover the QUADRIS Fund in 2004 and without exception, all my clients have been highly satisfied with the returns generated by the QUADRIS Fund. Unlike volatile equity based funds, the QUADRIS Fund generates predictable, positive returns - what more do your clients want? Roger W Bannister FPC, Independent Investment Broker 25

31 The use of both wood and fossil fuels produces atmospheric carbon dioxide. The only natural counter to carbon dioxide emissions is through absorption, by regenerating and establishing new forests. In some situations, wood can and is substituted by alternative materials including plastics and metals. However, most wood substitutes are made either from fossil fuels or the energy from them. The production of substitutes often involves processes that cause pollution, including the addition of significant amounts of carbon dioxide to the atmosphere. For instance, cement-making results in the release of fossil carbon from limestone. In contrast, the harvest of wood does not have to utilise non-renewable resources. In addition to its energy efficiency, wood has a stable structure and is very strong for its weight. With such favourable properties, there will always be a demand for wood, despite the alternatives available and an increase of wood substitution is unlikely.

32 The Rising Demand for Wood If we assume that there will be no future increase in the average per capita use of wood and that it remains at 0.6m 3 per person per year, the increase in the global population alone (expected to be ten billion by the middle of the new century) will require at least two billion m 3 more wood each year than can be supplied from those forests existing at the end of the twentieth century. Globally, an additional 100 million hectares of very productive managed plantations will be required to meet even this conservative increased demand projection. The major drivers of future wood demand will be global population, living standards and wood's cost competitiveness relative to substitute products, and the relative cost of wood and wood substitutes will be largely determined by energy costs. A global population of 10 billion using an average of 0.6 m 3 of wood per person per year would require an annual global wood harvest of 6 billion m 3 per year. This represents an increase of 2.5 billion m 3 more than the 3.5 billion m 3 annual global wood harvest of the mid 1990s. Furthermore, attempts to halt the illegal trade of logs and to promote value-added processing of timber in tropical countries will continue to reduce the volume of tropical industrial round wood. The international export market for industrial round wood is 110 million m 3 and for sawnwood 130 million m 3. However, the global timber demand is higher. Log exports from tropical countries fell almost 20% to 12.8 million m 3 in 2002, largely due to export bans in Africa and Indonesia where illegal logging remains an extremely serious threat to natural hardwood forests. (FAO 2003) 27

33 Satisfying Increased Demand During the mid 1990s more than 80% of the world's industrial wood harvest came from natural forests, less than 20% coming from forests planted and managed for the production of industrial wood (i.e. plantations). However, it will become more difficult to meet increasing demand in this way, partly due to the conversion of natural forest to agricultural and urban development land, and to concerns regarding the loss of biodiversity from these naturally forested areas. These pressures are likely to limit further increases in the wood harvest from natural forests and will almost certainly increase wood costs. An extra 0.3 billion m 3 of harvested wood is likely to be the upper limit of the supply from natural forests. The deficit between potential future demand and potential future supply is 2.2 billion m 3 or 2.0 billion hectares if the full potential of existing, immature plantations is considered. These plantations may consist of tree species indigenous to the region or species which have been introduced, as is the case with teak in Brazil, which thrives in this tropical region. 28

34 The Role of Plantations in Satisfying Demand In addition to relieving the pressure on natural primary forests to provide a growing population with timber, well - managed, sustainable plantations will play a vital role in satisfying the projected increase in the demand for timber for several reasons including: plantations can ensure trees are grown for known end use options and markets, such as pulpwood, structural lumber and high value appearance grade wood for manufactured products plantations often have higher yields per hectare. This can reduce the area that needs to be felled to satisfy a given wood demand plantations can be profitable, especially when planted with fast-growing, well-managed trees plantations can often provide a profitable and practical way of restoring degraded and erosion-prone land, land that should never have been cleared of its forest cover in the first place much research is currently focused on the use of both natural forests and plantations as carbon 'sinks' while they may have less biodiversity than natural forests, the greatest contribution that plantations make to biodiversity is indirect. Plantations reduce the need for wood-harvesting in natural forests by providing an alternative source of wood (Sutton, 1995) plantations can play an important role within the local community, by providing employment to local inhabitants, and economical benefits, both directly in the form of wages and the sale of wood products, and indirectly, through the additional requirements that a plantation creates, such as machinery and transport While much of the discussion so far has been about industrial demand for wood, the need for consistent supplies of fuelwood in the poorer areas of the world must not be ignored. As plantations can be established near to where the fuelwood is required, this reduces the time required to harvest and transport the wood. This could have major social and economic advantages.

35 What Area of Plantations Might the World Require? Assuming a high average yield and the use of productive land, an extra 100 million hectares of additional plantations will be needed to supply two billion m 3 annually - an area equal to that of Nigeria. This would require much of the world's land suitable for plantations, surplus to food production and which is not already forested. This creates an urgency for planting due to the time required between the plantation s initial establishment and final harvest. Fuelwood and some pulpwood plantations can be grown in under ten years but most industrial plantations require at least two to three decades to mature. In the case of Floresteca, the production cycle of teak has been carefully developed using ongoing Research and Development in its Bioteca laboratories, to allow it to reach maturity in a period of years, as opposed to 80 or more years in its natural habitat of Burma.

36 What is Floresteca s Contribution? Floresteca is acutely aware of the effects of deforestation and so sustainable practices are at the heart of their aim to offer a truly ethical and positively green approach to the production of timber for commercial purposes. Floresteca s teak plantations and infrastructure which now cover an area in excess of 60,000 hectares, are all sited on previously degraded land, often originally used for agricultural purposes or cattle grazing. Floresteca pledges never to destroy primary forests in its establishment of plantation areas or infrastructure. Being fully certified, sustainable, managed plantations, these areas also enjoy additional advantages over noncertified or unsustainable plantations, or indeed natural forests, including fire breaks and the correct and safe control of pests and diseases. Through an ongoing process of careful research and development at their Bioteca laboratories, Floresteca is able to ensure that the strongest, healthiest teak specimens are planted in their nurseries. A huge amount of work then goes into nurturing each sapling until the teak reaches maturity, using many techniques such as pruning, thinning and pest control. This attention to detail at every stage ensures minimum wastage and the best prices for the high quality timber when the mature trees are eventually felled. Floresteca also works hard to ensure that the local community and economy benefit from its existence. Indeed, the plantations are situated in some of the poorest regions in Brazil. The plantations employees are sourced from the local area and in addition to receiving salaries above the national average, an extensive range of additional benefits are also provided including education, healthcare and leisure facilities. Plantation grown teak is also far more labour intensive than other crops in the region, requiring 6 times more employees per ha of teak than soybean production and 40 times more than cattle ranching. As Floresteca realise their goal to achieve plantings of 50,000 ha of teak by 2014, so the demand for labour will increase, along with their ability to supply greater quantities of top quality, valuable hardwood to the domestic and international markets. Overall, if the demand for timber shifts to one of sustainable and renewable sources, as the evidence suggests it will, this will decrease the demand for illegal or unsustainable wood. In turn, the need to establish well-managed and sustainable plantations should increase, thus relieving the pressure on what remains of the world s natural, primary forests. Consequently, plantations have the potential to offer an environmentally friendly, renewable solution to the world's demand for wood and a fantastic investment opportunity. 31

37 Photograph courtesy of Chris Howard.

38 Frequently Asked Questions How do I make money out of forestry? Income is generated from the sale of harvested timber; the balance is attributable to appreciation, which is heavily influenced by market conditions and forest management activities. Investing in strictly managed, sustainable timber plantation businesses such as Floresteca Agroflorestal, is vital to the financial security of forestry investments. How does this investment differ from investments in conventional stocks and shares? An investment in the QUADRIS Environmental Fund differs in four key ways, making it an ideal long-term investment in an uncertain economic environment: low volatility uncorrelated to performance of stocks and shares consistent, absolute returns asset-backed investment What currencies can I invest in? Investments can be made in pounds sterling, Euro and US Dollars. How do I invest? Due to the nature of this investment, QUADRIS strongly advises potential investors to seek independent financial advice from a financial adviser. If you are not familiar with an ethical IFA in your area, QUADRIS will be pleased to put you in touch with your nearest IFA, with no obligation on your part. What is the minimum investment? The minimum investment is dependent on which share option is chosen. Single investments can be made from 1000 in QUADRIS Variable Rate Growth Shares and QUADRIS Fixed Rate Shares. What is the term of the investment? Due to the nature of the investment, investments in QUADRIS should be viewed as medium to long-term in order to realise their full potential. 33

39 What if I need to redeem my shares sooner than anticipated? Shares in the QUADRIS Environmental Fund may be redeemed at any time. However, the following charges currently apply to redemptions made during the first five years of the investment: Year 1 5% Year 2 4% Year 3 3% Year 4 2% Year 5 1% Can I choose the area of trees I would like to invest in? No. Due to the scale of the planting, it is not possible to adopt a chosen area of planting. Investments are spread across several areas of the plantation to minimise risk and to encompass plantings of varying stages of maturity. How do I know for sure that this is a truly ethical, socially proactive and environmentally sound investment? QUADRIS employs very strict investment criteria to ensure that they meet the highest of standards in four key areas: ethics, sustainability, environmental consideration and social consideration. The current project we are involved in, Floresteca Agroflorestal Ltda., has achieved quality certifications which cover all four of these criteria, including FSC certification and ISO accreditation. What if the trees catch fire? The majority of forest fires occur in natural unmanaged forested areas and are in some cases an essential part of the ecosystem. The risk management programmes of successful commercial forests such as Floresteca, ensure adequate firebreaks, lookout towers and trained fire fighters which minimise the risk of damage by fire. As a result, less than half of one per cent of commercially managed forests are damaged by fire and other disasters. Furthermore, prudent forestry management companies will arrange appropriate insurance cover against these risks. The teak tree is unique in the sense that it is fireresistant after 3-5 years. In the case of Floresteca, numerous precautions have been taken to minimise the risk of fire within the plantations including fire breaks and constant monitoring from observational towers and by land patrol.

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41 Credits & Acknowledgements QUADRIS Environmental Investments Limited Regent House The Broadway Woking Surrey GU21 5AP Floresteca Agroflorestal Ltda. P.O Box 257, CEP Indaiatuba - SP Brazil Copyright QUADRIS Environmental Investments Ltd The QUADRIS leaf and QUADRIS logo are trademarks of QUADRIS Environmental Investments Ltd. All rights reserved. The intellectual property rights to all material in this brochure including text, photographs and the QUADRIS logo belong to QUADRIS Environmental Investments Ltd. No part of this brochure may be reproduced in any form including printing, digitally, microfilm or photocopying without the prior permission of QUADRIS Environmental Investments Ltd.