EU Timber Funds Gain Traction As Capital Tilts Toward Climate-Aligned Strategies: Report

Private equity is undergoing a strategic reset. Up against a perfect storm of inflationary pressure, shifting investor preferences and a tightening regulatory net, the industry has had to become nimbler, leaning into sectors that offer both solid financial footing and tangible environmental value. One of the most notable shifts in today’s private capital markets is the growing momentum behind timber and forestry funds — a once-niche strategy that is now gaining notoriety as a key component of climate-focused portfolios.

A new EY report, entitled “The Rise of Timber and Forestry Funds in Recovering PE and VC markets,” dives into the rising influence of timber and climate funds around the world — particularly in the EU.

After several years of market upheaval, including trillions in sidelined capital that is finally shrinking, the private equity and venture capital space has begun to find its footing. Global PE fundraising fell to $680 billion in 2024, marking the third consecutive annual decline and the lowest tally since 2015, according to Preqin and Pitchbook data. Venture capital also cooled, with 1,783 funds raised — a 40 percent drop from the year-ago period. Yet the performance isn’t totally bleak. Investors directed $619 billion across 462 mega-deals, up 35 percent year-over-year, signaling a shift toward fewer but larger bets.

Geographically, North America, Europe and Asia capture the biggest wave of private capital deal flow, though each region is charting its own course. Asia is seeing a surge in VC funding, fueled by tech innovation. Globally, artificial intelligence is crowding deal pipelines, with AI investment up 35 percent from 2023. In Europe, sustainability continues to influence asset allocation, and nature-based solutions — especially timber and forestry — are increasingly commanding investor attention.

Morningstar data from Q1 2025 showed that more than 50 percent of all new fund launches and assets under management (AUM) in Europe are now in Article 8 and 9 funds, as per the EU’s Sustainable Finance Disclosure Regulation. ESG-aligned strategies have been catapulted from the outskirts to the mainstream, with fund managers now treating sustainability as both an investment theme and a competitive advantage.

Nowhere is this momentum more apparent than the rise in the number of timber and forestry funds. These investment vehicles, which target sustainably managed forests, brought in $8.4 billion last year—down slightly from 2023, but well ahead of the five-year average. Performance has been impressive, with IRRs often rising into the double-digit percentages and “select vintages” topping 16 percent on the high side of the spectrum, per the EY report.

Several tailwinds are helping to buoy the timber and forestry asset class, including rising demand for renewable construction materials, forests’ carbon-capture potential and EU-backed afforestation guardrails. As a result, the EU is taking its place as a strategic hub for timberland investment. Unlike traditional asset classes, timberland offers low correlation to public markets, inherent inflation protection and strong climate resilience. In a market increasingly focused on risk, return and impact, timber and forestry funds are no longer an alternative; instead, they’re becoming a lighthouse of where capital is likely headed next.

Source: globalaginvesting.com