The fifth forestry plan projects a return of 9.6% per annum over 10 years, and with declining markets and low deposit rates, provides an option for investors

In the broad church of socially responsible investment, one option always appears absent from those on offer - forestry. When Hibernian was touting "Ireland's first" socially responsible fund recently, the only question raised was whether it had been beaten to that title by Friends First's Stewardship funds; no one thought to mention forestry. Yet forestry has been an ethical option for all Irish investors for the past five years.

The fact that forestry funds are not generally sold through brokers may have something to do with its low profile, but 82,000 people in Ireland have put their money into the funds which, between them, have raised €18 million - many of them more than once.

When people were asked why they put their money into forestry funds, the ethical side of things was placed only ninth among 10 priorities. Top of the list came the likely return on investment - food for thought among those who dismiss ethical or socially responsible investing as a fool's salving of conscience.

So what exactly is the attraction of forestry funds and how do they work? The attraction is twofold - an attractive return on an investment that everyone understands.

The fifth forestry investment plan, currently open, is projecting a return of 9.6 per cent per annum over its 10-year life. At a time of historically low interest rates and inflation running at around 4.5 per cent, that is an attractive return for people who traditionally might put their money into bank deposits, An Post savings or the credit union. It also provides an alternative to people who have been scared off equity investments by the recent volatility in global stock markets.

More importantly for many of these investors, the concept of forestry investment is easy to understand, especially in a State where most people still have close connections with the land. You pay money, the fund buys land, plants trees and sells the trees or the afforested land at the end of the 10-year period. As a concept it is easily understandable and as an investment it is tactile; that makes it easier to sell than unit funds, trackers, bonds, etc.

So how do people get involved? The funds are a collective investment - much like unit funds - into which investors can buy for €750 a share. The shares can be bought by an individual or group of individuals in their own names or for others - such as children, which has apparently proved popular. The investments currently available through the forestry investment plans are operated as publicly limited companies and run for 10 years. Recent funds have each raised €3 million, half of which is used to buy semi-mature forests and half bare land suitable for afforestation. At the end of the 10-year period, the semi-mature or mature forestry is sold to the highest bidder and the money returned to the investors together with any profit made on it.

People looking to get out early can do so by trading shares on a "grey market" to other existing or interested investors. However, such transactions could be liable to stamp duty.

The reasons the funds offer such attractive projected returns come down to State policy. Despite the growth of forestry in Ireland in recent decades, only 9 per cent of the land is under trees. This compares with a European Union average of 31 per cent.

Successive governments have worked to raise the figure through a mixture of payments and tax reliefs. First, any profits on the investment are tax-free. This stems from the Government's aim to encourage commercial forestry. When it was first brought in, this provided a tax break only for farmers with at least 40 acres available to plant - the smallest acreage suitable for viable commercial afforestation - or the very wealthy, who were able to fund schemes of such size.

The forestry plans came into being as a device to enable the smaller investor to avail of the tax-efficient opportunity it presented.

Secondly, because of the interest of both EU and Irish authorities in extending the amount of land under forest in Ireland, there are very attractive grants available. These come in two forms:

n grants funded 75 per cent by the EU and 25 per cent by the Government to facilitate the planting of trees. These grants cover the cost of developing the land for planting - including the provision of drainage - and the price of the actual planting;

n premia cover the management costs, insurance premiums, audit fees and the day-to-day running of the forests.

Between them, this assistance sharply cuts the costs involved in commercial forestry in Ireland. To date, Irish Forestry Services has raised €18 million in 10 funds. On top of this, the funds have attracted €8.4 million in grants and €7.5 million in premia.

Another advantage for Irish forestry investors is our climate. Mild Irish winters allow a 12-month growing season. That allows trees to grow faster here than anywhere else in Europe. For example, sitka spruce, one of the most popular trees in modern plantations, matures in Ireland at between 30 and 32 years. Just across the Irish Sea, the same trees take up to 45 years to mature in Britain.

So what can go wrong? Obviously, as with all investments, success depends on the skill of those managing your fund. If the forests are not properly managed and tended, investors' returns will fall.

Being tactile has its advantages for forestry in the minds of many investors but it can present problems of its own. The Irish weather is currently the friend of the forestry industry but a change could undermine profits. Wind and frost, in particular, can damage trees.

Disease, too, is a threat. To date, Ireland has remained largely free of disease - helped by our island status and the efforts of the customs and excise officers who police imports - but there is no guarantee that that will continue.

Every year, television screens show devastating forest fires sweeping through vast swathes of countryside in the United States and elsewhere. Fire is the worst enemy of trees but Ireland is less at risk than some areas and has a good record in this regard.

Modern forests are planted with this in mind, using fire breaks and regular scrub clearance. In addition, we simply do not have the scale of forest to feature the extensive fires seen elsewhere. Should the worst happen, forestry investments are insured and the European Union does fund reforestation programmes.

A final, if slightly less unpredictable, risk is the market for the product. The market for wood is currently strong. Partly, this is because people are moving away from plastics that posed a threat in the past and partly because of an environmentally driven move away from the use of hardwoods. The rapid rise in the use of timber-framed housing in Britain and Ireland has also helped. However, there is no way to guarantee the state of the market for the type of wood these forests will produce in 10 years' time. That would affect the prices purchasers would pay for semi-mature to mature forest.

For the moment, Irish Forestry Services - the dominant private player in the commercial forestry sector with more than 7,000 acres under trees - says the returns it has projected on earlier funds are being exceeded. Whether this trend holds for the period of its investment plans is the question. The first of its four existing 10-year plans will not mature under 2010 and the six earlier 30-year forestry funds have about 25 years to go.

For the two people running the 11 companies currently operating or looking for investors for forestry funds, the pay-off comes it two ways. A commission of 4 per cent is payable to those bringing investors into each fund. In gerneral, this is Irish Forestry Services of which the two are also the directors - although some investors also come through accountants or stockbrokers. With roughly two €3 million funds a year being set up, that amounts to about €240,000. In addition, Irish Forestry Services manages the forests, for which its receives payment of €38 per acre per annum - currently more than €275,000.

For investors coming in, the major issue is projected returns. Despite the confidence of the men running the funds, there is a view that these may be too optimistic.

Still, at 9.6 per cent, they have some way to slide before they become a millstone.