Nordic forestry at a crossroads: Balancing growth and climate goals

The Nordic forestry sector, a crucial economic driver and key player in the EU’s broader decarbonisation strategy, is currently navigating a complex landscape of strategic and regulatory challenges related to climate and biodiversity. 

Forestry offers a large-scale and cost-effective approach to reducing emissions. Not only is forestry a natural carbon sequestration method, it is also viewed as a climate change mitigation tool. From an EU perspective, forestry will likely significantly contribute to the Fit for 55 package, which includes the Emission Trading System (ETS), Effort Sharing Regulation (ESR) and Land Use and Land Use-Change and Forestry (LULUCF) – the EU regulation setting out a legally binding target for CO₂ capture from forests. 

Simultaneously, the forestry sector will likely play a leading role in the Bioeconomy Strategy that was set forth in the Clean Industrial Deal. The Bioeconomy Strategy will likely promote the use of forest products and subsequently require more land use within the forests. This article aims to contextualize how the EU regulations can potentially impact Nordic forest product companies. 

Regulatory pressures on Nordic forestry

With Sweden and Finland having some of Europe’s largest forests, Nordic forest product companies are disproportionately affected by the EU’s regulatory drive. These companies primarily rely on local raw materials to maintain value chain integration and cost competitiveness. However, they do not have complete control over fiber sourcing, and typically need to purchase a significant portion of wood fibers from external sources.

Pressure to minimise local harvesting through LULUCF and other regulations (e.g. biodiversity) can create growth challenges in certain product segments, as increasing reliance on external sources raises costs. According to Nordea Equities Research, a 10% increase in wood commodity prices could reduce Nordic forest product companies’ earnings by 5-38% before mitigations.

Harvest reductions also impact other sectors, such as energy production from wood pellets, which depend on forest biproducts for their feedstocks.

Another tension arises from the EU Deforestation Regulation (EUDR), which can restrict certain wood-based raw materials and finished forest products from entering the EU market. This regulation will require companies to provide data about the harvesting locations for products placed on the EU market. 

In 2023, the Confederation of European Paper Industries (CEPI), comprising the 17 largest forest product producing countries within the EU and Norway, consumed over 47% of their market pulp from countries outside of this group. This critical segment could face restrictions if EUDR compliance is not met.  While other paper segments less reliant on external suppliers may be less affected by potential EUDR restrictions, they are more vulnerable to issues related to LULUFC and harvest limitations.

Global sourcing challenges

Overall, these tensions create a challenging balance in sourcing wood for forest products. Even without regulations, forestry companies encounter sourcing limitations from a cost perspective. Non-EU sourcing partners have complications. For example:

While the implementation of all of these regulations has not yet begun, these factors, combined with existing challenges, will likely make it increasingly difficult for forest product companies to maintain optimal operational performance. Companies must navigate a complex landscape of regulations, geopolitical issues and environmental concerns while striving to secure sustainable and cost-effective wood sources.

The effects of these regulations will reverberate beyond forest product companies. Forestry differs from other land-intensive sectors (such as mining) in that the sourcing of a significant portion of the wood within the EU originates from a fragmented set of small forest owners. These regulatory tensions will lead to other more fundamental questions about how the EU will implement its strategies to achieve its stated goals while preserving individuals’ ability to use and monetise their private land. The net result is a dynamic situation that will require multilateral coordination from forest product companies.

Nordea supports the climate transition of the forestry sector by offering a range of solutions and products to our large  as well as small- and medium-sized  corporate customers.