Forests are valuable for more than timber. The so-called lungs of the Earth act as enormous carbon sinks, help regulate the climate and provide a vast range of medicinal plants, alongside a host of other benefits.
The idea that these ‘natural capital’ benefits can be monetized is a relatively new one. In recent years, however, the role of forestry in combating climate change has earned wider recognition.
Schemes to offset carbon emissions by planting new carbon-sequestering forests, or strengthening protections for existing forests, have started to gain traction. The chance to generate extra revenues through selling carbon credits, while also delivering impact on climate change, is attractive for many timberland investors.
Investing in CO2 reduction is rapidly becoming more mainstream, and strategies are expanding beyond carbon. As managers pursue a wide range of strategies around natural capital, opinion is divided on the best ways to balance financial returns with impact.
Picking strategies
David Gowenlock, investment director for sustainable and impact investing at Cambridge Associates, says that forestry strategies have proven to be a good starting point for investors seeking natural capital opportunities. “Forestry in certain regions of the world is one of the best ways to generate high quality removal carbon credits today,” he points out.
But successfully executing a forest carbon strategy is no small feat. Investors are exposed to risks relating to fluctuating demand for credits in the voluntary carbon market. They could also suffer significant reputational consequences if a forest carbon project is perceived as failing to deliver the expected carbon benefits or is labeled as greenwashing.
Gowenlock says: “Manager selection is incredibly important, especially in this area, where perhaps there is an explosion of new strategies, and the managers will have varying levels of track record and experience in executing these types of projects.
“Some of the best managers, very early in the ideation of the strategy, have very strategic discussions with large-volume offtakers to help de-risk the strategy’s income derived from credit sales.”
He adds that managers also need to be selective in approving credit sales.
“It’s important that those offtakers are well aligned with LPs. For a number of LPs, there are reputational considerations associated with their selection of third-party fund managers,” says Gowenlock. “It’s not just about selling the credits, but about who are they being sold to.”
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BTG Pactual Timberland Investment Group has raised $500 million for its Latin American reforestation fund. The vehicle has a $1 billion fundraising target and was launched in 2021 with the aim of restoring approximately 133,000ha of natural forest and establishing sustainable commercial tree farms on an additional 133,000ha.
The vehicle struck a landmark deal with Microsoft in June, which agreed to buy 8 million carbon credits from the fund over a 19-year period. A similar deal was struck with Meta in September, with the Google parent company agreeing to a deal for 1.3 million carbon credits from the fund.
Australian fund manager New Forests acquired a 90,791-acre asset from timberland REIT Rayonier. New Forests has been active in the US since 2007 and managed an open-end US forestry strategy that generates revenue through commercial forestry and carbon credit sales. The new asset in the US South is a multi-use forest with an operating wind farm, commercial recreational leases and a mixture of stands.
Jeff Briggs, managing director with New Forests, says: “We believe a forest management strategy that sequesters additional carbon compared to past management practices while producing a sustainable supply of wood fiber, has the potential to be successful across the US.”
BNP Paribas Asset Management held a $130 million first close for its debut timberland investment vehicle with a $500 million fundraising target.
“Future Forest Fund will only invest in FSC certified or certifiable forests and serve its investors with plug-in data for their greenhouse gas accounting targets and EU, or other regulatory, reporting needs,” said a statement from BNP Paribas AM.
David Valliant, global head of finance, strategy and participations at BNP Paribas AM and chairman of IWC, says: “The Future Forest Fund illustrates the common vision we have with IWC to actively contribute to the environmental transition.”
Investor caution
While a growing number of high-profile GPs are ready to pursue forest carbon strategies, some seasoned forestry investors remain cautious.
Alton Owens, director of natural capital at Domain Timber Advisors, says his firm is looking at carbon credits, but says that concerns around the reliability of cashflows have so far led it to pause on entering the market. “There is uncertainty around timing of demand, around pricing, around what seems to be an ever-changing set of methodologies,” he says.
Nevertheless, Joe Sanderson, the firm’s CEO, says European LPs, in particular, have “a strong desire to enhance the biodiversity of the forest that they’re investing in, to track and monitor the carbon sequestration, and monetize that if need be.”
Sanderson tells Agri Investor that, in response, Domain has been working to enhance biodiversity and carbon sequestration on its timberland properties. This, he says, is a way to generate “environmental alpha.”
Paul Young, CEO of impact investment firm Conservation Resources, argues that introducing regenerative practices to improve biodiversity and soil health ultimately results in a “better business model.” He notes that regenerative practices, including planting a greater diversity of species, can reduce mortality rates and produce healthier soils, which helps to improve resilience to drought.
Young has a mixed view on the value of managing forests to produce carbon credits. “There are good forest carbon projects and there are bad forest carbon projects,” he says. While Conservation Resources does participate in afforestation carbon credit projects, Young warns that credits derived from improved forest management can be “suspect.”
These schemes are typically based around introducing longer rotations, on the logic that delaying harvesting allows trees more time to grow and sequester carbon. Young says, however, that these projects are often established in areas with weak demand for forest products, meaning there is little economic incentive to harvest the trees. By selling carbon credits, such schemes are therefore generating income without truly changing their practices to sequester more carbon.
“We actively do not participate in [improved forest management carbon credits],” says Young. “Through our regenerative practices, that’s going to create ecosystems that are not only going to be more resilient against climate change, but have a much greater impact at solving climate change.”
Investigations into carbon-offset projects by journalists and NGOs have also revealed many of these schemes may come with devastating impacts for indigenous peoples and local communities, while some forest-protection schemes overstate their ability to reduce emissions, according to a 2023 report by UK-based Carbon Brief.
Beyond carbon
Owens and Young are not alone in questioning some of the more conventional natural strategies that focus on generating carbon credits through timberland investments. Alex Godfrey, investment director in the natural capital team at Octopus Investments, insists that a natural capital investment needs to have an outcome that is positive for nature. “The investment should leave ecosystems better than we found them,” he says.
This logic may seem intuitive – but Godfrey argues that it is not always applied in practice by timberland managers, some of whom, he believes, could find themselves in “really hot water” when stronger reporting requirements take effect.
Octopus is currently fundraising for a natural capital strategy that taps into revenue streams that are nature-positive and deliver a range of social and environmental benefits. Godfrey says that Octopus plans to invest up to £250 million ($318.6 million; €301.6 million) in purchasing around 15 large estates where it will look to generate high-integrity carbon credits through afforestation and peatland restoration.
In the longer term, the firm also wants to secure income through biodiversity credits – which work in a similar way to carbon credits, although they can only offset biodiversity impacts that occur relatively close by.
Godfrey adds that it is important to ensure diversified revenue sources, saying, “Our IRR should be derived in a natural capital fund from nature credits, because that’s a nature-positive land use. But we recognize and acknowledge that nature markets are nascent.”
Therefore, Octopus is planning to underwrite its nature credits approach with nature and climate-positive land use that is not natural capital. For example, it plans to retrofit housing for the local community on one of its Scottish estates while also developing renewable energy projects on the site.
Godfrey says that these real estate and energy revenue streams alone should help Octopus achieve 6-7 percent IRR. This provides “really pragmatic strategy that allows investors safe entry at scale,” he adds, arguing that returns would be comparable to a conventional timberland fund while avoiding nature-negative consequences.
Aviva Investors launches carbon removal fund
Vehicle to assemble a diverse portfolio of carbon credits from forestry, peatlands, mangroves and carbon removal technology, reports Binyamin Ali
Aviva Investors has launched a carbon removal fund that will invest in nature-based and engineered carbon removal solutions.
Aviva Investors plans to assemble a portfolio of high integrity carbon credits by investing in areas such as afforestation and restoration projects, commercial forestry, peatland and mangroves, venture capital and private equity-based nature tech, and alternative carbon removal companies.
“Beyond carbon removal credits and low-carbon investments, the fund will also seek assets and projects that can provide measurable co-benefits such as biodiversity enhancement, species protection and reintroduction, improved water quality, employment and public access,” said a statement from the firm in November.
The Article 9 fund has a global remit, so it can access temperate and tropical climates, “which Aviva Investors believes is critical to address, given the climate investment adaptation gap that exists between developed and emerging markets around the world,” added the statement.
Greta Talbot-Jones, director of natural capital at Aviva Investors and co-portfolio manager of the carbon fund, commented: “Through our Carbon Removal Fund, we will be able to work directly with conservation groups, NGOs, specialist land managers and development partners.
“That is a vitally important element of this strategy as it should provide clearer, more direct and less diluted reporting lines from the projects we fund on how investment capital is being deployed, which activities that funding is supporting and where, and the impact it is having in terms of real-world outcomes.”
