Biodiversity should not be forgotten amid forestry’s focus on carbon sequestration, specialists in our Expert Voices network explain
Biodiversity shouldn't be forgotten amid forestry’s focus on carbon sequestration
With all eyes on COP26, forestry and carbon sequestration are at the top of many an agenda. To limit temperature increases to below 2°C, the Coalition for Negative Emissions has calculated that between six and 10 gigatonnes of CO₂ will have to be removed from the atmosphere annually by 2050.
Mechanical and other man-made carbon capture solutions are not yet anywhere near capable of meeting the challenge. The world’s biggest carbon capture facility, the Orca carbon-capture plant in Iceland, can capture 4,000 tonnes of CO₂ a year by mixing it with basalt and turning it to stone. Humanity’s CO₂ emissions currently stand at 40 billion metric tonnes a year, meaning Orca alone captures about three seconds' worth.
But of course, the earth has its own system. A recent estimate suggests forests can absorb as much as 16 billion metric tonnes of CO₂ a year. Natural resources strategies in timberland and farmland target land used for commercial purposes, and more sustainable land management practices could improve natural carbon sequestration.
On the surface, timberland can address some of investors’ key concerns around climate change and sustainability. However, as of March 2021, AUM in timberland stood at $17bn, the lowest since 2012, and down from a high of $21bn in 2017 (Fig. 1). It is difficult to accurately measure the value of private capital for particular segments in natural resources. The universe of funds targeting timberland includes specialist funds with an exclusive strategy, funds with it as a primary focus, funds with it as a secondary focus, and generalist funds that can invest in timberland.
This is in contrast to the entire asset class. Natural resources AUM, 85% of which lies with energy investments, has risen from $688bn in 2017 to over $1tn by March this year.
The recent COP26 pledge to end deforestation in more than 100 countries, which represents over 85% of the world’s forests, has brought new attention to an ongoing question. A major focus of maintaining and replanting forests is for carbon sequestration (removing CO₂ from the atmosphere), which is opening up a new form of revenue from timberland assets through carbon credits.
The global carbon credit market stands at roughly $6.7bn as of September, and the voluntary carbon credit market alone, which stood at $1bn in September 2021, is predicted to grow to over $50bn by 2030. However, what seems a simple equation of carbon released vs. carbon sequestrated may have unintended consequences for biodiversity.
We asked the Preqin Expert Voices network about balancing different sustainability aims within forestry, developments within the industry, and what the future may hold for the asset class.
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Tapani Pahkasalo, Partner at Dasos Capital:
What is good for biodiversity is usually good for carbon capture, however, what is good for carbon capture may not always be good for biodiversity. This poses a potential risk for forest carbon capture financiers that may not be fully understood and integrated today.
Forests can absorb CO₂ in a cost-effective way through the biological growth process. Forests also contain large amounts of biodiversity, although this remains more difficult to quantify than CO₂. Improved forest management techniques can enhance forest growth, in turn improving carbon capture and helping investors to walk the net zero path. This is effectively bringing funds into carbon forestry.
Loss of biodiversity is alarming, but its protection and enhancement is often done with public funds, which are limited in nature. Furthermore, intensification of forest growth may lead to increased loss of biodiversity.
However, sustainably managed forests can provide multiple benefits at once. Sustainable forest management and biodiversity are mutually supportive, not exclusive. Customers want sustainable forest products and are willing to pay for them, as demand for biodiversity is increasing. Biodiversity is already being priced at the markets separately from carbon, and this needs to be considered in the analysis that guides investment decisions.
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Chris Lipton, Head of Timberland Investments at Greenwood, Nuveen:
Timberland, and the wood fiber it generates, is vital to the global economy, providing a renewable resource for housing, furniture, packaging, heat, and energy. In addition to providing a source of wood fiber, we depend on forests for environmental processes like air and water purification, nutrient cycling, and climate regulation.
Furthermore, beyond its practical uses, timberland can play an important role in institutional portfolios, providing portfolio-level and quantifiable natural capital benefits. The case for investing in timberland rests on five tenets: strong market fundamentals, attractive return profile with strong income potential, uncorrelated returns compared with other asset classes, inflation hedging, and climate benefits.
Indeed, there is increasing recognition that as a natural climate solution, timberland investment, alongside others such as farmland or green infrastructure, can offset carbon emissions through sequestration and be another powerful source of climate-change mitigation for investors.
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Izzy van Romunde, Associate Director at Gresham House plc:
The traditional drivers of timber demand – house building and the housing shortage in developed economies, and urbanization and suburbanization movements in developing economies – are being turbocharged by sustainability.
Wood is increasingly being used as a low-carbon substitute building material to steel, aluminum, and concrete. Thanks to technological advances in wood, such as Cross Laminated Timber, which gives wood comparable or stronger qualities to traditional building materials, new and ever-bigger wood buildings are being developed across the world. Already completed examples include the 155,000 square foot Dalston Works building in Shoreditch, London, and the 84-meter high HoHo tower in Vienna, Austria.
Wood, the perfectly replenishable raw material, looks set to take an increasing share of construction materials, as developers need to reduce their carbon footprint and the world needs to build its future in a greener way; an ever-increasing amount of timber-framed ‘plyscrapers’ are under development for both commercial and residential uses.
Forecast increased timber demand, driven by sustainability, together with forestry’s income profile, is increasingly attracting institutional investors to this asset class. Regular inflation-linked income, through timber harvesting and capital appreciation as the trees grow and are replanted, is making forestry investing a must for institutional investors. There has never been a more relevant time to add forestry to a diversified investment portfolio.