bfinance: An introduction to Forestry, Agriculture and Carbon Credits

9 januari 2024

Investor demand for ‘natural capital’ is at an all-time high and more than 50 asset managers are now providing one or more strategies in this sector, reveals a new study on natural capital from independent global investment consultancy, bfinance: Natural Capital Investing: An Introduction to Forestry, Agriculture and Carbon Credits.

The last year saw ‘natural capital’ manager searches for bfinance clients outpacing real estate manager searches for the first time and COP28 has helped to keep the subject of climate change high on the investment agenda into 2024. Asset managers are hoping to benefit from surging appetite for this asset class from pension funds, endowments and other institutional investors.

Among the rapidly growing roster of available funds are 32 strategies that generate carbon credits for their investors – an emergent group that is now collectively seeking to raise USD 19 billion in equity commitments.

The report examines three major categories of ‘natural capital’ asset that investors can access in today’s market – agriculture, timberland and ‘Natural Climate Solutions’ (NCS) such as forest carbon – and compares their attributes on key subjects such as yields, returns, inflation sensitivity, diversification from traditional asset classes and carbon credit generation. These characteristics can all be found within ‘natural capital’ investments, to varying extents, depending on the strategies used.

Investors can now access a wide variety of pooled funds from more than fifty asset managers, many of whom offer multiple strategies, or obtain separately managed accounts with an appropriate mandate size. These strategies include timberland funds (the most mature sector of the market), agriculture funds, diversified funds and ‘Nature-based Solutions,’ with the last group demonstrating heavy overlap with newer forestry/timberland offerings.

In timberland, fund offerings now span the risk-return spectrum: value-added strategies feature more active management than in the core/core-plus segment, as well as exposure to other areas of the timber production and supply chain.

bfinance also sees a growing trend in favour of carbon credit creation in forestry. Among agriculture funds, the lower-risk end of the spectrum features strategies with a high proportion of buy-and-lease assets: here the focus is on renting out properties to operators, limiting direct exposure to commodity prices and harvest volume risk.

On the riskier side, bfinance finds significant involvement in direct farming operations. The nature-based solutions (NBS) cohort prioritises the protection and restoration of ecosystems (including biodiversity benefits) while addressing societal challenges such as food and water security to enhance human wellbeing.

The bfinance study also analysed 32 commingled funds seeking to produce carbon credits, with the funds collectively seeking to raise about USD19 billion in equity commitments. Several of these funds offer very low or no recurring yields, with 16% of funds’ returns almost entirely driven by carbon credit production and the rest seeing commercial returns supplemented with carbon credit revenue.

The report closes with a detailed discussion on carbon credits, given the ongoing questions and occasional negative headlines involving the quality and integrity of the market. Credibility in the sector is variable and investors should be mindful of obtaining ‘high-quality’ carbon credits.

Sarita Gosrani, Director of ESG and Responsible Investment at bfinance, said:

'Protecting, restoring, and sustainably managing natural ecosystems and biodiversity is so crucial and inextricably linked to achieving our climate goals. Investing in natural capital allows investors to capitalise on strong market fundamentals and have tangible environmental and social impact on the ground. We have been working with a number of investors to implement allocations to natural capital recently: it has been a fascinating time to research this rapidly evolving space. It is a complex area to say the least, with investment managers taking very different approaches (some still at early stages), and so finding the right partner is very important. We are delighted to share some insights on what investors can expect in practice when deploying capital in the asset class.'

Nikki Howard, Senior Associate Private Markets at bfinance, said:

'With the range of different natural capital investment opportunities in the market, we are delighted to be able to provide some education material on the back of several manager selection exercises over the last year. There are now over 50 institutional-quality managers spanning agriculture, forestry and natural climate solutions, and these numbers continue to grow. Investing in each of these asset classes poses very different considerations for investors from an impact and environmental perspective, as well as the risk-return profile. In this report, we explore the emergence of carbon as a return driver, as well as the critical considerations when assessing the impact and credibility of the different strategies currently on offer.'