Asset managers chase returns in tree carbon storage

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Asset managers chase returns in tree carbon storage

15 September 2021 Clean energy investing 0

JPMorgan Chase & Co updates

Asset managers that own forests logged for timber are expecting a jump in returns through a boom in the sale of units linked to the carbon stored in trees that are used to meet climate change targets.

Managers including Manulife, Gresham House and JPMorgan are among those that have moved this year to launch or grow a business around forestry offsets that are being sought after by organisations looking to compensate for their greenhouse gas emissions.

An offset is supposed to represent a tonne of carbon that has been permanently avoided or removed from the atmosphere.

Olly Hughes, managing director of forestry at specialist asset manager Gresham House, said the sale of carbon offsets could add about 1 per cent to net nominal returns from managed forests, which was “significant”. This income would provide an interim revenue stream while young trees were growing, he added.

JPMorgan Asset Management bought forest investment company Campbell Global in June for an undisclosed sum in a bid to “become an active participant in carbon offset markets”. The Portland-based Campbell had $5.3bn in assets and about 700,000 hectares under management.

Demand could push offset prices to $20-$50 per tonne of carbon by 2030, according to forecasts from specialist data group Trove Research, compared with less than $5 that many command today.

Several investment managers said the interest in carbon offset projects was driving up land prices in countries including the UK and New Zealand.

“This whole climate finance area is creating an evolution in the forestry asset class,” said David Brand, founder of forestry investment manager New Forests, based in Sydney. The sale of offsets generated by certain of its US forests could add 200-400 basis points to the returns from timber, he said.

The rush into the new business area has also resulted in blunders. In April, timberland owner EcoForests Asset Management announced a new offsets business, saying it had started the registration process with certification body Gold Standard and “sales of certified carbon capture assets are expected to take place by the fourth quarter”.

“Most investors now are asking for a carbon offset in line with a forestry project . . . we’re talking to mining companies in Canada, airlines in Europe,” said Michael Ackerman, EcoForests chief executive.

But Gold Standard told the Financial Times in June it had no knowledge of the plans. It said EcoForests’s explanation in its announcement of why its woodland was eligible to generate offsets misunderstood Gold Standard’s rules.

EcoForests agreed that there had been a “misunderstanding at our end” and it was reviewing whether the woodland could generate offsets. But it said companies were “investing in advance on the expectation that projects will be approved and generate offsets”.

Offsets are bought by organisations looking to make good on net zero emissions commitments, and some can be used in regulated cap and trade systems, such as California’s. However, critics say offsets are often less environmentally beneficial than they claim to be.

To produce the units, a forest must absorb more carbon than it would in the absence of the scheme — for example, if less of a forest is harvested than is legally permitted. Measuring how much carbon each tree absorbs is notoriously complicated, and influenced by its age, species and size.

Gresham House plans to plant more than 10,000 hectares of new woodland in the UK that will be logged and generate offsets. Investors can choose to take ownership of the offsets, or receive a share of the profits from those sold by Gresham House.

Newly created woodland in the UK can generate offsets, but harvested trees must be replaced — and no additional offsets can be generated by the replacement trees. If logged, a forest may only claim offsets for less than half of the carbon it has the potential to absorb in total, since continual logging and replanting means it is rarely storing the full amount.

In August, Manulife Investment Management bought nearly 90,000 acres of US timberland for an undisclosed sum that it hopes will generate offsets. Some will be sold, while others may be used to compensate for the group’s own emissions.

Manulife said some trees could remain unharvested for 10 years longer than normal in each harvesting cycle, enabling them to store a greater volume of carbon than they would have otherwise.

Gilles Dufrasne, of the not-for-profit group Carbon Market Watch, said the climate impact of the schemes was “very difficult to estimate precisely”.

That made them “unsuited” to generating offsets, “because the promise of having absorbed a tonne of carbon and permanently storing it just cannot be kept with enough certainty”.

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