Global investment funds say that categorisation and benchmarking challenges are holding institutional investors back from investing in forest assets.
Last week, Wood Central reported that pension funds want to invest in productive forestry, which “combines a large-scale sustainable investment with compelling risk-adjusted returns.”
Now, financial services giant AXA is in talks with investments for a new nature-based fund to “monetise carbon credits mainly through forest restoration and conservation activities.”
As reported in the Herald Sun, AXA IM Alts launched the fund last year with the €500m backing of its parent company and is seeking to raise at least €200m ($336m) more to deploy on local projects.
AXA IM Alts strongly supports forest assets – managing almost 90,000 hectares of plantations across France, Ireland, Finland and Australia.
In June 2021, it acquired 24,000 hectares of commercial plantations in Australia’s “Green Triangle”, noting the “Australian forestry sector’s structural attractiveness of steadily growing demand and static supply.”
The new fund is managed by Alexandre Martin-Min, who met with Australian super funds and investors last week to discuss the fund’s strategy.
He said while there was a lot of interest, there were also many questions about how local regulators would view investments from super funds.
“Carbon credits or green investments are new asset classes, and they need some benchmarking to understand how they’re positioned versus other asset classes in the allocations,” Mr Martin-Min said.
“Specifically, for the APRA-regulated super funds, that’s the APRA performance benchmark, which is a challenge at the moment for the investors here.”
The performance benchmark is designed to improve member outcomes by assessing the long-term performance of superannuation products against tailored benchmarks, with consequences for those that fail.
It represents each asset class – the S&P/ASX 300 Total Return Index, with emerging nature-based assets like forestry classified as “higher risk.”
Nonetheless, “there is a huge amount of interest in the strategy,” Mr Martin-Min said, with the strategy a powerful vehicle to achieve net-zero targets.
“But the challenge is it’s an unknown asset class. There isn’t much institutional backing, so it’s so significant that AXA’s put €500m into this strategy.”
“And people don’t understand what the return drivers are very well. And then they don’t know where it fits in the portfolio.”
Super funds are concerned that APRA’s performance benchmarking framework, designed to weed out underperforming funds, is deterring them from ethical and environmental investing because it often takes longer to generate returns on offer in other sectors, including fossil fuels.
In August, the Australian Retirement Trust closed one of its green and ethical funds after it failed the so-called Your Future, Your Super test.
“We are disappointed our QSuper Socially Responsible option failed the performance test,” the fund said in a statement.
According to Mr Martin-Min, regulators and investors can both play a role in overcoming the unintended consequences of the current framework.
“There is the part we can deal with, which is to provide the numbers, track information about the returns we can deliver, and there’s the part on the regulation side, in terms of the obligations to reduce the carbon footprint of portfolios or compensations.”
During the visit, Mr Martin-Min visited AXA IM Alts investment in the “Green Triangle.”
Considered one of Australia’s prized forest assets, the estate is the engine room of Australia’s multi-billion dollar forest products industry.
It includes more than 22,000 hectares of managed land with a mixed-age portfolio of radiata pine forests, one of the largest sources of saw-log supply.
Certified to PEFC, FSC and Responsible Wood, logs are sustainably harvested and converted into cross-laminated panels and glue-laminated timber beams as part of NeXTimber’s state-of-the-art mass timber facility.
It is also close to the Port of Portland, with the Federal and Victorian State Governments announcing plans to develop Australia’s first green shipping fuel production hub, with woody residues used to produce green methanol from the Green Triangle.
The region produces 1.7 million cubic metres of sawlogs and 1.0 million cubic metres of pulpwood annually.
Mr Martin-Min said AXA IM Alts was interested in adding to its forestry holdings in the Green Triangle.
The interest comes amid a decline in forestry plantations and ahead of native logging bans in Victoria and Western Australia.
As reported by Wood Central earlier this month, Australia’s plantation estate is at a 20-year low, with the decline in plantation size “due to ongoing conversion of hardwood plantations to other land uses.”
According to figures recently released by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), the total plantation area contracted by 28,000 hectares to 1.716 million.