Global asset managers are now assessing forests tree-by-tree, making calls on whether they should be felled – and converted into high-value mass timber products – or left in the ground for carbon credit generation.
A booming voluntary carbon market is now influencing that decision – expected to multiply 20 times (from US $2 billion in 2021 to US $40 billion in 2030), with big finance now eyeing the value of carbon sequestration.
That is according to Brian Kernohan, Manuflife’s Chief Investment Manager, who said the growing demand for credits has shifted the paradigm of nature-based capital management.
“If you invest in a forest, the question we ask is, ‘How do you manage wood products versus carbon?'” according to Mr Kernohan, who spoke to the Wall Street Journal overnight, who said “The answer to us is, ‘What do our clients want?'”
In January, Wood Central reported that “natural capital” strategies are now more in demand than “real estate”, with global banks scrambling to access forestry, agriculture, timber, and carbon-credit-based assets that “combine large-scale sustainable investment with compelling risk-adjusted returns.”
Manulife, formerly Hancock Natural Resource Group, manages more than 2.2 million hectares of forests in its investment portfolio – including HQPlantations and HVP Plantations in Australia – and is now calculating the value of every tree in its “informed” harvest strategy.
According to Mr Kernohan, every tree is evaluated based on species growth rates and product value; if the carbon credit value is high enough, it stays up even for a few more years. If not, it’s cut down for timber.
Broad-leaf trees, for example, “are better for carbon sequestration but take longer to grow, creating up to 500 to 600 credits per hectare but taking over 100 years to reach maturity.”Â
Meanwhile, conifer trees create half the number of credits per hectare, “but it only takes 35 to 40 years to mature, making them more helpful in getting to net-zero emissions faster.”
Last year, an investigation led by the Guardian, German weekly Die Zeit and SourceMaterial found that many certified carbon credits bought and sold didn’t represent genuine carbon emissions reductions.
Meanwhile, a US study last week found that carbon removals in tree planting projects could be overstated three-fold with “modelling not examining what happens to timber after trees have been logged.”
In October, Wood Central reported that Origin Energy, KPMG, Fraser Property and Zoos Victoria are among a raft of Australian businesses exposed to a failed REDD+ project in Zimbabwe – with up to 3 million carbon credits squandered on a major tree planting scheme.
“The issue with the whole market is the diversity in the types of credits and the methodologies used to calculate it,” according to Tom Frith, investment manager at JustCarbon, who spoke to the Wall Street Journal.
“It’s tough to tell what is kosher. For a business, it’s much easier to think of buying carbon credits as investing in a [individual] project rather than a uniform product.”
There are two types of carbon credits: removal credits, calculated based on how much carbon dioxide is removed during carbon sequestration, and avoidance credits, which calculate carbon based on activity that is not happening (i.e. logging).
The potential demand is fuelling the rise of a carbon development market, with carbon consultant Finite Carbon leading the charge of a new type of business, working with institutional investors looking to turn away from traditional income-generation projects and instead establish carbon removal projects.
Known as Natural Asset Companies (NACs), the rush has seen the New York Stock Exchange push to establish a market where listed companies trade on ecosystems by managing, maintaining, and restoring lands.
“You have a decision to make,” Daniel Crawford, Finite Carbon’s Vice President of Commercial Operations, said:
“You have acquired this tree, so what is the value, and where will the value come from? There’s now this new operation of carbon value for what is sequestered and stored.”
According to Mr Crawford, the carbon value for existing tree assets only becomes viable if there is a demand for lumber and timber within the forest area. However, if the tree was never destined to be cut down, there was never a case for carbon saving – and in that case, “there should be no avoidance credit.”
In 2021, Manulife invested solely in a forest in Maine to sequester carbon.
“Some wood is better for furniture or paper, and some types of trees better for carbon sequestration. It’s about understanding the potential,” according to Mr Kernohan, who added that a forest at the south end of Penobscot Lake had a very high carbon value, giving Manulife more of a reason to invest in that land.
However, the future of carbon sequestration as a viable financial market will ultimately depend on decisions made at global climate meetings.
Last year, Wood Central reported that talks – which would have established an international carbon credit market – collapsed over fundamental differences between the West and Global South over how the market would operate.
Whereas the US championed a “light-touch, no-frills” approach, with the market fuelled by the private sector in the voluntary market, the EU – backed by Latin America and Africa – wants a “compliance market” focus with more vigorous checks and balances and a “loosening of confidential clauses”, which could prevent scrutiny.
Establishing an international carbon market will have a major impact on the future of global forest markets, with Damien Walsh, a director of Margules Groome Consulting, revealing to Wood Central that “forest classification” will define the market.
“There is a lot of talk, especially in Europe, pushing for plantation (or planted) forests to be excluded from the international carbon market,” Mr Walsh said, “with the push to have the market limited to natural or natural restoration forest projects only.”
