Extracts from an article by Aysha Gilmore, which explores how UK asset owners are investing in carbon offsets such as timberland to help them transition to net zero.
AS THE threat of climate change becomes more evident, many asset owners are putting a greater emphasis on decarbonising their portfolios, with some pension funds looking to invest in natural capital to achieve this goal.
Investment in timberland plays a growing role for the £369bn Local Government Pension Scheme (LGPS), with both £9.6bn Essex and £5.7bn Leicestershire pension funds being prime examples.
Currently, Essex Pension Fund has invested £368m into timberland and plans to commit a further £136m, while Leicestershire has £194m invested in the asset class.
Susan Barker, chairman of Essex Pension Fund’s Strategy Board and Investment Committee, said, “The timberland sector presents an opportunity to invest in an asset class that has a negative carbon footprint – in other words, it sequesters more CO2 than is emitted each year. This is a characteristic almost unique to timberland and one which allows it to play a significant role in reducing the aggregate emissions profile of our broader portfolio.”
Aysha Gilmore writes that both Leicestershire and Essex invested in timberland through various funds managed by Stafford Capital Partners, with one being Stafford Capital Carbon Offset Opportunity Fund, which has aggregate commitments of $242m and a fundraising target of $1bn. The fund generates a supply of verified carbon credits each equivalent to one tonne of CO2.
Marek Guizot, principal at Stafford Timberland, says: “The logic behind a carbon offset and the value that you can sell it for is to really to attract capital into projects and activities that will either reduce emissions or remove emissions from the atmosphere. Specifically, projects that would not have occurred without access to such funding.”
PPF’s £1bn investment
Outside of the Local Government Pension Scheme, UK asset owners such as the £38bn Pension Protection Fund (PPF) are also investing in timberland, with the fund committing over £1bn to forestry and continuing to look for other opportunities within the asset class.
PPF explains that its investment in forestry is part of its wider sustainability strategy, which includes targets such as reaching net zero in its operational supply chain and travel emissions by 2035 or sooner.
A spokesperson said: “Forestry is a key element of our responsible investment strategy.”
Linda McAleer, senior investment consultant, investment defined benefit at Hymans Robertson, said, “Limited land supply and growing demand from investors seeking investment in natural capital to achieve environmental, social and governance benefits has resulted in some significant price increases for attractive investments.
“The extent to which demand and price increases continue will have to be considered carefully as this could potentially alter timberland’s risk and return profile over the coming years.
“Short-term fluctuations in carbon pricing and carbon pricing not evolving in line with expectations is a risk that investors need to be cognisant of. This risk can be mitigated by having a flexible strategy when looking to sell carbon offsets.”