Going down a more direct path to net zero takes investing in the power of natural solutions.

Generations of land management practices are being overhauled as our relationship with the land and wildlife is changing – for the better. Whether it be navigating the ethics of carbon in-setting and off-setting schemes, or simply redefining what constitutes natural beauty, Greta Talbot-Jones argues sustainability conscious real asset investors should take note of shifting trends in land use.

Read this article to understand:

  • How land use is undergoing a revolution, with nature-based climate and biodiversity solutions rising in prominence.
  • Why few investors will be able to completely eradicate carbon from their portfolios and will need to deploy carbon removal strategies.
  • Why a limited number of currently investible carbon removal technologies means nature-based solutions will be key to finding viable net-zero pathways.

Ask people to conjure up a view of the countryside and a national park is likely to spring to mind: the Lake District; Yorkshire Dales; or Scottish Highlands, or, alternatively, rolling fields of wheat and barley, or perhaps sheep and cows grazing contentedly. All are deemed to be quintessentially natural, and few would question their current appearance – or even health. 

Unfortunately, our footprint – as so often the case – is much larger and unintentionally destructive than we would first realise, or care to admit. Compared to their natural state, these landscapes are in fact mostly ecological deserts.

Such picture postcard scenes were not always this neat and orderly. The biggest difference compared to hundreds of years ago is the relative lack of trees and diverse species. Analyse the situation more closely and you will find that wild grasses, biodiversity such as birds, beavers and insects (most notably bees and butterflies), the quality of soil and the contours and health of rivers have all been compromised. Intensive and chemical-based land practices have eroded nature’s carbon sinks, degraded ecosystems and halted natural flood defences.

Invest in the land

Land ownership lies at the heart of solving these issues as whoever owns land influences its usage. Whether you personally agree that climate change is the “greatest commercial opportunity of our time”, it is undeniable that revising land use has an integral role to play in limiting global warming to 1.5 degrees Celsius. Nature-based solutions have the potential to provide one-third of net emission reductions required by 20301.

With net-zero ambitions being announced almost daily, large swathes of the investment value chain are realising the sheer challenge of reaching carbon neutrality. Whether driven by asset managers, asset owners, regulators, end clients, or a combination thereof, efforts to decarbonise buildings and infrastructure should be the top priority on any net-zero agenda, but such initiatives will not reduce a portfolio’s carbon intensity to zero in the long term. Unless removal strategies are deployed, there will always be a gap between stated carbon ambitions and reality. Having set ourselves the challenge of making our real assets portfolio net zero by 2040, we are acutely conscious of this mismatch.

Our in-house analysis shows that, given most of our debt and equity investments are in infrastructure and real estate, levels of residual carbon are inevitable, even when considering ambitious decarbonisation capital expenditure and increasing volumes of sustainability-linked financing.

To determine the required investment size, we must adopt a scientific approach to map and then estimate the remaining carbon intensity. Credibility and verification challenges are abundant in carbon markets, with blind offsetting likely to be classed as the greenwashing scandal of the 2020s.

To inset the residual carbon balance across our portfolios2, credible direct investments in carbon-removal solutions must be found to plug the gap – the most investable of which currently are forestry, peatland and biodiversity.

In time, we will look at tech-driven carbon capture and storage (CCUS) solutions but, due to the technology’s relative immaturity, our current focus is on nature-based solutions. We do, however, estimate that carbon capture on existing infrastructure energy projects should be investable in the latter half of the 2020s, and direct air capture in the 2030s.

Local and expert partnerships are key

Our first direct investment in natural capital was 6,300 hectares of Scottish moorland in the Glen Dye area of West Aberdeenshire in Scotland. In partnership with Par Equity (Par), the Scottish-based forestry investment fund manager, over 3,000 hectares of land will be newly planted, and 1,800 hectares of peatlands restored.

Over the project’s life, an estimated 1.4 million tonnes of carbon will be locked up via natural solutions on the property. Up to one third (1,000 hectares) of the replanted land will be productive conifer, providing employment for the local community in timber production. The remaining 2,000 hectares of replanting will be diverse native woodland, the design and management of which will be led by Scottish Woodlands.

Such projects have the potential to enhance social value hugely but, understandably, there is often scepticism over the motives of institutional investors. Conscious of this, for Glen Dye we partnered with experts in the market and built strong relationships locally, enhancing public access and education facilities.

There is increasing commentary on the impact of the demand for natural capital investing on land prices. Savills forecasts that £2.5 billion of funding is ready to be invested in the UK land market, which has seen record-breaking low levels of liquidity in recent years.3 Although it is unlikely that the scale of ambition and reality will converge, the mismatch in land supply and demand is undeniable. We expect the UK land market will evolve over time to embrace shared ownership models between private landowners and institutional investors.

For Glen Dye, we worked with industry experts and academics to develop a robust and credible reporting methodology to track the environmental, social and governance (ESG) impacts of the forestry and peatland assets. The metrics span several ESG factors and cover benefits from biodiversity and soil health, to education, health and well-being, and employment. Implementing a transparent and robust reporting strategy from inception will allow for benchmarking and provide the ability to track performance over time.

Nature-based solutions go far beyond carbon

2021’s Dasgupta report argued that financial flows devoted to enhancing our natural assets are dwarfed by subsidies that harm these.4

Even within nature-based sectors, tensions arise between the prioritisation of carbon sequestration over biodiversity regeneration. Dense afforestation, though rich in carbon sequestration potential, can restrict regeneration of shrubbery which are home to many species of insects and animals. Planting a mix of species, particularly those endemic to a region, works to balance this out as does leaving land open for natural rewilding.

The solution to incentivising biodiversity regeneration lies in policy interventions. In Scotland, the ambition to restore 250 thousand acres of degraded peatlands by 2030 is supported by £250 million of pledged grant funding.

Additionally, the Department for Environment, Food and Rural Affairs’ (Defra) proposed Environmental Land Management Schemes (ELMs) outline a dramatic shift in how revenues will be generated from the land in the 2020s.

In pilot phase currently, the three schemes cover sustainable farming, local nature recovery and landscape recovery. Landowners will be paid for delivering a range of environmental returns including clean and plentiful water, thriving plants and wildlife through to the reduction of and adaption to climate change through long-term replanting and ecosystem recovery, instead of the flat hectare-based subsidy farmers currently receive.5

Additionally, as part of the post-Brexit regime, an exit scheme is being introduced where farmers may elect to receive remaining subsidy payments as a lump sum, on condition they make their land available for new entrants. As a result, some farmers are choosing to retire, taking advantage of the combined benefits of direct pay-outs and rising land values. Defra’s policies aim to rebalance the incentives of land use, from traditional farming to natural regenerative practices.

Stabilising and scaling voluntary carbon markets

When buying offsets, the carbon removal seems almost instantaneous. However, in reality, sequestration timelines are decades long with the stacking of revenue streams common and cashflows pushed to the backend of those periods.

Within real assets such investment timelines are not unheard of, but fund structures, pricing and returns expectations need to match the nature of the underlying asset. With a growing focus on how net-zero targets will be reached, asset owners must start identifying managers who offer a robust investment strategy and deliver carbon units with traceable and credible origins.

Demand for credits on voluntary carbon markets (VCMs)6 is expected to increase fifteen-fold by 2030, resulting in the market doubling in size every 30 months. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimates the size of VCMs could range from $5 billion to $50 billion7 by the end of the decade, with natural climate solutions accounting for up to 85 per cent of supply. 2021 confirmed these trends, with $1 billion of credits traded on the VCM – a three-fold increase on 2020’s liquidity.8

Historically, carbon markets have struggled to achieve stable pricing due to fluctuations in supply, demand, and related credibility challenges.

Regulatory revisions and market collaborations, such as the TSVCM, are working to stabilise pricing in compliance and voluntary markets respectively. The Bank of England (in collaboration with the Network of Central Banks and Supervisors for Greening the Financial System) suggests that policies pushing a global shadow carbon price of over $150 a tonne by 2030 are required.9

Considering current voluntary carbon prices on average trade at around $10 per tonne, direct investments in nature act as a hedge for future carbon price appreciation while also retaining the underlying asset value of the land and crops. We anticipate a pricing premium will be achieved for credits developed by reputable investors and in markets where strong regulatory frameworks are in place for accreditation.

The next stage for us is to find innovative ways of packaging such investments into viable products with risk and return profiles that align with investors’ desired outcomes. Carbon removal solutions are an important piece of the net-zero puzzle, but should not be considered a “get-out-of-jail-free card”. The tough work of first reducing the carbon intensity of companies’ operations through active engagement and targeted structuring cannot be skipped.

For now, we need to return to the core challenge: multiple sustainability crises are driving a revolution in how we use the land. The population sizes of mammals, birds, fish, amphibians and reptiles have seen an alarming average drop of 68 per cent globally since 1970.10 Around one million animal and plant species – almost a quarter of the global total – are believed to be threatened with extinction.11

We will do our utmost to work with local communities and specialist partners to stay at the forefront of this rapidly developing asset class. Only by factoring in the true value of nature, the richness of biodiversity and the health of our climate into investment decisions will we be able to tackle such existential issues.

Key takeaways:

  • Active decarbonisation of buildings and seeking low-carbon alternatives to existing technologies should be the top priority for any net-zero strategy, with carbon removals only relied upon in the long term for residual carbon.  
  • Direct investment is the most credible way to generate carbon credits.
  • Community engagement is imperative and should be built into investment strategies from the outset.
  • Carbon removal and biodiversity regeneration sometimes conflict with each other, though both are imperative to reduce climate change impacts.
  • Recent policy measures in the UK are incentivising a range of alternative nature-based solutions, beyond forestry.
  • Stacking of revenue streams is common and often needed to generate stable returns.
  • Exposure to carbon markets can be a portfolio diversifier and provide downside protection against climate risks.

NB. We are open to speaking with asset owners, companies, academic institutions, NGOs and fellow asset managers who are developing strategies in this area. Collaboration is fundamental to establishing nature-based solutions as an investable asset class and stabilising voluntary carbon markets.

References

  1. Nature and Net Zero, World Economic Forum and McKinsey & Company, May 2021
  2. Insetting focuses on collaborative projects among the developer and stakeholders of one or more businesses. Credits will not be sold on secondary markets, instead inset to balance residual carbon in the value chain of a business. Offsetting develops projects primarily for the secondary carbon market with offsets sold to any purchaser.
  3. Who will profit from saving Scotland’s peat bogs?, New York Times, May 2022
  4. The Economics of Biodiversity: The Dasgupta Review, February 2021
  5. Environmental Land Management schemes: overview, March 15, 2021
  6. Compliance Carbon Markets: Traded and regulated by mandatory national, regional or international regimes (eg. EU Emissions Trading Scheme, EU-ETS). Voluntary Carbon Markets: Traded by companies and individuals on a voluntary basis to achieve carbon compensation and neutralisation.
  7. Taskforce on Scaling Voluntary Carbon Markets Report, January 2021
  8. Voluntary carbon markets poised for growth in 2022, S&P Global, January 4, 2022.
  9. Climate change – Plotting our course to Net Zero, Bank of England – Sarah Breeden speech, May 18, 2021 NB. The Network of Central Banks and Supervisors for Greening the Financial System have developed carbon pricing scenarios based on degrees of warming, related to both transition and physical risks, and the economic and financial consequences.
  10. WWF Living Planet Index 2020
  11. Dasgupta Review: Nature’s value must be at the heart of economics, University of Cambridge.
Greta Talbot-Jones

"It is undeniable that revising land use has an integral role to play in limiting global warming "

Greta Talbot-Jones 

Responsible Investment Associate Director

Our responsible investment views

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