The case for thematic investing in natural capital

Ryan Fan: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Ryan Fan. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspective and help you make sense of what really matters.

Eric Cooperstrom: Timberland is the unique asset class that provides investors with the opportunity to both earn competitive risk adjusted rate of return while generating positive and social and environmental impacts that directly address three of the greatest challenges that our world faces over the next decade.

Ryan Fan: In a previous episode that I hosted, we explored investment solutions with a carbon thematic, enabling investors to position for the transition to net zero emissions. Today, we’ll continue that discussion on thematic investing, diving deeper into the world of natural capital, including an investment strategy focused on forests for their carbon credit value and how timberland assets are helping to diversify risks and generate new revenue streams.I’m delighted to welcome today’s guest, Eric Cooperstrom, Managing Director for Impact investing and natural climate solutions at Manulife Investment Management. In his role, Eric develops timberland and agricultural investment products that align with the firm’s commitments to sustainability and responsible investing. He is directly involved in developing the firm’s carbon and climate investment strategy, supporting new business development and providing market intelligence and leadership. Before joining Manulife Investment Management in 2021, Eric held prior roles as Senior Director at Nature Vest Impact Investing Unit of Nature Conservancy and as principal at the School Foundation, a private foundation that supports social entrepreneurs. Good morning Eric. Welcome, and thank you for joining us on today’s episode of The Sustainability Agenda.

Eric Cooperstrom: Hi, Ryan. Thanks for having me.

Ryan Fan: Okay, Eric, let’s dive in. Manulife is described as the world’s largest natural capital investment manager. So help us understand what that means. For context, can you give us an overview of Manulife Natural Capital business and your approach to natural capital solutions?

Eric Cooperstrom: Absolutely. So as you mentioned, Manulife Investment Management business has a dedicated timber and agriculture investment unit, which combined is the largest investment manager of natural capital in the world with about $16 billion in assets under management. On the timberland side, we are the largest timber investment management organization, or TMO, with nearly $12 billion of assets under management and 5.5 million acres that we manage on behalf of our clients.And on the agriculture side, we’re the second largest investment manager in the world, with nearly $4 billion of assets under management and about 400,000 acres that we manage. We are global in our presence. We operate in all of the major institutionally investable timber and agriculture baskets in North and South America, Australia and New Zealand. And we’re vertically integrated, which we think is a key differentiator.The majority of my approximately 700 coworkers are farm managers, foresters, wildlife ecologists and area managers living in local communities and directly managing our client assets. Lastly, I’ll note that we have a core focus on sustainability. So we started operating in timber and agriculture nearly 40 years ago with the foundational principle that good stewardship is good business. And we have a dedicated sustainability team that is only focused on timber and agriculture.On the Timberland side, 100% of our client properties are third party certified to certification frameworks like SFI, FSC or PFC. And on the agriculture side, we actually helped establish a leading harvest sustainability standard, which is now an independent nonprofit. And 100% of our U.S. and Australia plant farmlands are certified to the leading harvest standard.

Ryan Fan: That’s pretty impressive. 40 years, 700 members on your team and always starting from a sustainability standpoint. Eric, let’s dive a little deeper into how assets like Timberland fit into Manulife’s investment thesis. How can they be attractive to investors?

Eric Cooperstrom: So Timberland is the unique asset class that provides investors with the opportunity to both earn competitive risk adjusted rate of return while generating positive and social and environmental impacts that directly address three of the greatest challenges that our world faces over the next decade. And those are climate change, nature loss, and inequality. I’ll focus first on the financial side.And I mentioned, you know, Timberland is an established asset class. The sector has an established track record of generating moderate total returns in the mid to high single digit range that consist of both income and appreciation. And the key differentiator is that Timberland investments tend to have much lower volatility as compared to traditional asset classes like stocks and bonds.That means that timberland investments can help reduce the overall risk of an investment portfolio, while also enhancing return and providing stability to those portfolios during periods of market uncertainty. Timberland is also a long term asset class, which aligns well with investors that think over those longer term horizons and can contribute again, as I mentioned to those various sustainability goals.I also note that Timberland has low to negative correlation compared to other asset classes that can help with portfolio diversification and Timberland has a positive relationship with inflation, supported in part by the favorable underlying demand fundamentals from the use of timber products to support basic human needs like hygiene and medical products, sustainable building materials and others that can have both a core use for human activities as well as the nature and social impact aspect.

Ryan Fan: So now that we have a good understanding of why Timberlands fit into an overall investment portfolio, can you explain to us – Manulife has developed an investment strategy focused on opportunities and sustainably managed forest land assets, where carbon is the primary driver. What is the actual strategy here and how do you position it with your investors? Also, I guess what interests or commitments are you seeing from these investors?

Eric Cooperstrom: We started to build on that nearly 40 year history of sustainably managing timberlands that I mentioned. And, I didn’t mention we’ve also developed a carbon project portfolio on our existing client assets that’s more opportunistic. So that portfolio tends to be nested within broader core sustainable timber management strategies. We’re looking at that track record, and we’re combining it with the rapid increase that we’ve seen over the last several years in private sector climate action, and specifically net zero commitments that are looking for scaled, investable solutions to help support those climate goals.So in 2021, we launched the Manulife Forest Climate Strategy to do just that, to provide investors and companies with that scaled solution that can potentially generate a competitive financial return and provide a durable stream of high quality carbon credits to help support their climate goals. The strategy itself focuses on investing in a diversified portfolio of forest assets, the majority of which have the potential to generate those high integrity and high quality carbon credits.We also look at investment opportunities in improved forest management for carbon sequestration opportunities, and in that case, we would change the management regime on an existing working forest that we acquire to intentionally sequester more carbon in a baseline scenario. The other investment approach that we look at is afforestation, reforestation, or green field investment opportunities, where we’re establishing a new forest. In addition to carbon,we also target conservation easement sales to ensure long term protection of sensitive habitats. We look at value added services or non timber income generating strategies like mitigation banking to enhance biodiversity outcomes or renewable energy citing. And we also target a minority portion of the strategy that’s focused on traditional sustainable timber value creation.

Ryan Fan: Over the last 18 to 24 months. You and I both know very well the negative publicity that certain project types have received in the voluntary carbon space. I’m curious about the carbon projects that you are developing that will generate durable, high quality voluntary carbon credits. What are the criteria you’re using to select projects to ensure that their resulting credits are high quality?How are the resulting credits being used in your investment strategy?

Eric Cooperstrom: First off, you’re absolutely right. Over the past several years, there has been increased scrutiny of carbon markets, protocols, practices and players. And at Manulife Investment Management, we believe that quality and integrity have really become table stakes for operating in the carbon market, and doing so can provide both value generation and risk mitigation opportunities. In March of 2021, we released our carbon principles that clearly state how we approach integrity in our carbon practices.These principles are publicly available on our website, and they’re aligned with international best practice, specifically with the Integrity Council for the Voluntary Carbon Market and their Core Carbon Principles, which came out last year. We integrate our principles and set of more specific underlying guidelines into every aspect of our carbon management, from feasibility studies to registration, issuance and credits sale or transfer.We only work with well-established registries in the voluntary carbon market and with relevant compliance carbon markets. And we set, you know, for instance, conservative baselines that benefit from our nearly 40 years of on the ground sustainable timber management experience, where our foresters know the regional depth management practices, they know local contractor and know capacities and relevant forest management comparables in the region.So we can utilize that considerable knowledge and expertise to establish highly defensible carbon project assumptions. We regularly amend and improve upon those principles as frameworks like the ICVCM, VCMI and SBTi and carbon ratings agencies continue to evolve their methodologies so that we stay ahead of the pack and really align with those international best practices. For our forest climate strategy,we provide investors and companies with optionality in terms of how they realize the carbon value, either as an in-kind distribution of the actual credit or via offset sales that can monetize the carbon return. And we’ve received consistent feedback from investors that this flexibility is a highly valuable component of our strategy, as carbon markets continue to change and their climate goals evolve over time, and companies and those investors that we’re speaking to.

Ryan Fan: Yeah, it’s quite impressive to see Manulife come out two years ahead of the Core Carbon Principles with your own principles and leading the way. I definitely applaud you on that. Look, now that you’ve addressed the issue of quality, can you explain how your investment strategy then mitigates other challenges such as commodity price volatility, uncertainty in the future value of carbon credits, and even the risk of damage to timberlands, you know, through wildfires or blight.

Eric Cooperstrom: On the carbon front, we believe that our laser focus on quality and integrity, demonstrated by the application of our carbon principles, can position the credits that are generated from our client properties to achieve both premiums and again, to potentially mitigate any scrutiny from various market actors. That mitigation really hinges on what I just described, which is incorporating realistic and defensible assumptions in our project development.In addition, the carbon methodologies relating to permanence require that every project contributes to a buffer pool that acts as a sort of port insurance mechanism in the event of a reversal or a carbon sequestration loss, due to various factors. More broadly, in terms of managing forests and reducing those unique risks that forests as biological assets face, like pests, fire, disease, we take a multi-pronged approach for our entire client timberland portfolio.First, we review all pipeline acquisition opportunities against our Sustainable and Responsible Investing, or SRI toolkit, which seeks to identify both challenges and opportunities. Those include climate change and natural disaster risk. And specifically, we utilize the third party reinsurance company’s climate change model as part of our due diligence into this assessment of natural risks. The second stage is to construct geographically diversified portfolios for our clients.We see this as greatly reducing the risk that any specific natural disaster or other blight affects multiple locations at the same time. And lastly, we utilize our integrated operations team, our foresters on the ground and other operations team members with nearly 40 years of experience to actively manage client properties. This means that we prioritize healthy forests, and we conduct very […]culture operations to reduce fuel loads, to mitigate the risk of more catastrophic events.These approaches have proven very effective in helping us maintain a relatively low level of loss from fire, pests and diseases on our client properties over several decades.

Ryan Fan: What I find interesting about those comments is that you’ve mentioned this throughout the podcast, 40 Years of experience. But it’s not just 40 years of experience of investing. It’s active management, I think, which is really interesting. The other point that I thought that you highlighted that is quite interesting is the use of reinsurance and their risk models. I think insurance is becoming a bigger part of the voluntary carbon markets, and hopefully it will help us to be able to allocate risk to the right parties so that we can start to scale some of this activity.Okay. So let’s close this out a little bit. where to next for your investment strategy over the medium term. And what new solutions do you hope to see materialize?

Eric Cooperstrom: First and foremost, we are focused on actively and efficiently deploying the forest climate strategy and making sure that we are seeking competitive returns and climate and social impact for our investors. We also see happening in real time payment for ecosystem services continue to develop rapidly beyond just carbon, and that affords the number of potential opportunities in the medium term.First, we have again a dedicated operations team, and within that dedicated operations team, we have what we call a value added services team that look at all of those different activities like mitigation, banking, renewable citing, cell tower citing on any given acre that we manage to add additional value to client portfolios and potentially drive additional impact. Mitigation banking is something in particular that we’re looking at to expand our presence in.And we have, for example, a current project that we’re developing in Florida that will provide a new perpetual home to over 1500 gopher tortoises, which are a keystone threatened species in that state. And that project has the potential to generate significant revenue for our clients while having that very clear biodiversity impact. On a related front, we’re actively monitoring nascent and rapidly growing biodiversity markets in the voluntary as well as compliance spaces.And we’re also seeing biochar markets evolve rapidly from both a revenue generation perspective on the offtake side, where we would provide the actual feedstock, and on the biochar utilization and re incorporation into the soil substrate side to increase growth in either our forests or agriculture footprint and the potential to generate carbon credits along the chain. We’re also exploring how we can deepen our footprint in attractive timber growing regions like South America, with a focus on afforestation and reforestation, as well as biodiversity and social impact.And we’re analyzing the broader natural capital market overall, including water and other areas where we can build upon our existing industry leadership position as the world’s largest natural capital investment manager.

Ryan Fan: Yeah, there’s, a lot to chew on there. I could actually hold a podcast just on biochar, and that would last an hour, I think, given the evolution of that particular part of the industry.

Eric Cooperstrom: That would be an interesting one.

Ryan Fan: Yeah, it definitely would be. Really excited about what Manulife Investment Management is doing in this space. I think it’s important that investment in decarbonization and biodiversity be made accessible. In order to scale the climate action needed to ensure we reach our climate goals. Thank you, Eric, for taking the time to join the show today. Thank you for your work to enable capital flows into timberlands for decarbonization and biodiversity purposes. And thank you to our listeners for tuning in.

Eric Cooperstrom: Thank you. Ryan.

Ryan Fan: Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Ryan Fan, and this is the sustainability agenda.

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