Investment managers who have bought up forestland are going tree by tree to figure out whether they should be felled for timber or kept up for carbon-credit generation. Source: WSJ
Growing demand for credits means investing in forests isn’t just about producing timber, but it can take a lot of legwork to determine what role each tree should play in a portfolio, as well as ensure it is delivering its promised environmental benefit if left standing.
“If you invest in a forest, the question we ask is, ‘How do you manage wood products versus carbon?’” said Brian Kernohan, chief sustainability officer, private markets, at Manulife Investment Management. “The answer to us is, ‘What do our clients want?’”
Manulife, which has 5.4 million acres of forest in its investment portfolio, calculates the value of each tree to inform its harvest strategy. Every tree in a forest has to be evaluated based on species growth rates and product value. If the carbon credit value is high enough, it stays up even if for just 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. Conifer trees, on the other hand, create half the number of credits per hectare, but only take 35 to 40 years to mature, which can make them more useful in getting to net-zero emissions faster.
Mr Kernohan said that until recently, forest land wasn’t valuable enough to be considered worth investing in solely for carbon sequestration. “We’re now able to realize that value,” he said.
The voluntary carbon credit market could be worth as much as US$40 billion by 2030, up from US$2 billion in 2021, according to a report from Boston Consulting Group and Shell. It offers a way for companies to help negate the carbon emissions they produce from operations and can be especially useful for those in hard-to-abate sectors such as energy generation and heavy industry.
Demand for carbon credits has grown rapidly both in the US and overseas, but in the past couple of years it has started to slow after questions were raised about whether projects are delivering what they promised.
Last year, an investigation by UK newspaper the Guardian, German weekly Die Zeit and SourceMaterial, a journalism nonprofit, found that many certified carbon credits that are bought and sold didn’t actually represent genuine reductions in carbon emissions.
“The issue with the whole market is the diversity in the types of credits and the methodologies used to calculate it,” said Tom Frith, investment manager at JustCarbon, a carbon-credit project financing firm. “It’s really hard to tell what is kosher. For a business, it’s much easier to think of buying carbon credits as investing in an [individual] project rather than a uniform product.”
There are different types of carbon credits. Removal credits, for example, are generated by how much carbon dioxide a company removes from the atmosphere and are seen as more valuable because the carbon tonnage can be more easily calculated. Meanwhile, avoidance credits can be more difficult to accurately calculate as they are generated through an activity not happening—for example, not cutting down a tree. Tree-planting initiatives also generate removal credits because they remove carbon through photosynthesis.
The potential demand is giving rise to firms known as carbon developers such as Finite Carbon based in Wayne, Pa. Finite Carbon works with institutional investors trying to establish how much people are willing to pay for carbon removal, and landowners who might be in a position to turn away from their traditional income sources in favor of carbon removal.
“You have a decision to make,” Daniel Crawford, vice president of commercial operations at Finite Carbon, 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.”
Mr Crawford said that the carbon value for existing tree assets only becomes viable if there is demand for lumber and timber within the area of the forest. If the tree was never going to be cut down, then there was never a case for carbon saving, he said. In that case, there should be no avoidance credit.
Manulife in 2021 invested in a forest in Maine solely to sequester carbon. “Some wood is better for furniture or paper and some types of trees better for carbon sequestration. It’s about understanding potential,” said Mr Kernohan. He 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.
Other firms are planting new trees to be used for carbon credits which mature over a longer period. Richard Kelly, co-founder of Foresight Sustainable Forestry based in the UK, said it is aiming to plant nine million trees by spring 2025, with half of the portfolio dedicated to carbon removal.
Mr Kelly said planting trees and issuing credits based on them protects the trees from being felled and removes any debate over whether they were ever going to be cut down.
