Nest and Cushon, two UK pension schemes with combined assets of more than £26bn, are in a joint search for asset management partners to develop new forestry investment strategies to address climate change pressures.
Both pension schemes believe that allocating money to forestry projects will offset environmentally damaging emissions from other investments and deliver attractive returns as the price of carbon rises to reflect the increasing costs of pollution by human activity.
The schemes have set aside an initial £600mn for a joint investment mandate and, by combining forces, aim to secure lower fees with third party managers. This kind of partnership approach has already been employed successfully by some of the largest pension funds in Australia.
Nest presently manages about £25bn on behalf of 10mn members, as the UK largest workplace pension scheme, and expects to invest some 2 per cent of its assets into forestry and other natural capital projects
“We want to explore how much money managers can actually put into work in timberland on an annual basis and how much it will cost,” said Mark Fawcett, chief investment officer at Nest.
Cushon, which expects to have assets of around £900mn by the end of this year, anticipates that it could grow its allocation to natural capital strategies up to 5 per cent of its assets over time, including controversial carbon credits. It has already agreed to act as a seed investor in a new Schroders multi-asset climate fund which is seeking regulatory approval for a launch by the end of the first quarter.
“Climate change represents a material risk to our members’ future returns. Pension providers have an opportunity to deliver sustainable investments thanks to natural capital, in both an environmental and a financial sense,” said Julius Pursaill, a strategist at Cushon.
Both pension schemes say they will avoid forestry projects where logging contributes to deforestation. Forests in tropical zones, such as the Amazon, offer high carbon sequestration potential, for example, but suffer from local political and fire risk, as well as the effects of climate change.
Mainstream asset managers that offer forestry management as an option to UK clients include Abrdn, Axa Investment Managers, Gresham House, JPMorgan, M&G and Nuveen. Schroders teamed up last year with Conservation International, a US non-profit environmental group, to launch Akaria Natural Capital which intends to invest in climate projects in Asia.
Carbon credit schemes based on forestry projects as a way of offsetting polluter emissions have ballooned in recent years but are unregulated and are notoriously fraught with issues regarding their quality and verification.
Among the pitfalls of carbon credit schemes are that the projects do not capture as much carbon as they claim. Accurately tracking the trees, often in remote areas, calculating the carbon stored, the health of the trees and distinguishing between species that store carbon at different rates are among the practical issues.
The influential Science Based Targets initiative has barred offsets from counting towards corporate net zero targets.
But the UK had the potential to attract investments into its nascent carbon offset market which could provide stable and guaranteed revenue streams to landowners, said Brendan Curran, policy fellow at the Grantham Institute on Climate Change at the London School of Economics.
“Verification and monitoring of carbon credits projects created by UK forestry projects should be easier than in many emerging markets,” he said.
The UK government has pledged to reach a target of 30,000 hectares of new woodland planting a year by 2025, with 67,333 hectares of woodland carbon projects registered at the end of December. It is estimated that those plantings would allow around 21.7mn tonnes of carbon to be sequestered — a fraction of what is required if the UK is to meet its target of net zero emissions by 2050 from 1990 levels.
Where climate change meets business, markets and politics. Explore the FT’s coverage here.
Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here