Interest in the timberland asset class, specifically for a forests ability to sequester (i.e., capture) and store carbon, has materially increased over the past few years (but even more so in the past 6-12 months). Whether they aspire to participate in voluntary markets or compliance markets, institutional and corporate investors of all types are committing to carbon neutrality (specifically striving to achieve net-zero emissions) by some year in the near future (i.e., 2025, 2030, 2050) which is both ambitious and fantastic. Importantly, this does not mean that companies will be necessarily be emitting zero greenhouse gases (GHG), although we can hope that these companies or institutions will be looking for ways to reduce emissions through technological or logistical advancements. A common approach for companies on the net-zero journey is contemplation and inclusion of an investment in forestry carbon offsets.
As trees grow, they capture carbon dioxide from the air, convert it into carbon, and store it within the wood of the tree. Across the United States, forests are sequestering and storing approximately 15% of the nation’s industrial GHG emissions on an annual basis…which, importantly, allows us to classify forests as a net emissions sink (NOTE: according to the US EPA, this is true even after accounting for forests loss due to catastrophic wildfires, forestland conversion to agricultural cropland, and biomass operations).
So we find ourselves at a place in time, where a new markets are being developed to take advantage of this naturally occurring, sponge-like characteristic that trees offer. But what are investors really buying, and how does this differ from investing in private timberland assets? Let’s quickly explore this topic…
What is a forest carbon offset? In general, forest landowners are “selling” the captured (or to be captured) carbon emissions from their private timber holdings to public/private investors and corporations that either need them to offset their GHG emission levels (i.e., compliance market or “cap-and-trade”) or are looking to voluntarily acquire offsets to demonstrate their commitment to protecting the environment or as an example of their social responsibility standards.
These carbon credit units (or offsets) are measured and sold in “metric tons of carbon-dioxide equivalents”, which is more colloquially referred to as “mtCO2e”.
The trading prices for forestry carbon offset credits vary, but a quantifiable range of relevance would suggest voluntary credits may sell for as much as $3 per mtCO2e, while compliance market credits trade closer to $14 per mtCO2e, on average [www.ncsu.edu].
To receive the revenue for selling forest carbon credits, the timber owner must uphold their end of the arrangement and ensure the carbon supply remains present during the full term (sometimes up to 100 years). These long-term agreements often require a complete transformation in the investment thesis for timberland owners, which may restrict their ability to capitalize on improved timber market pricing over time or potentially handicap the marketability of a forestland asset to new buyers. Ultimately, timberland owners must evaluate the benefits and additionality of revenue from the sale of carbon credits against the potential impediments (and risks) that may arise from their participation in a forest carbon offset transaction.
As a buyer of forest carbon credits, you are at most, indirectly affecting the long-term sustainability of standing forests for some predetermined timeframe. Even if this term is 100 years, the forestland owner could, in year 101, harvest the forest. And, throughout the term of the agreement, a lack of properly applied active forest management may result in inadequate environmental standards and/or biological conditions over time.
So why should investors acquire private forests, rather than buying forest carbon offsets?
The justification is simple:
Private timberland assets in core geographies, distributed across deep well-established markets with robust infrastructure have the ability to not only provide investors with an asset that yields a cash dividend through the sale of wood from the forests, but that also offers relatively stable non-correlated returns with value appreciation over time through the biological growth of the forests. Maybe most importantly, a private placement in timberland assets puts the investor in the driver seat in determining the future of the forests and the quality of care for the environment.
It’s an position into a real asset that not only offers a return on investment over time, but one that also allows investors to fully immerse themselves in; an investment they can see and feel; an investment they can ensure that sustainable, long-term management practices are being followed; an investment they can utilize for corporate retreats; an investment that can produce the wood or fiber required to offset the use of materials in their business processes; an investment that will sequester carbon emissions and store carbon that they can claim outright as their own which was produced from their forests; and an investment that they can hold into perpetuity to ensure it’s place in our environment for the long-term.
Private timberland investments are much more than investments in carbon, rather, they are an investment into the long-term sustainability of the environments natural carbon sink, that also have the added benefits of providing clean air, clean water, recreational activities, raw wood materials for the production of goods, and viable employment opportunities for society.
Nonindustrial private forest (NIPF) landowners have long taken advantage of the many benefits of private woodland ownership, and it’s time the more institutional and corporate investors follow suit.
The best way to ensure we keep forests as forests is through the active, long-term sustainable management of private timberland investments and the continued [and expanded] use of finished goods and products produced from wood.
The story in the following video, produced by #forestproud, is an excellent piece on private timberland investments and keeping forests as forests.
NOTICE: All thoughts, perspectives, opinions and positions are my own.