Natural climate solutions—investing in nature to address climate change

CORPORATE PARTICIPANTS

Sydney McConathy

Senior Managing Director, Head of Global Business Development, Hancock Natural Resouurce Group

Eric Cooperström

Managing Director, Impact Investing and Natural Climate Solutions, Hancock Natural Resource Group

PRESENTATION

Sydney McConathy

Good morning, and good afternoon to our colleagues in Europe. Thank you to our clients and investors for taking the time to join us today to talk about natural climate solutions (NCS) and how investors can think about decarbonizing their investment portfolio through an investment in forestry and agriculture. My colleague Eric Cooperström and I are excited to be here. My name is Sydney McConathy. I am the head of business development for Hancock Natural Resource Group (HNRG) and a member of HNRG's executive team. I've been with HNRG for over five years, and I've had a focus on sustainability and impact investing for the last 14 years. I've had the pleasure of working with institutional investors all over the globe to educate them on these two asset classes and the beneficial role that they can play from a sustainability and responsible investment perspective.

I'd like to also introduce my colleague, Eric. Eric, over to you.

Eric Cooperström

Thank you, Sydney, and welcome, everyone. My name is Eric Cooperström, and I lead impact investing and natural climate solutions for Hancock Natural Resource Group. I joined about three months ago and have a background in private equity and investment banking, followed by a long career in impact investing. Thank you, Sydney.

Sydney McConathy

Thanks so much, Eric. For those of you that are joining us today, I'd just ask if you have any questions, there's a question mark box in the top right corner of your screen. Please type any questions there and we will be happy to address all of those questions during our Q&A session at the end of the presentation.

Great, now on to the presentation. I'd like to briefly introduce our organization for those of you who may be new to Hancock and Manulife. Hancock Natural Resource Group is a wholly owned subsidiary of Manulife Investment Management, which is a leading global financial services firm. Having been a part of John Hancock since inception, HNRG was part of the John Hancock acquisition by Manulife in 2004. Today, HNRG is a part of Manulife Private Markets platform, under the real assets umbrella, which also includes infrastructure and real estate.

HNRG has over 30 years of experience investing in natural resources. We specialize in building and sustainably managing globally diversified timber and agriculture portfolios for the benefit of our investors, while at the same time contributing to the environment and local communities where we work. In the market, we are the largest timber investment manager and second-largest farmland manager by AUM globally, with approximately US$14 billion in assets under management. From an investor perspective, we have over 200 institutional investors, some of which have been clients with us for decades. To date, our client base consists of, mostly from an AUM perspective, some of the largest pension funds and insurance companies globally, including many investors from Europe. Our client assets geographically span across six different countries, and over six million acres globally. We are headquartered in Boston, with several regional timber and agriculture offices across the globe, and as you can see, we have numerous field offices as well, as part of our integrated investment and property management operations, which includes over 650 employees globally, including many foresters, farmers, wildlife biologists, and water experts on staff.¹

I'd like to now turn the floor over to my colleague, Eric, who will dive into the nuts and bolts of timberland and agriculture as natural capital solutions. Eric?

Eric Cooperström

Thank you, Sydney. Let me start by framing the current climate situation. The United Nations has declared that slowing global warming is a moral, ethical, and economic imperative, and our focus here is on anthropogenic or human-influenced greenhouse gas emissions, especially carbon dioxide, that a vast majority of scientists cite as the main drivers of climate change. A 2019 special report by the UN Intergovernmental Panel on Climate Change, or the IPCC, which is the standard bearer in terms of climate science, outlined the urgency to keep global average temperature rise to below 1.5˚ Celsius compared to preindustrial levels.² They also estimated that average temperatures have already increased by around 1˚ Celsius today, and we're already seeing the effects of climate change, including increased severity and frequency of droughts, hurricanes, wildfires, and other extreme weather.³

To put this in context, 2020 was the second-hottest year on record despite emissions declining due to the global pandemic, and the top 10 hottest years on record have all occurred since 2005.⁴ As we speak, more than 55% of the United States’ West is experiencing extreme or exceptional drought conditions according to the U.S. Drought Monitor, and the drought is on track to be one of the worst that we've seen in over 1,200 years according to a University of California, Irvine, professor.⁵ The results are significant and have real-world impacts, including lives lost, detriment to human health, and pressure on the habitability and stability of entire countries and regions. Next decade to 2030 is critical for keeping emissions and the effects of global warming within reasonable bounds.

The landmark climate deal, the Paris Agreement, was signed in 2016 by 196 state parties to address the climate crisis. The goal was to keep the rise in global temperatures to well below 2˚ Celsius above preindustrial levels and to pursue efforts to limit the increase to 1.5˚ Celsius. However, to date, only around 40% of countries have set new emission cutting targets for 2030, and to put that in perspective, these pledges would reduce emissions by only about 1% from 2010 levels compared to 45% proposed by the IPCC.⁶

However, there's hope. The world is rapidly waking up to the dangers and risks posed by climate change. The enabling environment for serious and ambitious action to address climate change has never been stronger across multiple sectors. I'll start in the public sector. In the United States, on day one of the Biden administration, the U.S. rejoined the Paris climate agreement and committed to reviewing the previous administration's climate policies.⁷ Other pillars of the Biden administration's climate plans include 30 by 30, with the protection of 30% of U.S. land and 30% of U.S. oceans by 2030, compared to about 14% protected today.⁸ The U.S. Department of Agriculture has indicated that it will create a carbon bank to pay farmers for sequestering carbon in soil, and on Earth Day of this year, the administration committed to reducing emissions by at least 50% by 2030, based on 2005 levels.⁹ In the European Union in 2020, leaders agreed to increase greenhouse gas-reduction targets to 55% 1990 levels by 2030 compared to a previous commitment 40%. And previously, in 2019, the EU set its ambition to become the first continent to become climate neutral by 2050. In December of 2019, the European Commission laid out the European Green Deal as a holistic approach to bringing the continent’s growth strategy across diverse industries in line with its climate goals.¹⁰

In China, which is the world's biggest source of carbon dioxide emissions, responsible for around 28% of the total, the president aims to have carbon dioxide emissions peak before 2030 and for the country to achieve carbon neutrality before 2060.¹¹ This is important because it was the first long-term climate commitment made by China. China is also about to phase down its use of coal-fired power plants in five years. From a broader level, the United Nations earlier this month launched the Decade on Ecosystem Restoration through 2030 to counteract the triple environmental emergencies of biodiversity loss, climate disruption, and escalating pollution. The UN is calling for changes at every level of society to avoid ecological disaster.

Moving on to the private sector, in the last few years we've seen a surge of corporate net-zero commitments joining an already robust landscape of climate alliances, disclosures, accounting standards, and reporting frameworks. To name a few, The Climate Pledge was co-founded by Amazon to achieve net-zero carbon by 2040—it has over 100 companies as signatories. Over 40 signatories are representing over $6.5 trillion in assets and joined the Net-Zero Asset Owner Alliance, convened by the United Nations, in pledging to decarbonize their portfolios by 2050.¹² In November 2020, the Forest Climate Working Group released a platform, endorsed by 43 CEOs and organizations, intending to help the U.S. Congress leverage forests for climate change action.

And last but not least, our technology advances. We've seen over the past few years increased attention to, and rapid advancement of, climate technologies. These include more efficient renewable energy, advanced satellite mapping and sensor technology, and carbon capture and storage.

Natural climate solutions (NCS) are a subset of the growing number of efforts to address climate change. They include conservation, restoration, and improved land management actions to increase carbon storage or avoid greenhouse gas emissions across global forests, wetlands, grasslands, and farmlands. In short, NCS means using climate-owned benefits to address the global warming imperative. NCS solutions can be stratified or grouped into three major buckets. One, forestry, which includes protecting and enhancing existing forests, as well as planting new trees in non-forested or previously forested areas; two, agriculture and grasslands, which include a suite of practices intended to better manage land crops and livestock for climate impact and benefit; and third, wetlands, such as mangroves, where we recognize the unique and crucial roles that inland and coastal wetlands serve for the global climate.

I want to note that NCS strategies are inherently local. They need to be tailored to local conditions, communities, and opportunities across urban, suburban, and rural landscapes. Overall, all relevant NCS approaches have value in combating climate change. It's critical to identify, fund, and support NCS investments and their associated climate benefits that have three overarching characteristics. First, they need to be truly additional. This means that they add real carbon sequestration value compared to status quo practices, and they also create environmental benefits not claimed elsewhere. Two, they need to be able to be measured accurately and consistently. There are a number of accepted intermediaries, platforms, and protocols run by public and private organizations for verification, and markets for trading carbon insets and offsets, which I'll touch on later. And third, these strategies need to have permanence, which means that the carbon sequestered by NCS investments is stored for the long term so that the global climate truly benefits. Again, there are various protocols and measures already in existence that define what long term actually means, depending on the practice. Timeframes here can range from years to decades to a century under the California cap-and-trade market.

So, why are we focusing on natural climate solutions? To meet the ambitious global climate targets that the world is set in time, the world needs to pull in multiple policy and strategy labor simultaneously. A general framework for carbon mitigation involves three pillars: abatement, compensation, and neutralization. Abatement involves industries and investors rapidly reducing, eliminating, and preventing emissions from their direct operations, supply chains, and investments. Compensation means paying for emission reductions like carbon offsets that are generated outside of the company's supply chain or investor’s portfolio. And third, neutralization means incorporating carbon sequestration projects and investments directly into a company's supply chain or investment portfolio.

I want to stress that corporate emissions reductions must start with internal climate action. I also recognize that many industries face difficult carbon reduction barriers. After reductions are made internally, only then should companies look to external investments to either neutralize or compensate for their remaining emissions toward achieving their net-zero goals.

With that framework in mind, where do natural climate solutions fit in? Well, according to the World Economic Forum and McKinsey, there is no clear path to deliver the climate mitigation the world needs without investing in nature. Plants and soils and terrestrial ecosystems currently absorb the equivalent of around 20% of human-derived greenhouse gas emissions.¹³ Nature has been sequestering carbon efficiently and effectively for millions of years. Natural climate solutions that result in better stewardship of the land can provide over one-third of cost-effective carbon dioxide mitigation requirements that will help keep the global temperature rise to below 2˚ Celsius through the next decade.¹⁴

I want to stress the cost-effective aspect of natural climate solutions. These solutions are available now, at scale, and with underlying economics that make them investable. I want to focus on forestry and agriculture, given Manulife real assets’ business focus, but also due to their potential to deliver the most economic pathways for carbon sequestration at scale, shown in this graph.

Forestry and agriculture represent nearly one-third of the spectrum of strategies for carbon capture and at the lowest cost.¹⁵ When you compare that to the highest-potential carbon sequestration pathways, like bioenergy, and direct air carbon capture, these technologies are unproven at scale, and potentially the most expensive solutions with estimated cost between $40 and over $1,000 per ton of carbon sequestered, far higher than NCS solutions.¹⁶ With the urgency global warming presents to the world, we can't wait for silver bullet technologies. The world must act now to address global emissions and, in particular, to maximize the investment and deployment of cost-effective natural climate solutions.

So, what does the current funding and investment picture look like for NCS? Overall climate spending peaked at just over $600 billion in 2017, before falling to $546 billion in 2018.¹⁷ Today, just one-tenth of 1% of global GDP is invested in nature-based solutions, and only 2.5% of global pandemic stimulus funds were committed to green solutions overall, even though just a small portion of stimulus funds would have put the world on a path to meet Paris climate commitments.¹⁸ Of total climate spending, only a sliver is devoted to ecosystems, and even less to natural climate solutions. According to the recently released UN State of Finance for Nature report, $8.1 trillion of investment in nature is required over the next three decades to successfully tackle the climate, biodiversity, and land degradation crises. This amounts to about $536 billion a year in need by 2050. The UN report also calls for annual investments in nature to triple by 2030 and to quadruple by 2050 to address the global climate-related issues. Specifically, investments in improved management, restoration, and conservation of forests alone will require over $200 billion in funding annually.¹⁹

Studies show that investments in nature could generate $10 trillion in business opportunity and 395 million new jobs.²⁰ Most existing financing for NCS solutions come from the public sector. The private finance sector is the largest and most underutilized pool of capital in the fight against climate change. First, billions of dollars still flow to fossil fuel and other harmful industries. Only approximately one-third of the $5 billion to $10 billion of private sector flows are directed toward natural climate solutions, and a majority of climate finance is concentrated in developed economies rather than in developing nations who could disproportionately benefit from natural climate solutions.¹⁵ The key message here is that we need an exponential increase in private sector finance that incorporates climate risk and return considerations and is dedicated to natural climate solutions.

I'm going to focus on forests now. So, why forests? First, it's important to understand and set the stage for the current condition of earth's forests. Forests are home to about 80% of the world's terrestrial biodiversity²¹, and the global pandemic and previous contagion outbreaks that made it much clearer that expansion of human activities and the destruction of intact forests drives animals out of their native habitats and into closer contact with human populations. Destruction of intact forests has been linked to over 30% of the outbreaks of new and emerging diseases.²² In 2020, primary forest loss increased by 12% to over 12 million acres of tree cover globally. Forest loss accounts for 8% to 10% of the world's carbon emissions.²³ A 2018 paper in the journal Nature Ecology & Evolution stated that of earth's remaining forests, as much as 82% are now degraded to some extent as a result of direct human actions.²⁴ Healthy intact forests provide a range of benefits to people, biodiversity, and the planet, which I'll touch more specifically on later. The World Economic Forum estimates that the total value of intact forests and their associated ecosystem services represents $150 trillion of value, or about double the value of global stock markets.²⁵

Globally, forests act as a carbon sink, sequestering about two times the carbon that they emit via cleared or degraded forests and forest fires over the 2001 to 2019 period, according to the World Resources Institute.²⁶ This means that forests absorb over 7.5 billion net tons of carbon dioxide per year, or 1.5 times the U.S.’s total annual emissions.²⁶ Within natural climate solutions, forests represent over two-thirds of the mitigation opportunities necessary to keep global temperatures below 2˚ Celsius and half of the low-cost NCS solutions available.¹⁶ In addition, although wood has been used as a building material for thousands of years, new approaches like mass timber or cross-laminated timber are increasing the potential usage and benefits of wood-based construction. Specifically, building with wood can reduce GHG emissions by over a quarter compared to carbon-intensive concrete and steel.²⁷

Here I want to detail the range of options for NCS forestry opportunities. These include avoided forest conversion, which is one of the least expensive and highest potential strategies to reducing global emissions, and reforestation, which will be critical to maintaining intact forests. Other forestry NCS strategies include avoided wood fuels, which are widely used in developing countries to produce charcoal for cooking, and improve plantations to drive greater carbon sequestration and power diversity outcomes.

I want to focus on improved forest management here, given Manulife real assets’ leadership in the timberland sector. A 2018 paper led by my former employer, the Nature Conservancy, found that NCS strategies, including improved forest management, could provide a maximum yearly sequestration potential, the equivalent of 21% of the U.S.’s current net annual emissions.²⁸ Improved forest management can take many forms and, generally, is a more holistic approach to supporting forest, biodiversity, and community health. Improved forest management strategies can include cutting less timber less frequently to increase carbon stocking, to reduced or no chemical usage, and protection of sensitive habitats. It also includes support for local communities to enable economic and community resilience.

I want to note that forest management technology is also evolving rapidly. These tech solutions involve geographic information system mapping, LIDAR deployment to increase the accuracy of timber inventories, more accurate carbon yield projections, machine learning with satellite imaging, and remote verification and monitoring. Manulife his practice many of these improved forest management strategies across our timberland properties for years, and we're exploring how to expand our improved forest management and carbon sequestration approaches, enabled by some of these technologies.

Now, I want to shift our focus to agriculture. First, I want to note that agriculture overall is behind forestry on many fronts from an impact perspective, but the pace of change, innovation, and the enabling environment for impact in agriculture is rapidly evolving. First, painting the picture of agriculture’s positioning with respect to climate change. I already mentioned that plants and soils currently absorb the equivalent of around 20% of anthropogenic greenhouse gas emissions. Agriculture also contributes an estimated 17% of global greenhouse gas emissions, making it the second- largest emitting sector, not including an additional 7% to 14% contribution through land use changes according to the OECD.²⁹

I also want to note that over a quarter of agriculture’s emissions are estimated to come from livestock rather than crops. At the same time, global populations are expected to increase from 8 billion today to around 10 billion by 2050.³⁰ In order to feed this growing population, the world will need to make existing farmland more productive and to reduce waste, especially in the emerging world. In addition, agriculture is the only one of the carbon-emitting industries that has the potential to mitigate its own emissions.

Today, there are a range of enabling factors poised to open up new opportunities for impact and agriculture.

Starting with corporate commitments, over the last several years, we've seen numerous sustainable supply chain commitments from multinational consumer packaged goods companies, such as Mars, Unilever, and Walmart, that rely on sustainable agriculture supply chains. Unilever even recently released Unilever Regenerative Agriculture Principles, which detail how farmers can enhance the land that is critical to providing raw materials for the companies’ operations. Other big agriculture companies like Bayer and Nutrien are jockeying with start-ups to encourage crop producers to adopt climate-friendly practices and develop farming-driven carbon markets. Others, like Cargill, Corteva, and Archer-Daniels-Midland, are facilitating and funding farmers’ efforts for soil sequestration.

Next, technology advances. According to AgFunder, farm tech start-up investment has grown 370% since 2013, reaching around $4.7 billion in 2019.³¹ Technology innovations include satellite monitoring, soil moisture probes, drones for deploying precision agriculture, and herd management, as well as artificial intelligence and continuous monitoring and airflow. With growing populations and increasing demands for food, greater pressure is being put on farmers, and the tech sector is piling in to help solve these major growth challenges and opportunities.

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