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.

Next, from a public perspective, I already mentioned that the USDA under the Biden administration is considering plans to create a multibillion dollar carbon bank to pay farmers for carbon sequestration in soils. And in April of this year, the European Commission released its findings from a two-year study that will serve as the basis for a carbon farming initiative that’s expected to launch by year end.

Lastly, on the carbon sequestration side, Manulife Real Assets has documented and analyzed over 10 different carbon programs, ranging from major agriculture companies to start-ups like Nori and Indigo Ag.³² Many of these efforts are positioning themselves to serve as intermediaries and clearing houses for the supply of soil carbon sequestration and to connect with buyers’ existing carbon offsets, much like the major registries that already exist for carbon offset and validation, verification, and registration for other sources of sequestration.

As with forestry, several natural climate solution opportunities exist for agriculture. First, agroforestry, which involves the intentional blending of trees and shrubs with farmland to increase environmental, social, and economic benefits. Next, avoided grassland conversion: Grassland conversion is important for many reasons. According to nonprofit Nature4Climate, an estimated 50% of carbon stored in the soil is released when grasslands are disturbed for expanding agriculture.³³ Avoiding the conversion of grasslands would prevent the release of 35 million tons of carbon dioxide equivalent per year.³²

Here, I want to focus on regenerative agriculture and soil health. As an example, a February 2021 study in the proceedings of the National Academy of Sciences analyzed topsoil health in the U.S. corn belt, which stretches from Ohio to Nebraska. This area produces approximately 75% of U.S. corn, which is the most produced crop in the U.S., worth an estimated $35 billion to the region last year. The study found that nearly 35% of the region had lost its topsoil completely through years of intensive farming. Degraded topsoil results in slower crop growth, less healthy plants, and lower yields for farmers. Less carbon rich soil remains, which erodes more easily and is less able to absorb chemical fertilizers that can end up polluting streams and rivers and causing a host of environmental problems.³⁴

The study includes an estimate that degraded topsoil costs the region almost $3 billion per year. Regenerative practices such as cover-cropping, reduced or no tillage, use of compost and move chemical fertilizers, and rotational grazing focus on building soil health by rebuilding organic matter and restoring the soil biodiversity. This includes beneficial bacteria and fungi that help nitrogen absorption.

These practices can promote healthy ecosystems and biodiversity, improve harvest yields, and lead to greater farm profitability. They also may help defend against pests and diseases, nutrient deficiencies, and increase soil moisture absorption and carbon sequestration.

I want to note that the science behind soil health is still developing, and much remains to be understood about regenerative agriculture benefits.

For instance, the WRI (the World Resources Institute) has noted that cover cropping and other regenerative practices are good for soil health and the environment, but carbon drawdown rates are too low to play a major role in averting climate disaster.³⁵ On the other hand, The Nature Conservancy reported in 2020 that soil could provide nearly 10% of the carbon dioxide drawdown needed to avert near-term climate catastrophe.³⁶ Manulife Real Assets currently employs select regenerative practices on many of our farms, and we intend to increase their application over time as we determine which practices are most effective in which environments.

I already alluded to the many co-benefits of natural climate solutions. This slide shows the range of environmental, social, and economic benefits that natural climate solutions can drive. It’s important to note that these co-benefits can accrue for both biodiversity and people, from healthier air, water, and soil that can benefit both people and animals, to greater opportunities for recreation, human health benefits, and economic diversity and resilience to support local communities. Natural climate solutions can provide investment opportunities, climate solutions, and a range of possible benefits.

I also want to touch on the underlying risk and return profiles for investing in timberland and agriculture. The overall takeaway is that timber investment and agriculture investment are established asset classes that have, historically, demonstrated moderate yields and relatively low volatility. I want to note that these figures have not been adjusted for our view of managing investments in these sectors, primarily as natural climate solutions. Lastly, the underlying macroeconomic fundamentals for increased timber and ag demand going forward: The World Bank forecasts that 2050 global timber demand will quadruple, and as I mentioned, the world population is expected to reach nearly 10 billion by 2050.³⁷ And as a result, we will need more agriculture and more efficient agriculture to feed the planet.

Now, I want to touch on two tools for deriving value from NCS investments: carbon offsets and carbon insets, starting with carbon offsets, which are tradable instruments generated from projects that sequester carbon outside of an offset buyer’s operations. 

Through 2020, Manulife Real Assets has sold 6.1 million carbon credits in total. Here, I want to highlight two projects. One is a project in Michigan on the left side of the slide that was the result of an acquisition and involves a 200,000- acre carbon bank on hard maple and sugarbush. Manulife has sold over US$2 million of carbon credits into the California Air Resources Board compliance market and has generated an additional 320,000 credits for sale last year.

On the right side is a project in Florida that has been in development since 2017 and involves approximately 10,000 acres in a voluntary carbon bank that overlays a 50,000-acre water easement with the St. Johns Water District; we’re registering the resulting offsets now through the American Carbon Registry.

These projects illustrate the opportunity for developing carbon offsets and generating incremental revenue on forest properties.

Zooming out, natural climate solutions now account for around 40% of retired carbon credits in the voluntary carbon markets, an increase from only around 5% in 2010.³⁸ According to a recent study by Trove Research and the University College London, voluntary carbon offset demand is expected to increase by up to 30 times by 2050, driven by the increase in corporate net-zero commitments.³⁹ Such increases in demand could result in corresponding significant increases in carbon offset prices. The study also notes that natural climate solutions could fulfill the entirety of increased carbon offset demand through 2030. But it’s important to also note that there are risks that need to be considered for carbon offsets.

One, the potential exists for greenwashing or compensating for continued industry emissions via offset purchases without industries taking meaningful abatement measures in their own operations first.

Second, questions around credit quality persist, especially given the large quantity of relatively inexpensive and lower-quality historical offsets that are available in the voluntary markets.

Lastly, from a company and investor point of view that is seeking to achieve net-zero goals, voluntary carbon markets, in particular, have inherent volatility around offset pricing. This creates, potentially, large future liabilities for companies that are seeking to offset a significant portion of their emissions on an annual basis.

I'm of the view that high-quality offsets that are verified, validated, and registered with leading offset registries can provide a valuable tool to compensate for the hardest to reduce and most expensive industry emission. It can also provide valuable income for forest owners and farmland operators to support truly additional carbon sequestration on their properties.

The last slide I want to talk about focuses on carbon insets. Carbon insets involve carbon sequestration within a company’s value chain or investment portfolio. Directly balancing emissions cannot be easily reduced or removed in driving business value. As with offsets, insets are best positioned to neutralize a company or investor’s emissions after they have taken steps to abate emissions in their own operations. Insets offer several benefits.

One, they can be developed via third-party verification protocols that support high integrity, additionality, and permanence. Two, they offer companies and investors the benefits of owning carbon inset-producing assets such as timberland or agriculture properties, compared to facing annual liabilities to purchase offsets. And third, insets may be less controversial as a strategy to addressing value chain emissions with insets incorporated directly into operating and investment strategies, as opposed to purchasing carbon offsets generated elsewhere.

Manulife Real Assets is currently exploring opportunities for natural climate solutions that harness these tools and create environmental, social, and economic value in both the timber and agriculture sectors.

That concludes my presentation, and I’ll turn it back over to Sydney to facilitate questions from participants.

Sydney McConathy

Terrific. Thank you, Eric. So we’d now like to move onto a Q&A session. We invite investors to please put any questions you might have in the question box. It looks like we have a couple to start off with.

So, from an investor perspective, while timberland has attracted more and more interest globally as the natural climate solution to climate change, timberland investment seems not to utilize its carbon offset credits so far. What is the main reason?

Eric Cooperström

It’s a great question, and I want to point to the difference between traditional timberland investing and investing in timberland to specifically generate carbon credits, and there are a few tenets of the carbon markets that are important to call out. The main one is additionality. So, leveling up and changing strategies beyond the status quo that lead to real and additional carbon sequestration. And so, traditional forest management is that status quo, and there needs to be changes, such as improved forest management, to actually increase and create those incremental carbon benefits. That’s where carbon markets come in. So your typical traditional forestry management plan is not eligible for carbon credit identification.

I will note that there have been some really interesting developments such as the Natural Capital Exchange that have been developed over the last few years that are looking to compensate forest owners for more incremental and shorter time period carbon sequestration. NCX operates on a one-year basis for deferred timber harvest. So, again, there has to be a change in management to create the carbon sequestration that’s identified by the carbon markets.

Sydney McConathy

Thanks, Eric. And on a related topic, we have another question that just came in: “How do you view the tokenization," which I would interpret as monetization, "of carbon offsets?”

Eric Cooperström

I'm sorry, can you explain that a bit further, if the member from the audience wouldn’t mind.

Sydney McConathy

While they're doing that, we’ll move onto the next question and go back on that one. So, another question that came in related to agriculture. So, “Have you seen many developments in seagrass or other aquatic carbon sequestration schemes?”

Eric Cooperström

So, aquatic carbon is also referred to as blue carbon opportunities, and there are certainly a number of NGOs and other organizations that are developing strategies. I’ll say, to my knowledge at least, these efforts are pretty nascent. Some are less proven. But there is a huge amount of potential in developing blue carbon strategies and carbon sequestration focused on those approaches.

Sydney McConathy

Great, thanks, Eric. And how do you see the carbon credit market developing in the short to medium term? How can an investor measure and have confidence in the quality of a carbon project?

Eric Cooperström

It’s a great question, and there's a lot of research coming out right now driven by the surge in corporate net-zero commitments that I noted earlier, that we’re going to see a much stronger demand going forward and resulting prices for carbon offsets and insets going forward. Some of that research that I can point to, the nonprofit Ceres, which focuses on environmental matters noted that the volume of NCS transactions on the voluntary market, was only 36.7 million tons or so of carbon dioxide equivalent in 2019. That could represent only about 0.5% of the 2030 feasible potential.³⁹

And I also noted that Trove Research recently came out with a report stating that carbon demand would increase by up to 20 times by 2040 and 30 times by 2050. They expect that that could drive prices up toward $50 per ton of CO₂ by 2030.⁴⁰

In terms of quality, I’ll point to a number of efforts. One, in particular, that we at Manulife are pursuing: We've created a Carbon Standards Working Group to research and analyze the existing protocols that are out there and to improve on them. We want to make sure that we have a guiding set of principles and internal screening mechanisms for the carbon projects, that we pursue and to make sure that we are truly adding additional carbon sequestration and climate benefit, and that we have best-in-class practices for carbon management.

Sydney McConathy

Thanks, Eric. Great response. We have a clarification on the tokenization. So, “How do you view the tokenization of carbon offsets, and tokenization is in terms of blockchain solutions that allow carbon offsets to be secured and traded as cryptocurrency tokens based on specific tokens, such as NORI?”

Eric Cooperström

I will admit it is a topic I am not deeply involved in or familiar with. I have a broad view of blockchain and added security, which I think can only be additive to transactions like carbon markets. Ultimately, the value of a carbon credit reflects the underlying asset and the underlying project. So I’ll just repeat what I said, which is we need to ensure that carbon project developers are truly hitting the benchmarks of additionality, permanence, and high integrity to actually be additive to the global climate change issue. If blockchain solutions can assist or be additive from a security and identity and an integrity standpoint, then I welcome that development.

Sydney McConathy

Perfect, thanks so much, Eric. We have a number of questions related to returns and one that came in from the audience, and one which we had here, which is, “What percentage of additional return to timberland investment is expected from carbon credit sales?” And related to that, if you could also comment on the long-standing debate around the trade-off between generating impact and financial returns for investors: How do you view the risk/return spectrum for natural climate solutions on these topics around this trade-off?

Eric Cooperström

Sure, those are great questions and persisting questions that should be asked. I think for both sides of the question, the answer—the heterogeneity of impact is important. There is no one definition of impact. Unlike investing in a 10-year Treasury bond, impact just doesn’t mean the same depending on the project and the strategy. So there is a wide spectrum, especially within timberland and agriculture investment. So that really will dictate what risk and return looks like.

For example, on one end of the spectrum, you could, as a forest owner, traditionally manage assets to maximize financial return and incorporate selective carbon projects. That really varies depending on property and your specific strategy as a timberland owner and operator.

I’ll give the example that our existing operations across Manulife’s timber and ag business incorporate many activities that generate impact and also target market rate returns.

If you're shifting to the other side of the spectrum and managing assets primarily for impact, such as carbon sequestration and carbon projects, then the risk/return profile could shift dramatically. So, for example, a forest that you are 80%, 90% focused on carbon sequestration, that forest is going to derive its value from the market price of carbon, primarily, as opposed to traditional forest management, which will have a reliance on timber prices.

So just as forest product prices and timber prices could decrease or increase due to macroeconomic variables, carbon prices could increase or decrease according to a different set of variables.

If, as a lot of the research that I pointed to, we see carbon prices increase dramatically to $20, $30, $40 a ton, I think then you could have carbon project returns and, ultimately, timberland investment returns that exceed or meet traditional timber prices. That could also lead to a host of other changes in the timber investment industry overall that could complicate matters, but it really does depend.

Sorry, I can't provide a clear answer there.

Sydney McConathy

Thank you, Eric, that’s great. Now, it looks like we’re getting close to the end of our time here. I think we have time for just one more question and I will say, any questions that are not answered, we’d ask to have the opportunity to follow up with you directly via email or a phone call. So we’ll just go with the last one at the top of the screen here, which is, “While trees are great for carbon sequestration, if reforestation strategies focus on monoculture plantations, this isn't good for biodiversity. Is this considered or made clear in investments?”

Eric Cooperström

Yes, absolutely. So I’ll say that reforestation is an incredibly important component of NCS. It’s also, unfortunately, one that is economically difficult to actually pursue. But in terms of how you reforest, that’s incredibly important, and there's a number of studies that have recently come out that point to the need for forest managers and other asset owners to really consider biodiversity in addition to just pursuing NCS strategies like reforestation.

So it absolutely is considered and should be considered in a greater level and detail.

Sydney McConathy

Perfect. Well, thank you, Eric, for the great presentation today, and thanks to everybody for joining us. We appreciate the opportunity to speak with you about forestry and farmland as natural capital solutions, and we look forward to future conversations with you.

Take care.

Eric Cooperström

Thank you everyone. Take care.

 

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