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Missing the Wood for the Trees

January 25, 2022

What role nature-based solutions play in the de-carbonisation challenge, the evolution of carbon pricing mechanisms, and how we can manage risks associated with future emissions.

Economies need to significantly and immediately start reducing emissions, but realistically, some sectors are unlikely to become completely emission-free by 2050. Due to the inability of certain sectors to reduce emissions fully by 2050, an alternative to account for their share of CO2 emissions reductions must be sought. A first step in achieving this is for net deforestation to rapidly come to a halt and even be reversed to balance those unavoidable emissions. A second step would likely require incentives to be created such that the various economic actors reduce their emissions such that we stand a chance at fulfilling the Paris Agreement.

Whilst it is understood that nature-based solutions, such as Forestry, are not the whole solution and should not be undertaken in lieu of reducing carbon emissions, they will inevitably play a role in the decarbonisation challenge, whilst other forms of carbon capture or sequestration are more commercially developed. The bigger picture is that achieving net zero actually requires investments that provide carbon capture and sequestration, acknowledging there will remain unavoidable emissions, even in a highly decarbonised economy that has fully embraced new technologies and substitutions.

Investors should consider the first-mover opportunity in acquiring Forestry with strong carbon sequestration

Institutional investors should consider the first-mover opportunity in acquiring Forestry with strong carbon sequestration potential while the asset class remains priced in a historical context based on timber value or alternative use, rather than its additional climate positive potential. Furthermore, investors effectively have an option based on carbon offset pricing, which is difficult to price but we expect could increase faster than what is currently priced in and become highly valuable in the future.

In our analogy, the Trees represent the various changes and engagement activities that institutional investors can deploy to decarbonise portfolios. However, there is an important acknowledgement that the bigger picture and raft of measures required to achieved net zero, the Wood in our analogy, necessarily requires some carbon sequestration to be part of the decarbonisation puzzle. Investors and corporates with a long-term mindset should consider blending investments in Forestry and other nature-based solutions alongside the decarbonisation in their traditional investment portfolios.

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