The changing nature of the carbon market

Q: What kind of opportunities can generally be found for carbon-focused timberland investors?

Thomas: Traditionally, commercial timberlands have been primarily valued using a discounted cash flow approach focused on the expected streams of revenue generated from the sale of future timber harvests. And we’ve always managed timberland properties for more than just their timber value, such as capitalizing on the opportunities presented by leases, recreation access, and easements, among other value-added strategies.

Today, the ability of trees to naturally capture CO₂ from the atmosphere and provide long-term storage in secure carbon sinks has added a new dimension and opened new timberland investment opportunities. There's a range of drivers emerging that should further support forestry as a viable, scalable, and investable NCS opportunity, such as the global prioritization of the Paris Agreement goals, increased carbon market participation, and growing demand for high-quality carbon credits.

Driven by the surge of net-zero commitments, companies and investors are increasingly looking to carbon markets as a transitional tool for achieving their climate goals. Voluntary carbon offset demand is expected to increase by a factor of up to 100 by 2050, driven by the increase in corporate net-zero commitments, which, in turn, is likely to drive carbon offset prices higher. 

Q: What does Manulife look for when exploring carbon-focused investment opportunities?

Eric: Looking at investment opportunities from a timberland and agriculture point of view, we use our core sustainable investment strategies as our starting point. As one of the leading timberland and agriculture investment managers, many of the fundamentals are already present within our sustainable practices. And these have impact advantages in terms of a variety of outcomes, including cleaner air, water, and soil, as well as community benefits.

My role is focused on helping to expand our strategic focus and product offering across both timberland and agriculture in terms of carbon-focused projects, and impact-focused investments more broadly. In terms of timberland, specifically, we’re looking to acquire forests with strong carbon value creation potential and high conservation value. We have a global footprint across our timberland and agriculture business and that allows for the potential to match investor sequestration needs and impact desires with local investment opportunities.

Q: How are carbon markets evolving and what’s your view on the best ways for clients to achieve their net-zero plans?

Eric: We’ve noticed a growing preference for NCS within carbon markets as their potential for combating climate change becomes more widely recognized. We know that forestry-generated carbon credits are available now, have an established track record at scale, are comparatively low cost, and can deliver a whole host of co-benefits for the environment and communities. Forestry projects are now generating new management options that can help our clients to achieve a wide range of carbon-, financial-, and ESG-focused goals.

Carbon markets have evolved over the last two decades to place an increasing focus on standards and management practices. We welcome this increasingly rigorous scrutiny, and the clearer guidance emerging from initiatives such as the Science Based Targets initiative that are helping companies work toward net zero.

Thomas: Carbon markets are certainly experiencing rapid growth, and we expect private sector net-zero commitments to especially boost demand for voluntary carbon credits. But across carbon markets, quality is quickly becoming a critical differentiator. We’ve developed our own carbon principles that we integrate into our timberland acquisitions, which represent a high-integrity climate benefit methodology aligned with the Integrity Council for the Voluntary Carbon Markets’ (IC-VCM) preliminary Core Carbon Principles. We believe high-quality credits are essential to providing value for both our clients and the environment.

As increasing numbers of investors and companies begin to explicitly value carbon sequestration and other ecosystem services, we believe that carbon will become a more integrated value driver of both timberland and agriculture and should provide our clients with stable, high-quality, long-term sources of carbon sequestration in support of their net-zero goals. 

Q: How does Manulife help its clients achieve their net-zero plans? What makes the company’s offering unique?

Eric: As one of the world’s largest timberland and agriculture investment managers, we have significant asset class experience and a credible track record of managing natural resources and natural climate solutions, both for climate change purposes and broader ecological and social impact. This experience extends throughout our organization. We’re vertically integrated and have farm management and forest management staff that make up the bulk of our employee base.

We have local capacity and experience, so we can pull that ESG and NCS thread all the way through the organization, from acquisition screening to investment management and property disposition. In addition, as a multinational company, we have geographic breadth that our clients can tap into. We’re also further developing our carbon strategies, creating solutions for investors focused on NCS. 

Q: Could you go into further detail regarding Manulife’s recent timberland acquisition in Maine?

Thomas: This investment is classified as carbon focused, with the core of the investment thesis centered on the timberlands being used primarily to store carbon. We reserve the option to sell the carbon credits as offsets or retire the carbon credits directly for the purpose of supporting the firm’s net-zero commitments. The strategy builds on our 35-plus years of experience sustainably managing timberland to focus on a much greater intensity of carbon-value investing.

Eric: This acquisition represents an opportunity to integrate natural climate solutions into investment decisions and work toward Manulife’s climate action plan. We’re well positioned to seek positive climate impact and to invest in assets to create carbon sequestration and other conservation opportunities derived from forests for the benefit of our clients. We believe carbon-focused investments can meet the needs of those who are interested in offsetting carbon emissions—and who value other positive environmental and social impacts—as well as generating financial returns. The Blueback transaction serves as a model for our NCS-focused strategy, where we intend to provide optionality to investors in terms of how they can capture carbon value: either by facilitating the sale of carbon credits to the market or transferring those credits directly to investors as in-kind distributions, so they can choose to use them directly in support of their net-zero goals.

Q: What role can forests and farms play in creating a high-quality carbon market?

Thomas: Manulife Investment Management is well positioned within our sector to accelerate the use of nature-based solutions in the fight against climate change. And we feel confident that, given the increased demand and focus on carbon markets, more precise analyses and supporting evidence of tangible sequestration benefits should help to strengthen carbon credit quality and transparency going forward. We believe that sustainably managed forests and farms are a critical part of the climate solution, with immense benefits for health and wealth, and we’ll continue our focus on providing nature-based solutions to mitigate climate change, developing products for investors interested in nature-based solutions that capture even more carbon per dollar invested. 

Q: What does the future hold for carbon-focused investments and are you optimistic that it can make a tangible difference to climate change efforts?

Eric: NCS are critical to approaching and meeting global climate change goals and helping avoid the worst effects of climate change. There was a seminal study in the Proceedings of the National Academy of Sciences published several years ago, showing that NCS could contribute up to a third of the cost-effective solutions needed to keep the earth within the Paris Agreement warming boundary of 2˚C. In our view, it’s a necessity that NCS play a key role and that greater investment flows are used to support them. In particular, timberland and agriculture investments can make up the vast majority of those NCS offerings and can provide additional co-benefits beyond just climate change mitigation. Now we’re seeing demand catch up from corporate and individual investors who have made these net-zero commitments, as well as the necessary carbon market infrastructure around critical issues like quality, standards, and transparency. All the ingredients for continued growth around NCS are on the table now. It’s up to the world to act on them.

Manulife’s Florida carbon project

Manulife Investment Management recently completed a voluntary market project on client timberlands in Florida, initiating—and now managing—two carbon projects encompassing over 10,000 acres of primarily bottomland hardwood forest. Manulife expects to sequester over 500,000 tonnes of CO₂ from these projects over the next eight years, representing emissions reductions equivalent to 108,700 vehicles for one year while creating additional financial value for clients.

The Florida property is encumbered with a water quality easement with the state, and the project should secure the long-term viability and integrity of the hardwood structure that provides a significant groundwater recharge area. The project will also serve as a connecting corridor for diverse wildlife, including black bears, white-tailed deer, and a variety of birds, as well as providing habitat for river otters.