Corporate demand for forest-related carbon removal could generate $800bn in annual revenues by 2050, worth a market capitalisation of $1.2 trillion today, surpassing the current market capitalisation of oil & gas majors - new study commissioned by UN-supported investor body finds
LONDON: New analysis commissioned by the $100 trillion UN-supported Principles of Responsible Investment (PRI), predicts that technologies to remove carbon from the atmosphere – also known as ‘negative emission technologies’ (NETs) – could create trillion dollar upside opportunities for investors as more and more countries, cities and corporates make ambitious plans to become net zero.1
Nature-based solutions (NBS) to the climate crisis focused on reforestation and afforestation could generate US$800 billion in annual revenues by 2050 with assets valued well over US$1.2 trillion, surpassing the current market capitalisation of the oil & gas majors.2
As part of the PRI-commissioned Inevitable Policy Response programme, the latest report, An Investor Guide To Negative Emission Technologies And The Importance Of Land Use, concludes that an entire new industry may emerge that values carbon stored in vegetation and soil, unlocking new business models and investment opportunities for avoided deforestation, reforestation and afforestation, and land restoration. Big tech and big oil have already started to channel their resources into forest-related natured based solutions to achieve new net-zero targets — and in turn this is driving demand for NBS carbon credits.
Thanks to its low-cost and potential for large-scale implementation, reforestation and afforestation looks likely to emerge as the earliest feasible investment opportunity. Investments in avoided deforestation will present additional opportunity as measuring, reporting and verification (MRV) mechanisms and compensation schemes reach scale. However, reputational risks may dampen investor enthusiasm unless forest laws are vigorously enforced or tightened to end deforestation. Technical solutions, such as Direct Air Carbon Capture, Use and Storage (DACCS) and bioenergy with CCS (BECCS), could generate an additional annual revenue of US$625 billion by 2050.
Fiona Reynolds, CEO UN PRI said: “We can’t achieve net zero without nature-based solutions. The pandemic has supercharged the investment case, especially in forestry, and this new analysis shows the magnitude of the opportunity. Forest finance has historically been small and largely the purview of the public sector. But policy and business momentum have now advanced to a critical mass for forests to begin emerging as a new asset class. Investors can act now to unlock investment opportunities and to take an increasingly leading role in financing. With more and more companies setting net zero targets, investors also need greater transparency about the negative emission technologies businesses will rely on to get there. Afforestation activities are the most viable first move, but to ensure success actors must simultaneously focus on ending deforestation. The report also highlights that an overreliance on bioenergy could have terrible consequences for the planet, biodiversity and food security.”
An ‘inevitable’ part of achieving Paris
In 2018, the International Panel on Climate Change (IPCC) set out four representative pathways that align to a global temperature rise of 1.5oC. Alongside deep decarbonisation, all rely on negative emission technologies.
- Even the most ambitious in decarbonization terms, P1, relies on carbon removal to sequester 2.5 GtCO2/year in 2050.
- In the IPCC’s ‘slower’ P4 scenario, total negative emissions are 16 GtCO2 in 2050, roughly around half of CO2 emissions from combustion of fossil fuels today. The reliance of the climate scenarios on NETs increases further in the second half of the century.
Blindspot: land use
When it comes to removing emissions, the role of land-use has remained a critical blindspot often missed in climate scenarios that focus on energy only. The Inevitable Policy Response (IPR) Forecast Policy Scenario (FPS), provides a high conviction and granular picture of how the policy response to climate change will most likely unfold in the real economy. It shows that biogenic greenhouse gas (GHG) emissions and emissions from agriculture and fertiliser use remain despite technological change and mitigation efforts, thereby requiring carbon removal technologies to achieve net zero global emissions. Climate scenarios that limit global warming to 1.5o C require even deeper negative emissions to reach their temperature targets.
Corporate net zero commitments drives demand for natural carbon removal technologies
In less than a year, there has been a three-fold increase3 in the number of companies committed to net zero, from 500 recorded in 2019 to 1,541 in 2020. The pace of ambition is particularly marked among the highest emitting sectors and those worst hit by the pandemic – in oil & gas, steel, cement, automobile, and food.
To fulfil these commitments, companies will require deep decarbonization efforts, with residual emissions balanced by investment in carbon removal activities. This has driven demand for natural and technological solutions that actively suck carbon from the atmosphere, which in turn is driving the demand for nature-based carbon credits. From 2017 to 2018, the value of forestry and land-use-related credits traded in the voluntary offset market tripled to US$172 million, increasing the share of forestry and land-use-related offsets in the total voluntary offset market by 23%, from 52% to 64%.
Big tech big oil’s big bet on natural solutions
Big tech and Big oil have already started to channel their resources into forest related natured based solutions to achieve new net-zero targets — and in turn this is driving demand for NBS carbon credits.
- Shell forecasts that roughly a quarter of emission reductions to reach net-zero will come from natural sinks and has started to invest in forest-related projects, such as the planting of 5 million trees in the Netherlands and regenerating an 800 ha forest in Australia
- bp is currently running an offset programme, protecting 40,000 ha of forest in Zambia. Total is committed to investing US$100 million per year in forest protection
- Apple is protecting a 11,000 ha mangrove forest in Colombia, and Microsoft has committed to support selected forest projects by paying US$15/tCO2, higher than the global average of US$10/tCO2
- Amazon has launched the Right Now Climate Fund, investing US$100 million in NBS. The first project of US$10 million was announced in April 2020 to restore and conserve 1.6 Mha forest in the US, removing 18 MtCO2 from the atmosphere
Seven promising business models
All these developments are expected to facilitate much needed private investment in forest finance. The report identifies a number of emerging financing mechanisms:
- Distressed asset, where investors purchase and restore deforested or degraded public and private land to benefit from the carbon stock it produces, with the potential to sell the land on to other investors or to the government for conservation purposes. Restoration can be implemented by a land management company contracted by the investor.
- Stewardship model, where an investor leases deforested or degraded land without an ownership change, and the leaseholder receives the benefits flowing from the carbon stock associated with restorative management before returning it to the previous owner. Restoration can be implemented by a land management company contracted by the investor.
- Carbon farming agreements, where an investor supports the ‘farming’ of carbon through forest growth by providing the land manager with financing for the initial land purchase and planting costs. In return, the investor receives payments tied to the carbon stock increases. Such a model can be used to finance large land holders or cooperatives of smallholders, reducing the risk to those cooperatives while simultaneously reducing the administrative burden on investors.
- Sustainable farming agreements, where an investor supports traditional crop farming practices that reduce emissions or sequester carbon (e.g. in soils) by financing farmers’ land or capital cost. Investors receive payments when the carbon-reduction certificates are created and sold on the market. This too can be used to finance large farmers or cooperatives of small farmers.
- Green bonds, where investors can purchase securitised forest sequestration and carbon-reduction projects. This can allow investors to take stakes in projects already developed by others, and they can be used to aggregate projects that are of insufficient scale for investors, or that are developed by a government or NGO.
- Carbon off-taker guarantees, financial instruments guarantee a future price for carbon credits, reducing carbon price volatility and risk for developers. Like insurance, they allow for risk sharing, and can be underwritten by public or private financial institutions.
- Forest insurance provision, a disaster insurance against carbon losses from extreme weather, disease, or forest fires, which can improve carbon credit ratings and allow for risk sharing. This financing mechanism is currently provided predominantly through public funds, but presents an increasingly viable business for private insurers as the market grows.
Allison Spector, Director of Sustainability at Nuveen said - “We believe there is a powerful role for forest-based natural climate solutions. Yet the feasibility of implementing these strategies across the vast forestlands of the world is yet to be demonstrated and is predicated on an end to deforestation. To realize the climate mitigation potential of forests, Nuveen and its timber manager, Greenwood Resources, work with investors to develop opportunities in the U.S. and Latin America focused on improving forest management to store more carbon and reforesting degraded landscapes into productive forests. Private capital would open the door for much larger investments in other regions of the U.S. and globally, providing material progress towards meeting Paris Agreement commitments and corporate net zero targets.”
Win-win: profiting from an end to deforestation
While many corporate commitments are focusing on reforestation, stopping deforestation is critical to climate action and could also present a large investable opportunity – comparable to afforestation and reforestation – if markets can be developed and commercialised. Yet, data suggests deforestation has doubled during the pandemic.
As well as constraining a large investible market, companies with deforestation in their supply chain expose investors to significant financial risk in terms of potential regulatory action, loss of market access, loss of customers in the short term, and failing to adapt to the transition to a low-carbon economy in the longer term (Ceres, 2020). Analysis from the Inevitable Policy Response project suggest that risks associated with legal action, market access, and consumer pressure could decrease a company’s valuation by around 15%.
Bioenergy: unrealistic and dangerous assumptions
Bioenergy with carbon capture and storage (BECCS) is the leading negative emission technology in all Paris-aligned scenarios, because of its double gains through energy generation and CO2 sequestration. But producing high levels of bioenergy to the degree assumed necessary is likely to push the world to its planetary boundaries in terms of water and land availability. In some of the less ambitious pathways to Paris (IPCC P4), negative emissions by BECCS exceed 16 GtCO2/year by mid-century. Yet this is over three times the estimated sustainable scale, when other land use requirements such as food are taken in to consideration.
To limit such negative side effects, most studies suggest that BECCS needs to be limited to a sustainable scale, around 0.5 – 5 GtCO2/year (2). To avoid these blind spots, the report provides decision makers with the transparency they need on the use of negative emissions technologies in net zero pathways, as well as a realistic scenario that fully integrates land use systems.
Investors can proactively shape market to unlock opportunities
Investors who move early have a unique opportunity support the forestry market’s institutional development by engaging with policymakers and companies while developing innovative business models and financing mechanisms to channel finance:
- Pressure companies to commit to climate action, invest in NBS and ensure deforestation free supply chains.
- Stop investing in companies with deforestation in their supply chain.
- Move early in the rapidly growing NBS market
- Support NBS market and institutional development by engaging with policymakers. Investors can shape the design of the expanding NBS market to suit the needs of private financing. In the short term, this could involve developing new financial models with the government through concessional finance, de-risking activities that transfer risk from investors to government or development banks, and providing technical assistance. Investors could also promote the adoption of carbon pricing as it would provide NBS projects with a sustained return and a price signal for future projects.
- Promote a global standard for NBS projects. The current offset market is fragmented due to the variety of available standards. A lack of consensus about accounting of sequestered emissions causes complexity, incurs expenses and creates risks for investors, thus discouraging investment in forest-based carbon sequestration projects (Wise et al., 2019). A global standard for NBS projects, such as the Architecture for REDD+ Transactions (ART) The REDD+ Environmental Excellence Standard (TREES), and a carbon credit ESG rating could align existing standards and ensure additionality and permanence of CO2 savings while avoiding double counting and leakage.
- Promote sustainability standards for BECCS. A sustainability standard could ensure that low-carbon agricultural and sustainable land-use practices are deployed in biomass production that limit emissions from supply chains and land-use change.
- Monitor developments in the DACCS space. DACCS may emerge as the key NET in the medium term. The technology has no known negative side effects and does not put pressure on land and water resources, ecosystems, or biodiversity. However, due to the low CO2 concentration in the atmosphere its energy consumption is too high, inflating its costs. More research and demonstration projects may address these challenges, making it a viable option for removing CO2 emissions from the atmosphere.
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For more information, please contact Phil Drew and Joseph Doyle at Brunswick on [email protected].
The Inevitable Policy Response (IPR) is a pioneering project which aims to prepare financial markets for climate-related policy risks that are likely to emerge in the short and medium term. What is “Inevitable” is some further policy response as the realities of climate change become increasingly apparent. The questions for risk forecasting are when this response will come, what policies will be used, and where the impact will be felt. IPR forecasts a response by 2025 that will be forceful, abrupt, and disorderly because of the delay. It provides a Forecast Policy Scenario (FPS) which lays out the policies that are likely to be implemented up to 2050 and quantifies the impact of this response on the real economy and financial markets
The Inevitable Policy Response has been developed by consortium partners UN PRI, Energy Transition Advisors, Vivid Economics, Carbon Tracker Initiative, 2-Degrees Investing Initiative, and Grantham Institute on Climate Change and the Environment. The project has been commissioned by the PRI with support from The Finance Hub, the Gordon and Betty Moore Foundation, KR Foundation, and ClimateWorks Foundation
About Principles for Responsible Investment:
The Principles for Responsible Investment (PRI) is the world’s leading proponent of responsible investment. Supported by the United Nations, it works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. Launched in New York in 2006, the PRI has grown to more than 3,000 signatories, managing over USD $100 trillion AUM.
1 Also known as carbon dioxide removal (CDR). NETs are technical solutions and Nature Based Solutions (NBS) that sequester carbon from the atmosphere.
2 As of June 2020. Oil & gas majors include BP, Chevron, China National Offshore Oil, ConoccoPhilips, Enterprise Product Partners, EOG Resources, ExxonMobil, Kinder Morgan, Occidental Petroleum, Petrobas, PetroChina Company, Santos, Schlumberger, Sinopec, Suncor Energy, and Total.
3 Data-Driven EnviroLab and the NewClimate Institute, 2020