Natural capital – the missing piece of our net zero puzzle
The Green Files is a unique CEFC series where we talk to the people making a difference in the race to net zero emissions.
It’s one of our most overlooked asset classes. And according to Heechung Sung, Head of Natural Capital at the CEFC, it has enormous potential for investors to diversify their portfolios, capture long-term returns and deliver positive environmental outcomes.
Monday 21 August 2023
It’s astonishing to think that, according to Australia’s respected Climateworks Centre, we could sequester enough carbon to meet our Paris commitments by planting trees on just two per cent of Australian farmland1. That means greening the equivalent of one per cent of our total land area to help keep the planet below 1.5°C.
It’s an eye-opening figure. Perhaps the only thing more staggering than the fact itself, is that it isn’t more widely known. How could such a critical environmental win – one which could come at minimal cost and deliver measurable co-benefits – remain so under-utilised?
Part of the answer lies in how we think about climate change. Yes, renewables, energy storage and energy efficiency are a big part of the all-important transition to net zero emissions, but we have been too slow to appreciate the power of natural capital to also deliver here. Trees, soil and water: three critical natural assets that contribute to US$125 trillion of value internationally every year2.
The recent investment in Wilga Farming by Caisse de dépôt et placement du Québec (CDPQ) and the CEFC is an example of how substantial new capital can spearhead investment to decarbonise Australian farming while boosting farm production.
Our greatest asset, an unparalleled opportunity
Most of Australia's population lives in coastal areas, which means the breadth and diversity of our incredible land mass can be difficult to comprehend. From red clay soils in Southern Queensland, to gritty pale sandy soils in Western Australia, mangroves in the Northern Territory, to forests in Tasmania, our natural capital assets are arguably our greatest.
Within the broader natural capital asset class, agriculture continues to be crucial to the Australian economy – forecasted to reach ~$80 billion of production in 2023-243. As a net exporter of agriculture commodities, Australia is well positioned to tap into the global tailwinds of population growth and the emerging middle class in developing economies. And of course, Australia has a real opportunity to differentiate itself from other markets as a clean, green producer of food.
Despite this, institutional investors have tended to steer clear of this asset class. Blame external risks such as commodity price fluctuations and climate risk exposures, as well as challenges in achieving scale. However, there are welcome signs things are changing. A growing number of sophisticated and experienced asset managers and institutional asset owners are beginning to deploy generous licks of capital through diverse aggregation strategies in terms of both geography and commodity exposure.
Investors are also recognising the importance of natural capital in managing their all-important risk profile – particularly as it becomes impossible to ignore the financial and non-financial risks associated with climate change, biodiversity loss and the flow-on effects to the agricultural systems driving our economies. High quality, well managed farmland investments also present a compelling alternative or diversifier to traditional asset classes, which can be vulnerable to economic fluctuations.
Opportunity ripe for the picking
Over half of Australia’s land is used for agriculture. Yet much of it is not managed to its full potential. According to ABARES farm survey data, approximately 30 per cent of farmers produce 65-80 per cent of our commodity output, many of which are highly successful family-owned farms. There are likely to be a few reasons for this, but it does highlight the need to rethink how landscapes are managed and what is the best use of less productive farms. New and evolving technologies and research are key to decarbonising agriculture, but require patient, large-scale capital. Large-scale investments by institutional investors are also key to lifting agricultural productivity and putting underperforming farmland onto a sustainable footing for the long-term. These types of large-scale investments can also be pathfinders for smaller-scale family farms in terms of technology and the adoption of best in class farming systems.
Efficient, responsibly managed agricultural assets are only likely to increase in value. Those institutional and family farmers who recognise this now stand to benefit in the future. What’s more, the sequestration (carbon capture) potential for landowners has the ability to offset their own emissions while also creating new revenue streams via carbon credits, alongside broader biodiversity benefits, especially in soils.
A long-term play, for benefits all round
The urgency and complexity of improving the sustainability and competitiveness of Australia’s agricultural sector holds vast opportunity. Large-scale investment across all aspects and scale of farms is needed to create a more liquid and dynamic market, drawing in domestic and international capital. Technology, efficiency gains and strategic landscape management must come together so we can harness the power of our natural capital assets to deliver on our productivity ambitions and our net zero future.
1 Based on Climateworks Decarbonisation Futures 1.5 degree pathway, which assumes 8 Mha of carbon forestry.