Building sustainable returns with natural capital

Frank Barillaro: Max, natural capital is fast becoming a big thing with institutional investors in particular, and it's something that we have a lot of experience in as a firm. Can you outline the reasons why you think this is a growing segment and how does our strategy align to natural capital within a food and agriculture context?

Max Butler: Sure. So natural capital has existed for forever for us as agricultural managers. Natural capital refers to the stock of the natural assets that we rely on to produce returns. And it's really the framing of these assets, using the term of natural capital that has become more popular recently.

For us, it relates to the soil, the air, the water that are embedded in all of our portfolio companies that we use to generate food and fibre that we then sell to create shareholder returns. So it's becoming more and more popular.

For us, we are an agricultural manager that uses a natural capital framework within our assets to make sure that we're focusing on the opportunities and the threats that will impact our ability to continue to generate agri returns. That framework is aligned with the TCFD. And it's similar to how a lot of people across the world think about natural capital.

Frank Barillaro: How does land and asset backing assist in a natural capital framework and what's the relevance for natural capital investor in that context?

Max Butler: The focus on natural capital is ensuring that we are investing into our assets for the long term that what we will support them to continue to produce income into perpetuity.

In the context of land, we need to ensure that as we're managing our land on a year-to-year basis, we're reinvesting in and implementing things such as renovating the soil or ensuring that we have good irrigation to maintain salinity levels for our almond orchards.

Natural capital frameworks ensure that we have a long-term mindset and that's what land assets require.

Frank Barillaro: Thanks Max. Brad, do you think that land and hard assets underpin returns for an institutional investment within a natural capital content?

Brad Mytton: Yeah, absolutely. So Max touched on some of this. The ability for us to maintain soils, to use water more effectively, to store water, to avoid runoff, some of those other things to manage biodiversity, to plant trees, to generate carbon credits and biodiversity projects. So all of that is enabled and much, much simpler if we own and operate those assets.

I think about some of the examples in our portfolio, Proten for example significant investment into solar for solar assets, is on a net zero journey in line with government targets. A really impressive set of initiatives that we've worked with management team to put together on that one.

There's environmental planting projects for again, for carbon sequestration and biodiversity benefits on some of our support land. Think about Flavorite where we recycle or control 95% of the water that comes onto the glasshouses ends up sort of being used to grow tomatoes. Amazing water efficiency. Ulupna Pastoral Companies doing some wonderful things around natural capital and has their own natural capital strategy, right. So owning and operating those assets, doing all of those raft of initiatives is a key part of what we do.

Some of the other meaningful projects in our almond aggregation as you know, working with, biodiversity corridors there. There's a very rare form of native parrot there that we're supporting, maintaining from extinction, right. Some initiatives like that where we can have a productive, in that case almond orchard, but also have some areas reserved for some of those natural capital aspects. And, in that case, the parrot is, it's been a big focus for us. And I think it gets enabled by that hard asset, ownership and Operation.

Frank Barillaro: Max, Brad touched on government legislation and right now there's new federal policy which effectively requires corporate emitters to secure access to carbon credit. And this is all around movement toward net zero.

What are we doing in that space using food and agriculture to offer these corporate emitters a solution to the issue that is increasingly becoming one of net zero and reducing our greenhouse emissions?

Max Butler: So the journey for us began a couple of years ago because we saw the safeguard mechanism and we saw the wall of demand that was coming, that was going to be entering the market. And we looked around to see whether there was supply being provided scale and there wasn't. So we then thought about the different ways that we as Roc Partners could play this thematic and that's where we identified an opportunity for us to play a role in creating this solution.

As part of that, we partnered with Rafael Wood from C6 Investment Management to create a new joint venture manager called Silva Capital. And so Silva Capital invests into agricultural land to generate high integrity carbon credits at scale.

Key to our thesis for Silva Capital is that, and this goes back to our points earlier about asset backing, is that in generating a successful carbon project, you need to ensure that you maintain the agricultural productivity for the underlying assets.

And that's important for two reasons. So one, from an asset value perspective to help the return stack up and provide a defensive backing to the project. But two, for the actual right to exist within the agricultural community.

If we are seeing, on behalf of our largest investors to be coming into agricultural communities and to be transitioning those assets away from agricultural livelihoods, that's going to result in no one being able to play for the local rugby team, no one in the schools. And that's not a long-term solution for the problem.

So our fund, we focus on purchasing agricultural land and only investing into high integrity carbon projects.

High integrity is a word or a theme that is very popular in the market right now and has different interpretations and different meanings to different people. For us, our view of high integrity is looking at the most defensible carbon project. The way that we think about it is there was previously cleared land that was that was probably hand cleared 100 years ago. Now we go in and we restore that to a grazing woodland where one year there's a cleared pasture, five years later you can see trees growing.

That is carbon that you can go out, you can touch, you can feel it is highly defendable. And no one is going to ever try to undermine or question whether that's real carbon. And that's important for… to reduce any regulatory risk and also public scrutiny on behalf of our investors.

This is an example of a true natural capital strategy where we're not only using underlying land, but we're monetizing the carbon benefit by generating the carbon credits.

Frank Barillaro: One of the really interesting things I thought about the carbon strategy we've adopted is a lot of projects out there are turning what is otherwise good agricultural land into pure carbon sinks. And at the end of it, you're left with trees in the ground, but not much alternative use.

The strategy we've adopted with carbon is slightly different that we're not taking entire land areas and turning into carbon sinks, but we are actually blending them with agriculture use.

Can you explain a little bit more about how we do that and why that's it's better from a social perspective and neighbours not getting upset with what we're doing?

Max Butler: Definitely. So there are different methodologies that you can use to generate carbon credits, but only one methodology allows you to create a consolidated agri-carbon enterprise, and that's environmental planting.

So this involves purchasing agricultural land and planting native species endemic to the area, that generates high bio biodiversity value. And the way that you can plant the plantings is we're not effectively, it's not a plantation forestry asset.

We ensure that there's spacing between the trees that means we can hit the minimum canopy cover threshold for the methodology, but still ensure that we have laneways effectively to generate pasture to then run animals.

There is a short-term operating change that needs to happen whilst the trees are growing. We won't be able to reintroduce the livestock to ensure that the trees can survive. But once the trees get up to a sufficient height where the roots hit the water table, they're sturdy. That's when we can reintroduce grazing pressure, be it sheep or cattle and ensure that we maintain the agricultural characteristics of the property. And that is not just national parks or forest.

And that means that we'll be able to retain jobs in the community. We'll always need a farm manager.

There will be operating changes that need to happen because we're now converting pasture, open pasture into grazing woodland, but those grazing systems exist elsewhere in the world.

Frank Barillaro: Max, just further on the carbon fund, what assets has the fund started to invest in and what's the criteria you look for when we go about making investments in that space?

Max Butler: So we completed the first close of the fund July 18 last year and since then we've had a second close on $100 million. Since then we've purchased properties that will allow us to plant about 7,000 hectares which over 25 year project crediting, will generate 3,000,000 ACCUs.

So this is split across 2 assets, 1 in Queensland and one in NSW.

The types of assets that we look we look for, to grow trees you need to have productive land. This methodology will not work in the centre of Australia. Semi-Arid has less than 600 mil of rainfall.

We're looking for areas that have high levels of rainfall, supported by good soil types, are also affordable from a broad acre perspective. So we focus mainly on livestock assets. The assets that we've that we targeted generally close to the coast, not too far inland and do have good agricultural characteristics because you won't be able to grow the trees if you also can't grow pasture.

Frank Barillaro: One of the really exciting features I think about the carbon fund, which you've established is the optionality to invest as a corporate admitter and actually gain access to the carbon credits, or to invest as a financial investor and monetise those carbon credits.

Can you explain a little bit more about how that how that works and how we're seeing the optionality appeal to potential investors in the marketplace?

Max Butler: Yes, definitely. So the context of the reason that we built this flexibility into the fund is we wanted to appeal to the widest group of investors.

And right now the market is bifurcated between corporate investors who are legislated to reduce their emissions and then financial investors who hold majority of the wealth in Australia.

What the challenge has been for us is that the corporate investors understand the need to purchase ACCU’s and they have demand, but they don't understand financial products. On the inverse, we have our super funds that, investing into funds is their bread and butter, but they're still developing their understanding on the carbon market.

So in trying to understand which group we targeted, we thought why don't we design a product that can actually appeal to both. The way that it works for our investors is they can make an annual election as to how they receive their returns. They can either receive the annual return, the cash yield in cash or via a specific distribution of the ACCU's.

For a corporate investor who is seeking, they're not seeking to generate cash, they're effectively trying to secure ACCU's at the lowest marginal cost. If we're distributing ACCU’s out to them each year, they're effectively prepaying for a stream of ACCU’s that they receive at cost. The only other cheaper way for them to receive ACCU’s is for them to do the project themselves, which for you know the large oil and gas or airlines, they don't have the capability or the desire to do.

So it's a neat solution for investors, the corporate investors to receive cheap ACCU’s, financial investors for those who understand the thematic and want to take a part, and be a part of building supply for Australia's pathway to decarbonisation. We also offer them the opportunity to participate in the fund.