The next wave of carbon investing

LPs are increasingly expecting their sustainable agriculture plays – including carbon sequestration – to generate attractive returns, say Roc Partners’ Brad Mytton, Frank Barillaro and Sam Bayes.

Sustainable investing has already come a long way, and in recent years it has become a multifaceted investment strategy in its own right, providing more and more large institutional investors with portfolio diversification.

As these investors’ commitments to net zero grow, a significant shift in the agriculture investment landscape is underway, with bigger portions of capital being directed toward the carbon farming and sustainable forestry sectors. Roc Partners’ managing partner for food and agriculture Brad Mytton, partner for food and agriculture Frank Barillaro, and senior associate for responsible investment Sam Bayes, delve into the forces increasingly driving LPs toward carbon farming and forestry investments, and the broader implications for our planet and financial markets.

What factors are behind the rising popularity of direct investments in the carbon markets, forestry and assets with low emission profiles?

Sam Bayes: At the macro level, there is increasing awareness of climate change and its potential impacts. The Intergovernmental Panel on Climate Change’s latest findings suggest that there is more than a 50 percent chance that the global temperature rise will surpass 1.5C between 2021 and 2040, and we are not on track to meet our Paris climate targets.

Also, our stakeholders – members of superannuation funds and other institutional investors – are becoming increasingly vocal about their expectations around responsible investment practices and broader ESG integration.

Brad Mytton: Over the past 10 years,  there has also been more regulatory focus on emissions monitoring and improving those baselines. Now we are seeing a shift among more forward- thinking investors towards where the opportunities are, especially with regards to higher integrity carbon methodologies.

Frank Barillaro: What we have also seen in the last decade is that what started out as an idea has matured into a market. People can now go from a starting carbon baseline to achieving accreditations and trading or monetizing carbon in a marketplace. Although there is still a long way to go in terms of development and maturity, we see that picking up over the next five to 10 years.

How are LPs trying to understand and mitigate their total carbon footprint?

Sam Bayes: One of the key frameworks LPs are now using is the Global GHG Accounting and Reporting Standard for the Financial Industry, developed by the Partnership for Carbon Accounting Financials. It’s a comprehensive methodology to accurately and consistently measure financed emissions, and it’s targeted at superannuation funds, investment managers, banks and insurers. In my experience, both large and small LPs are on that journey, but larger ones are certainty further along.

Another key trend driving this is the mandatory climate-related financial disclosure regime coming to Australia. The bill proposes to introduce reporting obligations in three groups, over a four-year period based on revenue, assets, number of employees and whether the entity has existing climate reporting obligations. The first phase for large entities is planned to start from January 1, 2025 and we expect many LPs will be captured with that wave of reporting.

Frank Barillaro: In the agriculture and food production space, there will come a time when consumers will shape LPs’ attitudes towards carbon emissions. It will come down to consumer preferences and whether they are willing to pay a premium for carbon-neutral food. So we see an opportunity to capture a price premium by ensuring we are able to continue to produce food with a zero, or at least a minimal, carbon footprint. We are in the early stages of that market developing.

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