Manulife Investment Management is turning some of its timberland and forestry assets into carbon credits to generate extra returns or decarbonisation progress for investors.

Such carbon projects will become increasingly profitable as carbon prices increase, says Eric Cooperström, managing director for impact investing and natural capital solutions at Manulife IM.

Manulife IM, the asset management arm of Canadian insurance company Manulife, manages timberland assets worth $11.5 billion, making it the world’s largest timberland manager. These assets are held within Manulife IM’s Timberland and Agriculture business – which, until 2021, was called Hancock Natural Resource Group, and was acquired by Manulife in 2004. Manulife IM invests across private markets on behalf of the Manulife insurance business’s general account and for third-party investors through pooled funds and individual mandates.

Most of Manulife IM’s existing timberland assets “are managed under a traditional sustainable timber management regime” and do not currently generate carbon credits, although Manulife IM measures the carbon naturally sequestered by these assets, Cooperström told New Private Markets.

“That’s not creditable,” he says. “You can’t generate carbon credits just by counting the number of tonnes that those trees sequester. For existing forests, you have to change your management regime so that you sequester more carbon than you would under a business-as-usual case for those forests.”

For some timberland assets it manages, Manulife IM has developed carbon projects that generate tradeable carbon credits. “Historically, it’s been very much an opportunistic play – where there’s incremental value that we could generate on behalf of clients, and it aligns with our clients’ interests and risk/return profile,” says Cooperström. “We have experience across the voluntary market and the compliance market.”

Cooperström is also developing a separate climate forest strategy that will be focused on generating carbon credits from timberland assets. These can be sold in carbon offset markets to generate a profit, or used by Manulife IM’s clients to offset their own emissions and meet net-zero targets.

“We would run through our standard due diligence and underwriting process for timberland assets and conduct a review of potential carbon value, just as we do with our traditional timber strategy,” says Cooperström.

“After acquisition, we work with third-party carbon project developers and independent verification bodies” to calculate the net carbon sequestration of the assets. Manulife IM and the developer take this evidence to the asset’s governing carbon registry – such as the American Carbon Registry – which issues the carbon credits. Manulife IM’s investors can then choose to sell these into carbon markets and receive the monetary value or, going forward, to retire the credits to achieve their own decarbonisation goals.

Profit potential

How will this strategy perform? “Where carbon projects are feasible, the profitability is tied to future expectations of carbon prices. And most forecasts are pretty bullish about those,” says Cooperström. “Historically [in forest-generated carbon credits], there has been quite a bit of volatility in pricing, especially in the voluntary market, and historically, generally low prices. But with the influx of net-zero commitments that companies and investors are making, and the view of natural climate solutions as high value, there are certainly some tailwinds in terms of carbon pricing.”

“Where land and timber prices tend to be lower, you can see a lot more feasibility for carbon projects.”

Performance will also be affected by the local value of timber and land and the asset’s particular characteristics. “Different forests have different economics – it depends on the region, the species and the age class of particular forests,” says Cooperström.

“There are certain regions in the traditional timber belt around the world [where there is] higher potential for implementing carbon projects. For example, in the Pacific Northwest in the US, you have pretty high land prices and very high timber value. At current carbon prices, it would be difficult to make the economics work for an average carbon project. In other regions, like the US lakes states and the US northeast, where land and timber prices tend to be lower, you can see a lot more feasibility for carbon projects.”

Screening buyers

Last month, Manulife IM announced a set of nine principles to ensure the integrity of its carbon projects. These include ensuring that carbon sequestration is permanent, additive (only carbon sequestered due to MIM’s intervention is counted) and not double-counted.

One principle is: “Avoid enabling greenwashing for carbon offset buyers and carbon inset transfer recipients – rigorously screen potential credit buyers and recipients for tangible commitments to and progress toward climate action.”

Cooperström acknowledges the subjectivity of identifying greenwashers: “A company can, on paper, speak a good game on climate and ultimately, its actions might differ. So we’re being as careful as we can.

“For example, we recently sold carbon offsets from one of our properties in Florida into the voluntary market. As part of the request for bids for those credits, we requested that companies specifically call out their climate commitments and their actions. We can then compare campaigns across their bids. We’re incorporating this very integrally into our processes – it’s more than just a monetary figure that we’re considering.”

Biodiversity bucks

Another principle is: “Doing no net harm – focus on additional social and ecological benefits, such as improving biodiversity and minimising negative externalities.” Cooperström explained: “In that Florida project, for instance, we’re supporting a range of sensitive species and [conservation of] wetlands and water quality.” These measures can generate co-benefits for certified credits and therefore support their monetary value, says Cooperström: “These tend to be included as premium-generating drivers for carbon credit buyers.”

Will Manulife start investing in biodiversity credit generation? “It’s certainly something that we’re keeping tabs on. It’s early days, but as I’m focused on impact investing broadly, biodiversity is absolutely front of mind,” says Cooperström.

“One of the key hurdles with biodiversity is measuring it in a consistent way, in a way that provides confidence that you’re actually driving impact? It has a lot of parallels with soil carbon as well. There’s huge potential for soil carbon and biodiversity as investable markets. But I think the details – the science, the application of the science, protocols and regulations – need to be ironed out, and we need to test those and gain confidence before those really scale up.”