Climate Asset Management makes first Australian acquisition

Climate Asset Management, the natural capital joint venture between HSBC Asset Management and Pollination, has made its first Australian investment, reports affiliate title Agri Investor.

The firm has acquired approximately 1,800ha of farmland in the Bundaberg region of Queensland (section of asset pictured above), which was formerly used for high-intensity sugar cane production, and will convert it into a macadamia orchard.

CAM has made the investment through its Natural Capital Strategy, a closed-end fund with a fundraising target of $1 billion. The firm declined to comment on the value of the transaction. It is the fund’s third deal, following investments in almonds in Spain and in almonds and olives in Portugal.

CAM last published an update on fundraising in December 2022, revealing it had received commitments of more than $650 million across its two funds: the Natural Capital Strategy and the Nature-Based Carbon Strategy. Commitments were split roughly evenly between the two funds, with HSBC acting as anchor investor in both.

CAM chief investment officer Ben O’Donnell declined to provide any specific updates on fundraising, but did say conditions were challenging: “We’ve had good engagement with a range of institutional LPs as we move towards a final close.

“That said, the interest rate environment and the increasing return from government treasuries over the last 12-18 months has meant a bit of a pause from an alternative investment perspective, and that’s slowed down capital raising relative to our broader objectives. But we still see an interest in impact and ESG-oriented strategies, which I think is a better place to raise capital in the current environment than, say, vanilla real estate or infrastructure strategies, on a relative basis.”

O’Donnell said the latest purchase fitted neatly with the underlying principles of the fund’s investment thesis.

“We think it will deliver long-term value creation for our unitholders as well as significant environmental benefits to the underlying asset relative to where it sits today, as well as the landscape within which that asset is based,” he said.

“The sugar cane industry has had some challenges in Australia and there are other institutions looking at how to transition the sector to be more sustainable – but we feel there is an opportunity here not just to generate returns [from the farm] but to also stack environmental credits into the transaction.

“And regardless of whether we can realise extra income from those credits, it will help us improve the underlying landscape and the connectivity between it and the broader native habitat that surrounds it.”

By planting macadamia trees, O’Donnell said, the use of the asset would be converted from sugar cane to a permanent crop, with the orchard providing a habitat for insects and creating biodiversity, with cover cropping between rows of trees adding to this. The asset comes with water rights that CAM will be able to access for its trees.

“We’ll sequester a significant amount of carbon in that process, and the intention is to regenerate soils through both active processes and the increase in biomass,” he said.

Net zero by 2030

The asset is located between two national parks in Queensland and CAM will allocate around 10 percent of its land area to native habitat restoration, targeting propagation of critically endangered flora species through partnerships with local stakeholders including a herbarium.

The firm aims to achieve net zero Scope 1 and 2 carbon emissions on the project by 2030, generating additional carbon credits through an increase in carbon storage both above and below ground.

O’Donnell said it was unlikely that credits would represent more than 10 percent of the farm’s income but they were still important from an environmental perspective.

“If we’re rewarded for the improvements we make, it’s a self-fulfilling cycle that will allow us to keep undertaking more work to in turn generate further credits. Even though it’s not a huge proportion of the overall income of the asset, credit markets support active and positive interventions to deliver better sustainability and environmental outcomes,” he said.

On the decision to plant macadamias following a period when the sector has seen Australian growers receive some of their lowest farm-gate prices in a decade, O’Donnell said: “The price of all agricultural commodities, including across the spectrum of nuts, is variable over time – but we have high confidence that high-provenance plant protein demand that fits in with health, wellness and convenience snacking trends will continue to grow on the upside.

“Macadamias currently represent only 1-2 percent of the global nut market, but they are viewed as a premium nut. We see that trend continuing. Our view on price is that they will remain relatively soft for a period of time, but the long-term supply and demand trend will be supportive for commodity price growth over the 15-year hold period of the fund.”

O’Donnell said CAM “was not seeing a huge amount of additional opportunities” to acquire assets in Australia. “We will continue to look at the risk-return that investments in Australia can deliver relative to other investments that we make across the broader geographic regions we’re targeting,” he said.

“We will continue to look at the market in Australia and would invest if the right deal comes along. Land values have gone up significantly thanks to a bunch of different factors. La Niña has been a really positive influence to the upside and land prices have responded – but with higher interest rates and the potential for a change in climatic conditions, we’re reluctant to run hard in the current market.”