Regenerative Forestry: A Lucrative Path to Climate and Biodiversity Solutions
Regenerative forestry presents a significant opportunity for investors, offering both financial returns and solutions to Europe's pressing climate and biodiversity challenges. A recent white paper from a natural real assets manager highlights the potential of continuous cover forestry (CCF), a regenerative forest management approach, to deliver substantial environmental and economic benefits.
The manager's forestry portfolio, supported by a prominent European financial institution and an EU environmental programme, demonstrates that CCF could sequester 20% more carbon than traditional clear-fell forestry over a 20-year period. Specifically, across 1,763 hectares of surveyed forest, CCF is estimated to sequester an additional 214,871 tonnes of CO2 compared to clear-fell methods over the same timeframe. Utilising an industry-standard voluntary carbon market methodology, this could generate carbon credits valued at approximately €8 million at current market prices.
According to a managing partner at the firm, this approach is not only superior for the environment – benefiting carbon sequestration, biodiversity, water, and soils – but also proves to be more economically profitable.
Steadier Cashflows with Continuous Cover Forestry
Traditional clear-fell forestry involves the complete removal of trees from an area, followed by replanting en masse. This practice leads to substantial carbon release from both trees and soils, with newly planted forests requiring decades to re-establish.
In contrast, CCF involves felling only portions of a forest at any given time, thereby maintaining a continuous canopy cover and preserving biodiversity. While the environmental benefits of CCF have long been acknowledged, its economic viability was previously questioned. However, this perception is now shifting.
Advantages of CCF include earlier and more stable cashflows due to regular thinning of the forest. It also eliminates the cost of replanting, as it relies on natural regeneration. Furthermore, forests managed with CCF tend to yield larger, more valuable trees, resulting in a higher price per cubic metre.
In the long term, CCF enhances forestry resilience, a critical factor in a changing climate that brings increased risks from storms, pests, and diseases. This approach addresses a primary concern for forest owners: how to make their assets more resilient against future environmental stresses.
The land use, land use change, and forestry (LULUCF) sector in Europe currently absorbs more greenhouse gases than it emits, with forests acting as a net carbon sink. However, due to the age of trees in some countries, including one mentioned in the report, forests are projected to become net carbon emitters as they approach felling in the coming decades.
While continuous cover forestry demands greater management skills and knowledge, research consistently indicates that it delivers superior long-term internal rates of return for forest owners.
Expanding Regenerative Forestry Across Europe
Building on these findings, the manager has announced plans to raise a €200 million fund to invest in sustainable forestry and carbon initiatives across Europe. This new fund aims to replicate the success achieved with its initial forestry fund in other European nations, targeting around seven countries with suitable conditions.
The strategy will primarily involve acquiring smaller properties and applying CCF wherever feasible, with an estimated 80% focus on existing forestry and 20% on afforestation. A key distinction from the first fund is the expectation of monetising carbon and potentially biodiversity benefits, which was not previously possible. The development of nascent but growing forest carbon markets in Europe, coupled with strong demand for carbon credits from European forestry projects, supports this outlook. Credits are anticipated to be generated not only from afforestation but also from the transition to CCF management, as this change in practice leads to additional carbon storage.
The manager emphasises that "not all forestry is created equal." This type of regenerative forestry maximises biodiversity benefits by fostering a more diverse range of species, ages, and structures within forests, providing richer habitats for flora and fauna. The belief is that carbon sequestration, biodiversity enhancement, resilience, and overall financial returns go hand in hand, presenting a compelling proposition for investors.
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