Regenerative forestry could provide “a significant upside to investors” while simultaneously addressing Europe’s climate and biodiversity challenges, according to a new white paper from $760 million natural real assets manager SLM Partners.
The firm’s Irish forestry portfolio, which is supported by the European Investment Bank and the European Commission’s LIFE programme, says that continuous cover forestry (CCF), a regenerative type of forest management, could sequester 20% more carbon than clear-fell forestry over a 20-year period.
Across the 1,763 hectares of forest surveyed, CCF would sequester 214,871 tons of CO2 more than clear-fell forestry over the period, according to SLM. Using industry standard Verra’s voluntary carbon market methodology, SLM estimates this could generate carbon credits worth €8 million ($8.3 million) at today’s carbon price.
“It’s not just better for the environment — the carbon, biodiversity, water, soils — but also more economically profitable,” Paul McMahon, managing partner, SLM Partners, told AgFunderNews.
Steadier cashflows with CCF
Clear-fell forestry, which is the industry go-to, involves clearing all trees from an area at once. In other words, trees are planted, cut down, and replanted en masse, according to McMahon. This in turn leads to large amounts of carbon released from trees and soils, and the newly planted forests take decades to grow back.
By contrast, CCF only fells portions of a forest at any given time, so that canopy cover is always maintained and biodiversity with it.
Twenty or even 10 years ago, the industry might have recognized the environmental benefits of CCF but questioned its economics, said McMahon. Now, that’s starting to change.
“You have certain advantages in continuous cover forestry. Avoiding clear-fell events means you get earlier, stabler cashflows [because] you’re thinning the forest on a more regular basis. You avoid the cost of replanting, because you rely on natural regeneration, instead of having to come in and artificially replant every time you clear.”
The list goes on: forests managed with CCF yield higher-on-average-sized trees, which make for more valuable logs and a higher price per meter cubed, he added.
Longer term, CCF helps build forestry resilience, which is “increasingly important in a world with a changing climate” that means more storms, pests and disease.
“That’s probably the number one concern if you actually own forests: in the next 100 years, these forests are going to suffer from undue stresses and threats. How do you make the asset, the resource, more resilient?”
In Europe, the land use, land use change and forestry (LULUCF) sector currently absorbs more greenhouse gases than it emits, and forests act as a net carbon sink.
However, McMahon said that due to the age of the trees in some countries, including Ireland, forests will become a net carbon emitter, as they are due to be felled in the next few decades.
“Certainly continuous cover takes a little bit more, takes more management. skills and knowledge,” he said. “But I think for the forest owner, the research is very clear. If you think of long-term IRR [internal rate of return], the research is showing, in most cases, that continuous cover approach delivers.”
Expanding CCF across Europe
Along with its research findings, SLM has also announced it is raising a €200 million ($210 million) fund to invest in sustainable forestry and carbon in Europe.
The new fund will build on the success of the Irish forestry fund in other European countries. McMahon said there are around seven countries in Europe where SLM believes it can replicate what it did with the Irish fund.
“We will look to mostly acquire smaller properties, and we’ll be using continuous cover forestry wherever possible as a more sustainable, resilient way of managing. We will do some afforestation, but it’s probably more of an 80/20 split, 80% existing forestry, 20% afforestation.”
Something that’s different than with the first fund is that SLM expects to be able to monetize carbon and possibly even biodiversity “in a way that just wasn’t possible” before.
“We’ve seen the development of quite nascent but certainly developing forest carbon markets in Europe, and some strong demand coming from carbon credits from European forestry projects,” he said.
“We expect to generate credits not just from afforestation but also from changing to continuous cover management, because switching management is a change of practice which will store more carbon, and therefore generate some credits for that additional component.”
“No all forestry is created equal,” he added. “This type of forestry is going to maximize the biodiversity benefits by encouraging a more diverse range of species within forests, a more diverse range of age and structure, and that provides a much better habitat for a wide range of flora and fauna. We believe carbon and diversity go hand in hand, plus the resilience factor, plus the overall IRRs is an interesting proposition.”
