Stephen O’Neill, Head of Infrastructure and Natural Capital at Nest, explains the due diligence underpinning the UK pension provider’s investment in sustainable forestry.
“All businesses depend on and impact biodiversity and can be agents of positive change.”
This is the first of ten key messages highlighted in an assessment of the impact and dependence of business on biodiversity released recently by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).
The assessment explores and explains these impacts and dependencies, also making recommendations to governments, businesses and financial institutions on the measures needed to reverse biodiversity loss and nature degradation “to improve outcomes for biodiversity and nature’s contributions to people”.
IPBES’s scientists support their ten key messages with three sets of background messages, which cover: the relationship between business and biodiversity; the options for action available to businesses, financial institutions and governments; and the means for measuring business impacts and dependencies.
With the information we have today, it is both necessary and possible to align finance flows with nature’s rhythms, IPBES says, the better to safeguard our dependencies. But the required changes and processes may not be straightforward or familiar. It requires a leap of faith, perhaps, but is not a leap in the dark.
UK pension provider Nest has already taken its first steps along this path, making two investments in sustainable forestry using specialist timberland investment management organisations (TIMOs).
In 2024, the fund announced the appointment of Campbell Global, a unit of JP Morgan Asset Management, to manage a £550 million (US$750 million) mandate. This was followed a year later by a separate but similar sized commitment, via BTG Pactual’s Timberland Investment Group (TIG). Combined, the transactions provide Nest’s 13 million members with exposure to sustainably managed forests across the Americas and Australasia.
As one of IBPES’ background message notes, “Financial institutions can shift finance away from harmful activities and towards business activities with positive impacts on biodiversity.”
First foray
“We looked at the broader natural capital space, including agriculture, and decided on core timberland assets globally as our first foray, because we found that they had scale and also a sophisticated level of environmental stewardship embedded into the industry already,” says Stephen O’Neill, Head of Infrastructure and Natural Capital at Nest.
“The investment thesis is to get a non-correlated return, with a strong underpinning of inflation and GDP growth as a long-term tailwind behind the performance of the asset class. A lot of the lumber gets used in housing construction, so it’s also highly driven by the long-term demand for housing. In the UK, the US and many other regions, there is an under-building issue, so that should provide a long-term tailwind for the sector.”
Absolute returns vary across geographies between high single and low double digits, according to O’Neill, with the aggregate return depending on the blend of deployment. As such, timberland assets sit in Nest’s long-term stable growth and incoming-seeking portfolios, two of the core building blocks on which the varying needs of default fund members rely.
From an impact perspective, carbon sequestration is a significant factor in Nest’s venture into sustainable forestry, “with enormous opportunities for enhancing the overall sustainability profile of our asset allocation”, says O’Neill.
But while the results are being closely monitored, it is too early either for Nest to consider using the sequestered CO2 to offset its own emissions or generate carbon emissions credits for purchase by counterparties that wish to offset their own.
“The carbon credit markets are still evolving,” says O’Neill. “Different methodologies apply in different geographies, and the science is still rapidly moving. We are in a ‘wait and see’ frame of mind and want to see something more universal and robust.”
As with any investment, upside opportunity must be managed alongside downside risk, with both environmental and social factors having the potential to be financially material.
“There’s a whole set of considerations around water use, and impact on ecology. You’ve got these tree farms in wildernesses where there are other animals and plants, so you’ve got to consider the impact on those,” O’Neill explains.
“You’ve also got to consider the impact on communities – whether it’s from building roads, indigenous land rights in various regions, or the interactions with those communities and indigenous peoples. All this needs to be factored into how we appraise the way the manager looks at and manages the properties.”
Local realities
According to Key Message Five in the recent IPBES assessment, “Existing methods, knowledge and data for measuring impacts and dependencies already, and can further inform decisions and actions, directly and in the value chain.”
Some of the pre-investment due diligence needed to understand timberland’s sustainability exposures can be conducted via information exchange during manager selection and evaluation. This helps explain process and practice but is also largely illustrative, based on past performance of existing projects. Particularly relevant to proposed new acquisitions, asset owners can build on this with site visits to get a better sense of local realities.
“In the case of TIG, we flew to the US, visiting forests on both coasts to meet with the people that work on the land – including the migrant labour that gets brought in to plant the forests – to see their safety conditions and to make sure they are happy and healthy, as well as properly compensated and documented,” explains O’Neill. “We also met people in the local community to get a sense of how they view the large timberland managers that operate in the area.”
In addition, Nest used expert consultants to conduct interviews with people across site locations to obtain an independent perspective on the interaction of timberland managers with local communities and their representatives, to provide assurance on the protection of Indigenous Peoples’ interests.
O’Neill admits that the picture varies according to geography and history, with developed markets more likely to have adopted mature engagement standards and processes. “In markets such as the US, it’s a fairly well trodden path, with robust and stabilised approaches to managing indigenous rights. In more emerging economies, where perhaps a large preponderance of indigenous communities, there are more tensions and risks to be managed.”
Partly due to concerns over worker safety and security, Nest has worked with their managers to allocate to regions with established norms, where the standards and level of community engagement are healthy and positive, “rather than strained or even risky”.
Building on best practice
To quote IBPES’ Key Message Six, “Different methods to measure and manage impacts and dependencies are needed for different sectors, levels of decision-making and business purposes.”
The level of specialism required to manage the particular challenges involved in managing timberland sustainably and responsibility has led to a comparatively high degree of expertise and consensus on best practice across managers.
This is reinforced by the development and ongoing evolution of standards, not just around managing Indigenous rights, but in the use of environmental benchmarks.
TIMOs typically manage their forestry assets in line with standards set by the Forest Stewardship Council (FSC), as well as country-level frameworks such as the US Sustainable Forestry Initiative (SFI) and the Australian Forestry Standard, both of which have been recognised by the Programme for the Endorsement of Forest Certification. These frameworks have been joined recently by climate-specific programmes, such as the Science Based Targets Initiative’s requirements and methodologies for reducing emissions from forests, land, and agriculture (FLAG) assets in alignment with the Paris Agreement.
The FSC’s third principle requires forest owners and managers to identify and uphold Indigenous Peoples’ rights of ownership, use and management of land and resources, while national standards such as the SFI explicitly include similar requirements. Individual TIMOs report on their approach to Indigenous rights in accordance with the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD), and incorporate human rights principles into their sustainable investment policies.
To ensure standards are observed, investors can conduct independent due diligence, using resources such as toolkits developed by the Accountability Framework and the Respecting Indigenous Rights coalition.
“Amongst the major timber managers, the standards are rigorously set, both by independent bodies, such as certification agencies, but also within the competitive field that they operate in. Asset owners around the world have very high expectations of these TIMOs so they have converged on a strong consensus view on what sustainable forest management looks like, covering all areas,” says O’Neill.
“We set a very high bar for selection. What’s important is that we make sure those standards are fully embedded in their processes, that they live and breathe the standards.”
As IPBES Key Message Eight observes, “ Businesses could better measure and manage their impacts and dependencies by appropriately engaging with science and Indigenous and local knowledge, methods and practices.”
Boots on the ground
While established best practice offers high levels of customer assurance, it makes for fine selection decisions. Having selected Nest’s TIMOs from an initial pool of around a dozen, O’Neill says local presence and knowledge can be a deciding factor.
“There is a lot to be said for a manager who has boots on the ground or can partner with highly respected operational partners in the geographies in which they wish to invest,” he says.
“Someone sitting in an office in New York or London buying a forest without putting boots on the ground and doing the due diligence – both in the acquisition and in the ongoing management – is far less likely to be able to give you peace of mind.”
These ‘boots on the ground’ help asset managers and to offset financially material risks inherent in timberland investment, but also ensure that their activities are aligned with the nature preservation goals of the Global Biodiversity Framework (GBF), as well as delivering social co-benefits. This requires an evolving combination of management, measurement and monitoring techniques based on scientific methods and local knowledge.
This involves only growing tree species with a proven track record within a specific location, such that its impact on local ecosystems – including on water use as well as interaction with other flora and fauna – is well-known. This does not mean restricting sustainable forests to native species, notes O’Neill. For example, the loblolly pine that is now prevalent across the US Deep South, was not necessarily native in all the areas in which it is found today, having only become a staple of timber plantations in the 1930s.
Further, tree planting and harvesting also needs to take account of the habit and habitats of local wildlife, especially endangered species. Protection mechanisms include monitoring and protecting the nests of specific bird species – such as the Marbled Murrelet, the only member of the Puffin family that nests in treetops – creating and maintaining pathways for turtles to access their nesting areas, and planting trees to avoid the straight lines that can upset the visual perception of deer and other fauna.
These practices evolve in line with latest science and technology, as does the measurement and reporting of CO2 sequestration and other co-benefits, says O’Neill.
“In the first instance, we rely heavily on the managers to collect that [carbon sequestration] data, as they’re on the ground, testing the soil, and bringing in third parties. In due course, there will be an evolving infrastructure that we build to corroborate that data, taking into account that the availability of data, and the science behind the validation of that data, is all very fast moving,” he explains.
The evolving nature of science-based evidence is a contributing factor to Nest’s cautious approach to calculating and attributing the impact of sustainable forestry investments to its overall carbon footprint. While continuing to monitor carbon sequestration volumes, it is also measuring other co-benefits, including jobs created or supported, both directly and indirectly, for example in local recreational activities.
“The existing knowledge base needs to be strengthened by addressing important gaps in knowledge and its application,” says IPBES Key Message Nine.
Watching brief
The range of options for asset owners seeking natural capital investments that combine risk-adjusted returns with GBF alignment is expanding rapidly. These include new opportunities and instruments, for both investors and their portfolio companies, including biodiversity credits and funds dedicated to preserving wetlands and peatlands.
In the UK, for example, global hygiene and health manufacturer Essity has invested in an FSC-approved project in partnership with the Woodland Trust, which focuses on long-term woodland creation, peatland recovery and environmental modelling to measure the real-world impact of nature-based solutions.
For most institutional investors, sustainable farmland and forestry is likely to remain a central focus in the short- to medium-term. This may mean geographic expansion, from the developed to emerging markets, subject to both financial and sustainability risk criteria.
According to O’Neill, foreign exchange risk is one of the reasons Nest is not currently planning to invest in Brazil, instead maintaining a watching brief on the development of its timber market and awareness of the country’s ongoing battle to reverse deforestation.
“Very few major institutional asset managers go anywhere near the Amazon basin at all,” he observes. “You would not be able to win a mandate from any pension plan around the world if you are involved in deforestation. Operations are strictly on areas of land that have been plantations for decades and for generations – afforestation and reforestation projects on land that has been used for agriculture.”
In terms of future natural capital themes, Nest has been monitoring the development of sustainable agriculture practices, both because the sustainability of agriculture is crucial to decarbonisation and protection of biodiversity, but also to address systemic food supply challenges.
“On balance, across the entire globe, those two aren’t living in perfect harmony at the moment, but I think institutional money has a role to play in driving best practice in those industries,” says Neill.
As IPBES notes in Key Message Four, “All businesses have a responsibility to address their impacts and dependencies.”
