Rich pickings await the asset owners willing to work with the natural cycles of private markets strategies focused on farmland and forestry.
There is much that divides the private and public markets, not least their role in channellling capital to sustainable investments.
According to MSCI, between 2020 and 2023, climate-labelled funds containing listed securities accounted for the majority of capital (US$526 billion), with private markets vehicles representing only around 15% (US$90.5 billion) of the total.
Though this may indicate investors’ preference for liquidity and faster returns, private markets are increasingly seen as core for financing the climate transition and building long-term resilience to physical impacts.
“Private markets are absolutely essential to finance the transition,” says Maxence Foucault, ESG Specialist and Private Assets Lead at BNP Paribas (BNPP) AM. “You need patient capital to be able to improve assets, see them grow and deliver on what investors want to see. Private capital is definitely aligned with that.”
Private markets are financing the net zero transition through assets such as renewable energy and grid infrastructure, low-carbon transport and buildings, industrial decarbonisation projects, and sustainable land use including farmland and forestry.
“You need a hands-on, deep understanding of how these assets work to be able to deliver both environmental and financial benefits,” says Andreas Baattrup Reitzel, Senior ESG Investment Manager at International Woodland Company (IWC), in which BNPP AM acquired a majority stake in 2023 as part of its expansion into natural capital.
“That is how the private market or direct investment differentiates from other asset classes,” he adds. “You need to be there, and you need to have a good grasp of what matters and what the risk issues are. You need to be involved in the day-to-day management of farming and forestry to be able to make sound decisions.”
Real assets are illiquid – with the unit of investment being as small as one farm or a forest, for example, rather than a share – as part of large, long-term acquisitions requiring a patient approach.
“Minimum investment timescales to carry out impactful development in natural capital are five to ten years: during that timeframe, you can create value and generate genuine sustainability,” argues Robert Guest, Managing Director at asset manager Foresight Group – which has been investing in real assets for 16 years and in natural capital for six. “However, the land management plans involved need to cover 30-100 years. For long-term value and impact to be captured, these also need to be long-term projects.”
The first step to selecting sustainable private market investments consists in identifying ecological land management systems that can deliver positive environmental impacts while being inherently profitable, explains Paul McMahon, Managing Partner at SLM Partners – a natural real assets manager with US$760 million in AUM, specialised in scaling up regenerative agriculture and forestry.
“One example is regenerative agriculture, which can benefit from lower operating costs or price premiums,” says McMahon. “Another is continuous cover forestry, which is a viable alternative to clearfell-based rotational forestry.”
The second step consists in locating specific geographies and market segments where these systems can be implemented to deliver attractive risk-adjusted returns for investors – an approach that has led SLM Partners to concentrate on developed markets such as the US, Australia and parts of Europe. The next stage is to find skilled local operators who can implement these systems, McMahon explains.
“Operational ability is crucial to success, especially in an operationally intensive activity such as agriculture, where a skilled and motivated farmer can make a huge difference,” he adds. “Only then do we look for particular plots of land to invest in. We do extensive technical due diligence on farms and forests before we acquire them, but all the other steps need to be completed before we get to this point.”
Although there is sometimes an inverse correlation between the size of a transaction and the degree of its environmental impact, McMahon argues that it’s up to asset managers to develop strategies that can efficiently aggregate multiple deals.
“One example from our work is our strategy of investing in organic grain farms in the US Midwest,” he says. “We set up a US$200 million separately managed account with an institutional investor and have now made 65 acquisitions. The average deal size is small, but we have been able to build a diversified portfolio at scale for our client over time.”
No pain, no gain
Sustainable investment in natural capital typically requires a high degree of due diligence. Many initial questions are tied to the physical characteristics of the asset, such as its location and how it may be affected by climate, as well as how it’s regulated and managed and how it may evolve over time.
“Investors need to carry out additional due diligence to ensure that an investment in natural real assets will deliver positive sustainability impact, as well as returns,” says McMahon. “Investing in agriculture or forestry is, in itself, not enough – there are plenty of conventional agricultural and forestry systems that have negative impacts.”
Initial due diligence happens at the level of strategy and manager intention: investors should probe whether a particular strategy has a credible impact thesis, and ask how it differs from business as usual. The next step is to identify impact KPIs and define a process to measure those over the course of a strategy: with real data from the field showing improvement in soil health, carbon profile, biodiversity, water quality, or whatever outcomes are being targeted.
“Environmental impact does not need to come at the expense of financial return,” McMahon adds. “Ecological farming and forestry systems can deliver higher returns than conventional approaches, while guarding against many risks.”
Though investing in real assets in agriculture and forestry involves “major” constraints such as lower cash yields and challenges in accessing scaled, turnkey portfolios at attractive prices, advantages include capital efficiency and relatively low volatility per unit of risk.
“[Real assets] tick many boxes: from a financial perspective, they are very useful in an allocation strategy due to the types of returns they deliver and the fact that they can offer regular cash flows,” says BNPP AM’s Foucault. “They’re also decorrelated with more traditional assets, which can be beneficial in periods of higher risk and offers a hedge against inflation. All these factors combined make them relevant for investors.”
The heightened level of due diligence required in the private market investment process also comes with a set of advantages, notably through co- or direct ownership.
“There’s a lot of economic reasons to be in this space, but from a sustainability standpoint, the ability to control the outcomes through a private real-asset investment is one of the greatest benefits,” explains Brian Kernohan, Chief Sustainability Officer at Manulife Investment Management.
“Because we do due diligence the way we want, we have greater choice about what we invest in. The ability to control those assets on behalf of your clients is powerful in private markets: you can effect change more quickly, because you have the ability to manage them directly versus a passive right.”
This contrasts with investments in public investments in shares, for example, whereby decision-making and management is largely incumbent on the company.
“That level of control, especially in natural capital assets, is very important because nature is variable: you can’t control all the variables of a forest or farm,” Kernohan adds. “You have to be able to manage that variability while still controlling what you can to continue to generate positive sustainability impacts – such as cleaner water and air, or enhanced wildlife habitat – alongside returns for the client.”
Manulife’s private market investments are spread across timberland, agriculture, real estate, infrastructure, private equity and private credit. In particular, it is a major global timberland investor and one of the largest natural capital managers in the space, with over 5.6 million acres across the US, Canada, New Zealand, Australia, Brazil and Chile, representing US$11.7 billion in AUM.
For institutional investors, certification programmes serve as an external assurance mechanism – translating complex sustainability outcomes into independently verified, science-based standards for land management, Kernohan explains.
“The notion of certification is essential to how we ensure sustainability: in timberland, we’ve been using third-party certification for about 26 years,” he says. “These programmes are vital as they involve experts in forestry and farmland who have decided what managers like us should care about, which makes it easier for us to point to what they say. It’s this arm’s length relationship that’s important.”
A growing trend
Over time, asset owners have become increasingly cognisant of the opportunities offered by private markets as a channel for sustainable investing.
Recent research suggests momentum is growing, with 94% of local government pension schemes (LGPSs), 75% of defined contribution (DC) pension schemes, 75% of insurers, 58% of defined benefit and 50% of charities expecting to hold an allocation in natural capital in the next five years.
“More UK LGPS and DC funds recognise that climate and nature is a systemic risk that will impact their asset portfolio in the next 10-15 years, and want to invest,” says Robert Gardner, CEO and Co-founder at Rebalance Earth, a UK-based natural capital asset manager investing in the restoration of landscapes and seascapes.
“The more sophisticated asset owners are now looking at building a natural capital allocation and blending sustainable forestry and agriculture.”
Rebalance Earth recently received a £25 million commitment from West Yorkshire Pension Fund for its Cornerstone Portfolio, aiming to advance its forthcoming nature-based infrastructure fund.
“There’s a lot of money that wants to invest in the UK and in real assets, whilst at the same time taking a place-based approach to adapting to climate change and nature loss,” Gardner adds.
“A common mistake is to see [private and public climate investments] as an ‘either or’. It should be an ‘and’,” he says, noting that ‘functional density’ can be a useful measure not just of ecosystem health but also investment flows.
According to Gardner, private market sustainable investments are currently facing obstacles similar to those encountered by renewable energy 15 years ago.
“The main challenge is that it’s new and it hasn’t been done before. It’s about building awareness and understanding what it means for portfolios and governance models,” he adds. “The reason this is getting more traction now is because of size and scale as UK pension funds consolidate.”
As asset owners become larger, their exposure to systemic risks is also increasing.
“Strategic asset allocation and portfolio construction has been built around a simple heuristic that, roughly speaking, the future will be the same as the past,” Gardner argues. “But this new world says that actually, in 15 to 25 years’ time, the future won’t be the same as the past – and that changes your expected returns.”
