Forestry: An Important Piece of the Global Decarbonisation Puzzle

28 Sep 2022 Daniel Della Vedova, Partner, Azure Capital Australia | Focus on

Daniel Della Vedova
Azure Capital

Land use strategies are expected to form an important part of the global effort to limit temperature increases to between 1.5°C and 2°C. According to the Intergovernmental Panel on Climate Change (IPCC), agriculture, forestry, and other land use activities account for approximately a quarter of emissions of greenhouse gases (GHGs). All assessed modelled pathways that limit warming to below 2°C require land based mitigation and change with improved agricultural landscape management and the sequestration of carbon in forests and forest products through reforestation, afforestation and reduced deforestation.

Significant investment in these natural climate solutions (NCS)1 will be required to limit warming to below 2°C. Figure 1 demonstrates that NCS can provide ~20% of the cost effective climate mitigation required between now and 2050.

Figure 1: Contribution of NCS to Stabilizing Warming to Below 2°C2

Increasing focus from institutional investors on the forestry sector


Climate change is becoming critically important for the world’s largest asset owners who are setting and reporting on ambitious emission targets. The United Nations-convened Net-Zero Asset Owner Alliance of currently 73 international institutional investors with US$10.6 trillion in assets under management is committed to transitioning their investment portfolios to net-zero GHG emissions by 2050.

"As investors seek to decarbonise their portfolios, it is becoming increasingly clear that this objective will require substantial investment in Natural Climate Solutions."

As investors seek to decarbonise their portfolios it is becoming increasingly clear that this objective will require substantial investment in NCS. Consequently, there is an increasing appetite for institutional investors to invest in forestry and related assets. Traditionally, institutional investors have invested in forestry through timberland investment management organisations (TIMOs). TIMOs are investment management vehicles that emerged in the 1980s and act as intermediaries for institutional clients to identify, analyse and acquire forestry assets. However, due to a desire for increased control, flexibility over investment timeframes, direct ownership of carbon credits and lower fees many (particularly larger) investors are increasingly seeking to develop internal investment capabilities to make direct forestry and related NCS investments.


Whether investing directly or through TIMOs a key requirement for investors is understanding how to value and manage climate benefits or assets arising from these NCS. There are two main ways investors can realise carbon benefits, either through (i) recognising carbon sequestration in GHG accounting or (ii) the creation of carbon credits that can be sold into government-regulated or voluntary carbon markets, with highly variable rules and standards applying in different jurisdictions.


Because of the nascent and often unregulated nature of NCS carbon benefits, there is increasing concern with “greenwashing” of carbon claims, particularly in the voluntary carbon markets which rely on variable quality third-party certification of projects often located in developing countries with poor transparency and regulation. With increasing focus on the quality of carbon assets from institutional investors there is expected to be additional demand and value premiums for assets that can demonstrate uncontroversial and quantifiable carbon benefits from a combination of robust science, certification, regulation, reporting and enforcement.   

Australia has a well-developed plantation forestry sector with very low sovereign risk and a fully regulated carbon regime


Australia has 134 million hectares of forest, covering 17% of Australia's land area with the seventh largest reported forest area globally. Australia’s forests are diverse, extensive, and highly regarded for their ecological, economic and social values. The Australian Government’s National Forest Industries Plan provides a vision supporting the forest industries' aspirational goal of planting a billion new plantation trees over the period to 2030 to meet growing demand for wood and wood products. Australia has a well-established institutional framework to support the conservation and sustainable management of forests.3

"Australia has a well-developed plantation forestry industry, with significant historical institutional investment."

In addition, Australia has a well-developed plantation forestry industry, with significant historical institutional investment. Figure 2 provides an overview of the approximately 2 million ha Australian plantation estate. There is approximately 1.04 million ha of softwood plantation and 0.88 million ha of hardwood plantation.3

Figure 2: Australian Plantation Estate3

The national Emissions Reduction Fund (ERF) is a key component of the carbon regime in Australia. It is a voluntary scheme overseen by the Clean Energy Regulator to provide incentive for participants to adopt new technology or practices to reduce their carbon emissions. A range of activities are qualified under the scheme and participants can earn Australian Carbon Credit Units (ACCUs) for carbon abatement. The activities include methods for the land sector, including increasing soil carbon, reducing livestock emissions, expanding opportunities for environmental and carbon sink plantings, and reforestation. The method available for plantation forestry is the Carbon Credits (Carbon Farming Initiative – Plantation Forestry) Methodology Determination. Four activities can be conducted under the plantation forestry method, including to:

  • Establish a new plantation forest on land that has had no plantation forest for seven years;
  • Convert a short-rotation plantation to a long-rotation plantation, where the conversion might occur either partway through the short-rotation plantation cycle, or following harvest of a short-rotation plantation;
  • Continuing rotational harvest cycles in a plantation forest provided the land would have otherwise been converted to a viable, non-forested land use; or
  • Transitioning a plantation forest to a permanent forest, in situations where that plantation is at risk of being converted to non-forested land.

Increasing direct investment in Australian forestry


In an Australian context we’ve seen two recent examples of direct investment in the forestry sector, both with important NCS characteristics.


Munich Re/MEAG

ASX listed Midway Limited (Midway) is one of Australia’s largest wood fibre processors and is involved in the production and export of wood fibre to producers of pulp and paper products throughout Asia.


Azure Capital recently advised Midway on the sale of its 17,000-hectare (gross) plantation forestry estate in south-west Victoria to a client of MEAG, Munich Re’s asset manager, for A$154.1 million. As part of the sale agreement, MEAG has also committed to invest an additional A$200 million in development of new hardwood forestry plantations in Victoria over the next five years. Midway will provide ongoing plantation management services and also provide a binding offtake for all wood products from these assets.


The transaction had a material carbon element. Strong ACCU generation is expected from primarily greenfield development with significant carbon offsets expected to be created through afforestation. This translates into a material component of the return profile for the greenfield assets. In addition, MEAG will be provided with exposure to a substantial natural capital asset with opportunities to enhance the natural ecosystems within the estate.


The sale of the existing plantation estate realises significant value for Midway shareholders and the MEAG greenfield commitment contributes towards the long-term-viability of the Midway’s processing and export facilities in Australia.



In 2021, AXA IM (AXA) acquired approximately 24,000 hectares of Australian woodland and an associated forestry management business. The estate is one of the largest in Australia’s premier forestry region, the Australian Green Triangle forestry region, which is located in south-east South Australia and south-west Victoria.


AXA highlighted that the forest’s significant carbon sequestration characteristics aligned with its wider approach to responsible investment and ambition to seek opportunities that combat climate change, preserve biodiversity and provide sustainable returns for its clients. A large scale wind farm is also being developed on the plantation site (Kentbruck Green Power Hub).


Azure Capital has a dedicated forestry and agriculture advisory team, and is actively working with participants in the sector including advising on NCS related issues.  


1.  Defined as the conservation, restoration, and/or improved land management actions that increase carbon storage and/or avoid greenhouse gas emissions across global forests, wetlands, grasslands, and agricultural lands.

2.  Sourced from Griscom et. Al. ‘Natural climate solutions’, Proceedings of the National Academy of Sciences of the United States of America  

3.  Sourced from Australian Government – Department of Agriculture, Fisheries and Forestry 2020-21

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