Highlighting the role of natural capital in portfolios

Talking Heads podcast with Celine Claudon

Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Our aim is to bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the role natural capital can play in an institutional investor portfolios. I’m Andy Craig, Co-Head of the Investment Insights Centre, and I’m joined today by Celine Claudon, Chief Commercial Officer for the International Woodland Company, also known as IWC.

By way of introduction, let me explain that IWC, based in Copenhagen, is a leading natural resources investment company with deep experience in global timberland agriculture and responsible investment. The BNP Paribas Group acquired a majority stake in IWC in 2023. They bring their long experience and expertise in the provision of investment services for natural resources.

Welcome, Celine, and thank you for joining me today.

Celine Claudon: Hello, Andy. Great to be here.

AC: Let’s start by talking about the factors driving the interest from institutional investors in forestry today. Would you say that they’re purely financial or are they also linked to broader sustainability goals? And how have they evolved over time?

CC: Yes, of course. When I started working with natural capital 20 years ago, institutional investors were purely investing for the financial characteristics of the asset class. Those are mainly inflation hedging, diversification due to the fact that timberland especially, and agriculture also, have no correlation with bonds and equities. And the attractive risk return profile. That was 20 years ago, and until probably 10 years ago, [that] was the case: purely financial considerations from investors. Today, the importance of climate change, the carbon footprint, and lately the biodiversity crisis, are getting more and more into the mind of investors. They may even have become the main key reasons for investing in natural capital.

AC: Timberland has traditionally been seen as a good hedge against inflation and as a means of diversifying portfolios. The investment case has been strengthened by the sustainability characteristics of the asset class. What about misconceptions that investors may have about forestry as an asset class?

CC: First, I will say that many investors still assume forestry is a long-term illiquid asset. In reality, though, you can design a diversified portfolio across age, class, sales and structures to actively manage liquidity. Sustainable forestry typically offers a 2-4% annual cash yield, which is highly valued by pension funds and insurers because it aligns well with their long-term liabilities. The cash yield can even be higher when investing in farmland, for example.

Another misconception is that returns depend primarily on carbon credits. In fact, timber, the sale of wood, remains the main value driver for most forestry investments with carbon revenues providing an optional upside. While dedicated carbon strategies do exist, the core income and return driver of most sustainable forestry investment is still the sale of timber to meet the rising global demand for renewable materials.

Turning to the main barrier for new investors today, it’s simply where to place natural capital within their strategic asset allocation. Many are wondering, is it part of the alternatives bucket? Is it real estate, green infrastructure, inflation hedging strategies? My hope and my expectation is that in the coming years, natural capital will become a standalone allocation and that its unique characteristics will be fully recognised.

AC: The idea that investors would have an allocation to natural capital would make a lot of sense, and it would probably be something that we could expect to see in coming years. At the moment, what do you see as the main trends or the forces working in favour of natural capital investing?

CC: First of all, more and more investors are looking at natural capital investment as an investment that can contribute to solving climate change and biodiversity loss. It usually takes a long time for them to actually make the first investment because it is so niche. But we see an uptick in the interest from investors.

On the revenue side, there are more new revenue streams that make the returns attractive from not only the sale of the wood, but also from carbon credits, potentially biodiversity credits, and other income. Then there’s a technology progress, AI, remote sensing, blockchains, more from an operational perspective. That is key when we measure impact. We can actually do detailed reporting to investors into, for example, carbon sequestration, biodiversity improvements.

And maybe finally regulation. Regulation can be a burden, but for investments that are as sustainable as natural capital, it is a push. Regulatory framework are actually supporting natural capital as an asset class.

AC: To wind up my questions, what if you had to give one piece of advice to investors considering an allocation to natural capital or forestry? What would it be?

CC: I would say, don’t let that lack of a bucket keep you from investing in an asset class that will provide financial and environmental benefit to your portfolio. Please look further than just the bucket and I can’t do it because it’s not in my strategic allocation. The second one will be, there are numerous strategies within natural capital. You need to make sure you get acquainted with what are those strategies and what are the different managers offering those and decide what is the ideal balance between risk, return and impact that you want to make. Investing, for example, in a core timberland in the US might be great for one investor, but another would prefer to invest in regenerative agriculture in Brazil. There are a lot of opportunities within natural capital.

AC: It sounds like a compelling case both for natural capital and for forestry. Thank you very much, Celine, for joining me today.

CC: You’re very welcome.

AC: That’s it for this week’s episode of Talking Heads. If you’d like more information on natural capital or investing in timberland, please reach out to your BNP Paribas Asset Management contact or to go to Viewpoint, our website for investment insights @ viewpoint.bnpparibas-am.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with Celine Claudon from the International Woodland Company. Please do join us again next time. Until then, take care.