Climate managers bet on farming to boost biodiversity investment

Sugar cane is one of Australia’s largest agricultural exports. The country’s raw sugar exports are expected to reach 3.5 million metric tons (MMT) in 2023/24, up from, 3.2MMT last year. Under the new free-trade agreement with the UK, Australia's Department of Agriculture, Fisheries and Forestry expects the value of the country's sugar exports to the UK to reach A$74 million ($48 million).

However, on the ground, thousands of hectares of sugar cane farmland are being repurposed to cultivate macadamia orchards instead, as investment managers look for high-value agriculture assets with better sustainability credentials that appeal to impact investors.

“We have the capacity to optimize land use by switching from purely monoculture to much more sustainable cropping strategies that incorporate species native to the region,” says Ben O’Donnell, chief investment officer of Climate Asset Management’s Natural Capital Fund.

Climate Asset Management, a joint venture of HSBC Asset Management and climate investment and advisory firm Pollination, has just completed the acquisition of 1,800 hectares of farmland in Queensland. The firm did not disclose the value of the acquisition.

By switching crops, the project will reduce pesticide use and conserve water resources. It will also allocate a portion of land to biodiversity regeneration, targeting key environmental and resource concerns of farming assets.

There was a pricing incentive too. Recent forecasts for macadamia prices have predicted good long-term growth for the premium nut, certainly better than those for raw cane sugar exports. That, in turn, has prompted greenfield macadamia planting across the state of Queensland.

The global macadamia market was valued at $1.58 billion in 2022; it is expected to expand at a compound annual growth rate of 9.3% between 2023 and 2030, according to Grand View Research.

In Australia and elsewhere, impact-driven private equity managers are purchasing land to transition farming models to mitigate the commodity-pricing, operational and new climate risks that threaten returns in conventional agriculture investments.

And the sector, which typically attracts risk-averse institutional investors looking for cash yield from a landlord-tenant model, is making room for a nimbler investor base.

In many ways, regenerative farming is to food and agriculture what renewables are to the energy sector.

Financing a more sustainable version of farming can help accelerate emissions reduction in the agriculture industry. It can also bring down overall costs.

In conventional farming, land use is coupled with increasingly high input costs because of the negative impact that monoculture crops have on soil quality and biodiversity, which increases the need for more pesticides, herbicides and fertilisers in a vicious circle.

“Conventional farming operations have been designed with high input costs and equipment use in mind," says Ryan Cameron, chief investment officer at Regenerate Asset Management. "Now that weather shocks are more frequent, the sector has become distressed.”

Regenerate, a boutique investment firm, has launched a European sustainable agriculture fund and secured €150 million from M&G’s impact investment fund Catalyst. It is in the final stages of securing its first farmland acquisition.

For Cameron, the regenerative agriculture trend is one way of capturing a new return opportunity in this asset class, while also addressing structural issues.

“The gradual pricing in of pollution and depreciating quality of the crops is affecting return on investment in conventional farming,” he says. “These head winds also create an opportunity to implement better and more resilient farming methods, which regenerate the land and improve profit per hectare.”

Farmland assets can come with a form of greenium too, as corporates are willing to pay more for raw materials that have a better sustainability score.

“These types of practices enable a fundamental shift in the carbon accounting of the land asset,” says Morten Rossé, head of nature and climate at HolistiQ Investment Partners, a new climate investment venture by Lombard Odier Investment Management. "You can sell that as a carbon credit. But what’s more attractive to us is selling that within the value chain to corporates that are worried about their Scope 3 targets."

One example is Nestle, which announced last June that it would be moving away from its carbon-offset pledges and carbon-neutral messaging to focus on greenhouse-gas emission reductions in its operations and supply chain.

Nestle isn’t the only big commercial company motivating private equity investors to look into regenerative agriculture. In May 2022, Unilever partnered with Axa Climate and alternative asset manager Tikehau Capital to launch a €1 billion PE fund to invest in regenerative agriculture projects and companies.

Investment managers are now looking for an array of crops that could cater to commercial players in the food and beverages industry.

“We’re looking at coffee and cacao plantations as well as cosmetic ingredients, which are all suitable assets for agroforestry,” adds Rossé.

Traditionally, the farmland segment of real asset investing has been dominated by large institutions such as pension funds and real estate investment trusts (Reits), who look to benefit from the capital appreciation of land values.

Whether the new investment model that these boutique firms are offering will attract the same type of investors remains to be seen.

But for Climate Asset Management’s O’Donnell, work on transitioning farms to regenerative practices is paving the way for institutional capital to invest in nature and environmental assets, especially when there is a carbon accounting angle.

“We are experiencing increasing appetite from investors for opportunities in natural capital to help diversify and rebalance investment portfolios targeting net zero,” he says.

HSBC AM is an anchor investor in the manager’s Natural Capital Fund, alongside 11 others, including insurance companies and pension funds.

As awareness of the financing needs to protect biodiversity grow, the carbon-offsetting benefits of natural capital assets such as transition agriculture could drive investment.

“We’re seeing genuine interest from investors now, especially with the policy developments around [Taskforce on Nature-related Financial Disclosures],” says Rossé, adding that there will be a need to educate the investor community to get them comfortable with this model.

“We are talking to investors that already have Reits or property mandates and who are used to making real-assets investments,” he says.