Experienced Danes branch out in natural capital

Danish pension funds, alongside their Nordic peers, have been pioneering natural capital investments for some time, with timberland representing the largest component, followed by agriculture and most recently ecosystem restoration. 

Some of the early adopters, since the mid-2000s include Sampension, AP Pension and Lærernes Pension. Last spring, the troika further boosted investments into the asset class with a US$160m (€156m) commitment to Ecosystem Investment Partners V, a fund focused on environmental restoration, conservation and biodiversity.  

Danish pension funds typically allocate 2-3% of their assets to natural capital, but this could grow, says Céline Claudon, chief commercial officer at International Woodland Company (IWC), the natural resources investment specialist and adviser to Sampension.

Sampension, for example, the third-largest pension fund in Denmark, has DKK5.91bn (€792m) in the asset class, representing just over 2% of its total assets. Claudon estimates that Danish institutional investors have invested close to US$4bn in natural capital over the past 30 years. 

IWC’s green natural capital investments encompass timberland, agriculture and ecosystem restoration, although Claudon notes that Danish investors “tend to gravitate towards forest investing”. She says: “Agriculture is more prominent in other countries and if Danish funds are investing, they tend to do it directly and domestically. It is growing but is smaller than forestry today.

“Ecosystem restoration is also smaller compared to forestry. However, IWC and some of its Danish clients have been involved in this space since 2007-2008, focusing on core markets, particularly the US, where there is a regulated market for it.” 

Claudon expects investments in agriculture and ecosystem restoration to catch up to forestry, but this is yet to be apparent. “In particular, investing in ecosystem restoration is likely to grow in the next few years because of the biodiversity crisis as well as regulatory pressure,” she adds. 

Another factor that plays into ecosystem restoration and biodiversity-focused investments, particularly locally, is the ‘feelgood factor’. Claudon says: “Restoring ecosystems like wetlands and contributing towards such projects is viewed very positively by the general public and the pension fund members.” 

Sampension’s journey into the asset class started fairly typically for Danish and other investors, through a number of smaller tickets in global closed-ended funds, which Claudon insists is a good way to enter and get to know natural capital. “Today Sampension’s main focus is on a few large separate accounts in core markets only,” she says. “We see the same trend among other investors that have been invested for some time, not only in Denmark, but the rest of Scandinavia and the US as well.” 

There are several reasons for moving from closed-ended funds to separate accounts, including increased investor control and discretion, better governance and often lower fees, Claudon explains. The fee structure in the sector has been comparable to that of private equity funds, she adds.

“By focusing on core markets, pension funds such as Sampension gain access to what I would call the true characteristics of the asset class, including relatively attractive risk-adjusted returns compared to other asset classes. When investing in emerging markets, you take on a number of extra risks that do not necessarily pay off.” 

Having control and ultimately deciding where to invest and when is key for Sampension and it remains selective and patient for the right investment opportunities, Claudon says, noting that this highlights a clear difference between more seasoned investors and newer entrants that can be more eager to place capital more quickly.

Sampension has substantially increased its knowledge and in-house expertise, but it still uses IWC as an adviser because the asset class is still such a niche sector. “You need specific experts who understand how to grow different tree species, understand potential effects of climate change on forestry and know the different timber markets, as investing in timberland is a very local endeavour,” Claudon notes.

Compared with the wider rush into natural capital among investors, activity among Danish pension funds has been more measured, she argues. Claudon attributes this to the Danes having started investing globally in the asset class earlier, along with other Nordic and North American investors. Investors in markets such as France and Germany have, to date, tended to focus on domestic assets.

IWC was established in 1991 by Danish institutional investors in order to be able to invest internationally in forestry. IWC is both a natural capital manager and adviser and is now majority-owned by BNP Paribas Asset Management, with US$6bn in assets under management or advice (its advisory business is dominant).

Claudon says that one of the biggest changes during her two decades at IWC is the motive investors have for investing in natural capital. “When I started, it was purely for the financial characteristics of the asset class: the inflation hedging, the diversification factor due to low correlations with other asset classes, and the attractive risk-return profile,” she says. “The importance of climate change, carbon-footprint considerations and, lately, the biodiversity crisis, are of increasing importance, making them key reasons for investing, particularly for new investors, rather than purely diversification and financial metrics.”

One example of a relative newcomer is PFA, the largest private pension fund in Denmark, which for two years sought to invest up to US$130m in US forests through Forest Investment Associates.

Claudon says forestry continues to provide opportunities, even if competition is heating up in some markets, making it harder to deploy capital. “The key is to be patient and differentiate yourself from others,” she adds.

Based on IWC studies and other research, Claudon estimates that there is US$200bn worth of institutional-quality timberland in the world, excluding privately held forestry. “While there is much more forest than that in the world, it is not all investible because of quality issues or conservation reasons,” she says.

“Out of the US$200bn, some US$120bn are invested today, so there is still US$80bn to be invested in by institutional investors. Also, it is likely that another US$100bn will be investible once the privately-held timberland becomes available – together with afforestation projects, newly planted areas, but this is likely over a 20-year time period, rather than five to 10 years,” she says. 

Challenges also remain. For existing, experienced investors, finding the right opportunities, to grow exposure or replace assets as existing investments mature can be a conundrum. New investors have to grapple with the question of which category natural capital belongs in.

Claudon says: “Is it part of the alternatives bucket, if there is one, or is it real estate? Is it green infrastructure, or is it inflation-hedge? I hope and expect that in the next few years, natural capital will be its own bucket and an allocation on its own in order to fully appreciate its unique characteristics.”