Stafford Capital: Taking the (carbon) credit

Some 18 months ago, Stafford Capital Partners began investing in greenfield forest projects – signalling a significant change of direction for a manager that had invested solely in brownfield assets bought on the secondary market over more than two decades.

The move was a preamble to the launch of a carbon strategy to fill what Stafford Capital perceives as a “desert” in the market for investors seeking exposure to natural capital and, in this instance, in timberland for the additional benefit of carbon credits.

By late 2022, Stafford had established its first carbon-offset vehicle, raising US$242m (€236m) from three UK local government pension schemes. Within 12 months, the strategy had raised US$635m – more than half the US$1bn target.

“The strategy recognises the need to plant more trees to bring all the environment benefits that come from having more forest in the world and a greater supply of timber,” says chief executive Angus Whiteley. 

Stafford manages US$8.4bn, half of which is in timberland and the other half in private equity and infrastructure. Its timberland assets are in Australasia, North America and parts of Latin America.

Pressure to contribute to climate solutions is inexorable, but hard-nosed institutions, mindful of their fiduciary responsibility to investors, wrestle with the question of whether natural capital is competitive relative to other asset classes. “This is the discussion we have with potential investors before the ones who put money to work in the natural capital space,” says Whiteley. 

Two strategies

To meet their requirements, Stafford offers two distinct strategies – one focusing purely on commercial returns, and the second on carbon and the delivery of carbon credits as part of the return.

“Our first strategy is to acquire existing forests and, importantly, we use secondaries to access assets. This gives us higher, solid returns from the underlying mature forests that we can access and which we believe would otherwise be unavailable if investing directly.

“The second is our afforestation strategy. We buy degraded, non-productive land to grow trees for carbon capture and to create biodiversity. This is our greenfield approach. Trees are planted on 70% of the land, and the remaining 30% becomes a riparian zone where nature can sit happily and thrive. Previously and prior to carbon credit being in place, we did not believe this strategy would work because it wouldn’t have attracted investor interest.”

Nor can it be applied to mature forests. “There may be underlying carbon stored within the forests, but they will be more limited, and it is harder to meet the additionality requirements,” Whiteley explains.

The global carbon-credit market continues to display strong growth. Estimates as to the size of the market vary. The World Bank said in 2023 that carbon pricing revenues had reached a record US$104bn, while the LSEG Carbon Market Year in Review in 2023 said the EU emissions trading system was worth around €770bn in 2023, representing 87% of the global total.

The market is complex, made up of compliance and voluntary sectors, but its presence enables managers like Stafford to offer timberland investors an extra revenue source, provided they observe certain additionality and permanence requirements when planting new forests, says Whiteley.

“I should stress that, while the carbon strategy is also delivering a commercial return to investors, that commercial return will be delivered in 10 or 15 years when the trees mature. Along the way, investors get capital growth and the sale of carbon credits. We expect to return 5% or 6% from a greenfield afforestation strategy.”

He adds: “Historically, return from timberland is around 5%, which is too low to attract much capital. That is why over the last 30 to 40 years there has been so little new planting of trees, except when there are government interventions, typically in the form of tax, subsidies or state ownership of assets.

“The reason new planting is taking place is because there are carbon credits. We see another 5% return coming from those when combined with the underlying return from timber production, giving investors a commercial return from their investment.”

Carbon credit integrity

Whiteley stresses that, for carbon markets to work, there must be transparency and accountability to protect the integrity of the carbon credits. He is also encouraged by the recent COP29 meeting in Azerbaijan which saw moves to make carbon credits transferable across national boundaries.

As well as managing environmental risks effectively, and contributing positively to the environment, he says timberland is a good long-term investment. “Timber and timber products are a fundamental need to society,” he says. “This is a core and real characteristic of the feature of these assets, and wood products also happen to have significant negative carbon intensity to them. The forests themselves have a special role in carbon sequestration.

“Capital started to flow into natural capital investments from the institutions in the last four to five years. But the time to do it is to get into the market reasonably early to reap best benefits from the investment.”

For this reason, Whiteley is disappointed that potential investors like Australia’s cash-rich superannuation funds, which are interested in nature-based solutions to climate change, are restricted from investing in a new sector like natural capital. He says Australia’s prudential regulations require superannuation funds to benchmark their performance every year. 

“The regulations remove the freedom of a very important source of capital for achieving its goal to be a meaningful player on a global stage,” Whiteley says. “It is a pity as Australia wants to be a leader in investing in the environment and it wants to be leaning into this topic and to be recognised as an important player in natural assets.” 

Stafford has seen active deployment into natural capital markets from UK investors. Parts of Europe are also allocating to natural capital, while another country that has become an increasingly important source of capital is Japan.

Whiteley says that the primary concern of US investors is the financial return. “The GP community in the US reflects a much more established business there than other countries,” he says. “Timberland investment strategies originally developed from North America where institutional investors have long bought assets from fully integrated timberland organisations.”