Exclusive: Stafford’s CEO on why more asset owners should venture into the forest

Last month, Stafford Capital Partners announced a $242 million first close of its new Carbon Offset and Sustainable Timberland Impact Fund, which included commitments from the UK local government pension schemes of Essex, Leicestershire and the City and County of Swansea. 

The fund, supporting the institutional decarbonisation agenda, has a target of $1 billion by the end of this year.

A good time for Net Zero Investor to catch up Angus Whiteley, the CEO of this independent boutique investment firm that manages around $7.5bn in AUM and offers its 140 institutional clients worldwide exposure to real assets such as infrastructure, timberland and agriculture and food, as well as private markets, mainly through secondaries and co-investments.

The firm's timberland business is one of the largest for institutional capital in the world and has been investing in managed forests and afforestation for 20 years across Europe, the Americas and Australia.

The IPCC report released in March was a 'final warning' on climate stating without drastic action we will likely exceed global warming targets. What should investors make of this?

The IPCC report was a renewed reminder of the vulnerabilities we face in the wake of the climate crisis. Today we are pushing the boundaries of the resources available on our planet, and without a rapid acceleration of climate action within the investment community, we will struggle to meet the world’s needs. Of course, a key takeaway from the report for us was the huge emphasis on the need to not only reduce greenhouse gas emissions, but to remove these gases from the atmosphere. 

I see the pivotal role that alternative investments can play in supporting the transition to a decarbonised economy and how investors can find value in adding or expanding these opportunities in their portfolios. In line with this transition, we were also reminded that traditional assets, in certain sectors, are at risk of becoming stranded and no longer investable due to physical and material risks. Adaptation to this new world and strict risk management is key for mitigating these challenges. This is a striking reminder that we should all be well on our journeys to manage and mitigate this.

You recently launched a carbon fund: Why does Stafford think such a carbon offering can make good money?

Recent analysis has forecast the Voluntary Carbon Market to reach somewhere between $10-40 billion by 2030, which is a significant leap from its $2 billion market valuation in 2021. This is based on the needs that companies have to purchase carbon credits to offset those emissions that they are not able to avoid through their decarbonisation efforts.

Planting trees is currently by far the most cost effective means available to remove CO2 from the atmosphere and it provides significant opportunity and optionality for investors with the offsets it generates. Our Carbon Offset Opportunity Fund provides investors with a source of carbon offsets that are generated from forestry projects that remove carbon from the atmosphere. This is something that has not been possible in our previous timberland funds – and we saw this as an opportunity to expand our offering to cater for the rising demand for carbon offsets.

Explain that in a bit more detail please.

Well, we see this optionality through two lenses. First, the investor can choose to use some or all of the offsets towards their own climate targets. In this case, the investment acts as a hedge against the future cost of carbon offsets, which is projected to rise significantly as we approach 2030 and beyond. Alternatively, they could choose to monetise their offsets and capture the value in those rising prices on the Voluntary Carbon Market.

Returns for the Carbon Fund will remain partly rooted in traditional timberland drivers though, with approximately half of the return still coming from timber sales and the capital appreciation of the underlying assets. We are confident that this optionality and blended approach, complements the return profile of traditional timberland investments and offers investors additional capital and environmental return opportunities.

Understood. Obviously these investments flourish if regulatory conditions are optimal. In that respect, asset owners, managers and corporates are all facing somewhat the same net zero struggles. To what extent do you pressure or lobby corporates to implement green investment strategies?

Stafford became a signatory to UNPRI in 2010 and to the Net Zero Asset Managers initiative in 2021. Protecting the environment in which we all live is critical and needs the collective efforts of all asset owners, managers and corporates. While Stafford has products which generate returns through delivering positive environmental and social outcomes, we consider all stakeholders to ensure that we can continue to deliver returns to our clients over the long term. So, this ‘struggle’ is core to our business activity.

Under Principle 4 of the UNPRI, we work to promote acceptance and implementation of the Principles within the investment industry, something we take seriously in our dialogue with other managers, LPs and other stakeholders across the industry. Our activities as an asset manager do not extend to lobbying corporates to implement green investment strategies. Our investor base is dominated by pension funds and insurance companies, where we spend time putting forward the merits of our products and how they address both environmental and social challenges alongside the return they deliver for their members and clients.

Stafford also invests in infrastructure and private equity - are alternative assets the answer for helping investors achieve net zero?

In short, yes. Timberland is just one of many alternative assets that can help investors achieve net zero without compromising returns. Through our infrastructure and private equity vehicles, we are able to demonstrate that a broader alternatives portfolio can also achieve this and support the transition to net zero.

Infrastructure as an asset class has matured over the last two decades, and now forms a meaningful allocation of investors’ portfolios. In this time. it has already played a significant role in the energy transition pathway, providing the expertise and capital to develop a source of renewable energy that will be part of all of our net zero agenda. The capital requirements remain vast, representing a great opportunity for investors to support their net zero goals alongside achieving the returns they seek.

And private equity?

As for private equity, it is uniquely positioned to push decarbonisation efforts within every industry and geography. On a portfolio-level, private equity firms can build custom-made portfolios for investors that are designed to align with net zero. Alongside a decarbonising program, portfolios can also be built in lower carbon-intensive sectors or more proactively in strategies that assist the decarbonising process directly with innovation and new business models.

Due to the nature of private equity investors working closely with management, they are also well positioned to motivate meaningful change within companies in short timeframes. This in all, creates an effective dynamic that helps implement decarbonising strategies in PE and one that is needed within other asset classes. 

In terms of reporting and disclosures, what do you expect in the next, let's say 2-5 years?

We are anticipating substantial changes in reporting and disclosures over the next few years. Much of this is being driven by the EU Sustainable Finance Disclosure Regulation (SFDR). Our traditional timberland strategy is categorised as Article 8 under the SFDR, and our carbon strategy as Article 9. This means significant additional reporting around the sustainability of the vehicles. 

There is also growing interest from our investors in receiving GHG emissions metrics associated with their investments. This is important for them in determining the overall emissions profile of their portfolios – and to track progress in decarbonising those portfolios. This will inevitably have a cascading effect as multiple underlying and interconnected business sectors look to improve on the collection and reporting of emissions data through their value chains.

Finally, many fund managers claim their investment vehicles are green and sustainable, so what frameworks and investment benchmarks does Stafford use to ensure its investments are having a genuine impact on emissions, and broader net zero issues like biodiversity?

Focusing on our timberland activities, Stafford’s Carbon Fund is classified as an Article 9 fund under the SFDR, which means that all investments will have to be assessed under the substantial contribution, do no significant harm (DNSH), and minimum safeguard criteria specified within the EU Taxonomy. 

Carbon projects developed on the Fund’s underlying assets will be subject to stringent third-party audit processes before the project can be registered – and prior to each occasion when carbon offsets are issued by the project. This is intended to ensure that the climate impact of the project is properly assessed and quantified, thus maintaining the quality and integrity of the carbon offsets that it issues.

Forest certification remains another important factor for us in demonstrating a high standard of ESG compliance across our investments. About 96% of our timberland portfolio is currently certified, with the remainder consisting of harvesting rights where we do not own the underlying land, or of young timberlands that are planned to be certified within the near future. Alongside this, as the issue of biodiversity becomes better understood and the frameworks are developed, it will be easier to communicate clearly the good work that is carried out by the timberland industry to maintain and enhance the world’s biodiversity.

Anything else you would like to say or share with our readers?

Alternative asset classes have earned their place in investors’ portfolios by consistently delivering investment returns in line with their mandate. Within the investment community, we have seen that allocations to alternatives have been on an upward trend.

As highlighted by the IPCC report in March, people’s responsibility has extended to safeguarding the planet in which we all live. In order to meet these needs effectively, and in the timeframes required, we need to mobilise capital within the investment community and allocating them to alternatives is a significant part of the answer. 

With the timberland sector and its ability to sequester carbon, through the additional infrastructure needs to transition our energy to low carbon sources, and through the interventions brought about by private equity to decarbonise, we will be well positioned to deliver a diversified alternatives portfolio for investors to achieve their net zero objectives.