Manulife Investment Management, the world’s largest manager of natural capital, has announced the initial close of its Forest Climate Fund (FCF). The FCF, launched last year, is a closed-end fund that aims to produce carbon credits through natural carbon sequestration. The fund primarily targets U.S. investors and select institutional investors who are interested in championing climate change mitigation through the stewardship of sustainably managed forests. Around 70% of the fund will be invested in carbon projects, with the goal of prioritizing carbon sequestration over timber harvesting. The FCF has already received commitments totaling approximately $224.5 million, and it aims to reach its targeted offering of $500 million.
The investment strategy of the FCF revolves around enabling investors to engage in timberlands managed to produce high-quality carbon credits through enhanced sustainable forest management practices. By increasing the amount of carbon stored in forests, these projects not only generate credits but also contribute to mitigating global warming. The strategy also includes the establishment of new forests through afforestation or reforestation, which generates high-quality credits while securing sustainable timber value. The fund aims to capture potential climate benefits by leveraging carbon credits, conservation easements, and limited timber harvests, all while ensuring competitive financial returns for investors.
The financial success of carbon projects like the FCF depends on future predictions of carbon prices. Historically, forest carbon credits have experienced notable pricing fluctuations, particularly within voluntary carbon markets, where prices have been relatively low. However, the situation is changing due to the surge in net-zero commitments made by companies and investors. Forestry projects accounted for 30% of the total carbon offset credits issued by voluntary registries in 2022. These projects come in various forms, including improved forest management (IFM) and afforestation/reforestation. IFM projects, in particular, have produced 193 million carbon offset credits since 2008, accounting for 28% of the total credits from forest projects and 11% of all credits generated in voluntary markets. The growing perception of natural climate solutions as having high value also contributes to the upward momentum in carbon pricing.
Despite investigations revealing the weaknesses of forest carbon sequestration, investors remain interested in natural climate solutions. Projections indicate that initiatives aimed at reducing carbon emissions through forests and other natural environments will continue to expand. Eric Cooperstrom, highlighting Manulife’s expertise and experience in sustainable forest management, stated, “The Manulife Forest Climate Fund expands on our decades of sustainable timberland management experience and is one of the natural climate solutions we have developed to sequester carbon more intensively and drive broader impact.”
Manulife plans to allocate the carbon credits to investors through direct in-kind transfers. This will allow investors to use the credits to fulfill their individual climate objectives or potentially monetize them in voluntary carbon markets through offset sales. Carbon offsets are sold through various exchanges, online marketplaces, and directly via carbon projects that reduce or remove emissions. Manulife’s current portfolio of sustainably managed forestry assets covers the U.S., Canada, Australia, New Zealand, and South America, totaling around 5.5 million acres of timberland. The majority of these assets are in the U.S., representing over 95% of improved forest management carbon credits issued and retired.
Forestlands are considered one of the most valuable nature-based solutions to combat climate change, and climate investors recognize the importance of protecting forests (REDD+) in the fight against the climate crisis. Manulife’s Forest Climate Fund is a carbon-focused impact investment strategy and is the company’s first natural capital fund recognized under Article 9 of the European Commission’s Sustainable Finance Disclosure Regulation (SFDR). While natural capital strategies that produce carbon credits have expanded recently, the way they distribute the credits differs. Stafford Capital Partners also launched its own forest carbon credit fund, the Carbon Offset Opportunity Fund, earlier this year. The fund raised $242 million in investor commitments from three UK local government pension schemes. By prioritizing carbon sequestration over timber harvesting, Manulife IM’s Forest Climate Fund demonstrates a commitment to carbon reduction and sustainable forest stewardship. Manulife’s innovative approach aims to generate high-quality carbon credits while ensuring both environmental impact and financial returns for investors, thus bolstering the fight against climate change.