The 2015 Paris Agreement set a global goal to reach net zero emissions in the second half of the century. As of June 2020, 120 countries have committed to this net-zero target. To fulfil this commitment and limit global warming to 1.5°C, the International Panel on Climate Change (IPCC) has shown in a new study that all climate scenarios rely on negative emissions technologies (NETs) alongside deep decarbonisation. Demand for NETs in the form of both natural and technological solutions that actively remove carbon from the atmosphere is also being driven by corporations. In less than a year, there has been a threefold increase in the number of companies committing to net zero emissions, from Apple to General Electric. To fulfil these commitments, companies will require deep decarbonisation efforts, with residual emissions balanced by investment in carbon removal activities.
New analysis commissioned by the UN-supported Principles of Responsible Investment (PRI), predicts that these negative emission technologies could create trillion-dollar upside opportunities for investors as more and more countries, cities and corporates make ambitious plans to become net zero. Although innovative technology such as bioenergy with carbon capture and storage (BECCS) is currently the leading negative emission technology in all Paris aligned scenarios, it remains expensive and most studies suggest that producing the high levels of bioenergy required to meet demand is not in fact sustainable. What are proving far more popular and lucrative are Nature-based solutions (NBS) with a focus on reforestation and afforestation which are forecast to generate 800 billion USD in annual revenues by 2050 with assets valued well over 1.2 trillion USD, surpassing even the current market capitalisation of the oil & gas majors.
Thanks to its low-cost and potential for large-scale implementation, reforestation and afforestation appears likely to emerge as the earliest feasible investment opportunity. As well as constraining a large investible market, companies with deforestation in their supply chain expose investors to significant financial risk in terms of potential regulatory action, loss of market access, loss of customers in the short term, and failing to adapt to the transition to a low-carbon economy in the longer term. Analysis from the Inevitable Policy Response project suggest that risks associated with legal action, market access, and consumer pressure could decrease a company’s valuation by up to 15%.
Corporates have already started to channel their resources into forest related NBS to achieve their new net-zero goals. For example, Apple is funding conservation of an 11,000-hectare mangrove forest in Colombia. Earlier this year, Amazon launched the Right Now Climate Fund, which is investing 100 million USD in nature-based solutions. BP is paying to protect 40,000 hectares of forest in Zambia and Total has committed to investing 100 million USD a year in forest protection. From 2017 to 2018, the value of forestry and land-use related credits traded in the voluntary offset market tripled to 172 million USD, increasing the share of forestry and land-use-related offsets in the total voluntary offset market by 23%, from 52% to 64%.
Demand for NBS carbon credits is likely to increase as both countries and companies seek to stay ahead of competitors and prepare for climate regulations. Investors who move early have a unique opportunity to support the forestry market’s institutional development by engaging with policymakers and companies while developing innovative business models and financing mechanisms to channel finance.
Analyst: Olivia Pepper
Sector Head: Sophia Li
Editor: Harry Forbes-Nixon