Resources

• This IPCC Special Report on Climate Change and Land summarizes the impacts of climate change on terrestrial ecosystems, and in turn how human activities such as agriculture and forestry contribute to climate change
• This set of case studies by The Nature Conservancy provides an overview of natural carbon capture
• New Forests’ 2020 Climate Disclosure Report provides an overview of the company’s climate-related strategy, risks, opportunities, and impacts as well as its climate action plan.
• Learn more about New Forests.

Guests

Host: Rebekah Emanuel, Head of Social Entrepreneurship, Harvard Innovation Labs

Guest: David Brand, Founder and CEO of New Forests

Transcript

David Brand:
So we see the opportunity for carbon to significantly transform the value in nature of the forestry sector. It’s kind of a tipping point in the price where more conservation, long-term perpetual restoration work becomes economically attractive. That's what I expect will happen, is we'll start to see an evolution in how landscapes are managed and invested in depending on the price of carbon.

Rebekah Emanuel:
I'm Rebekah Emanuel, and this is Climate Rising, a podcast from Harvard Business School. We explore the business implications and opportunities of climate change. In this season of Climate Rising, we focus on entrepreneurship tackling climate change. I'm the Director of Social Entrepreneurship at Harvard Innovation Labs, and I work with current and future entrepreneurs every day. Sustainable forestry can be complicated, debated, and have a counter-intuitive opportunity. There's a general consensus that preserving forest is good for our climate. That can make forestry, cutting down trees, a pretty awkward business. Today, I'll be speaking with David Brand, founder and CEO of New Forests. New Forests is a business that manages forest for long-term returns for institutional investors. He has an unusual climate vision.

Rebekah Emanuel:
Right now, the forestry business, together with agriculture and land use, is responsible for about one quarter of the emissions that cause climate change. That's because trees absorb carbon in their wood and leaves and harvesting trees and disturbing soil releases carbon into the atmosphere. Brand wants to reverse that. If right now forestry, agriculture, and land use are responsible for producing one quarter of global emissions, he wants to make the forestry industry responsible for capturing well over that percentage of emissions, all within 10 years. He sees this as quite profitable, too. We started our conversation by talking about just how much land his company manages and what they do. David, thank you for joining us.

David Brand:
My pleasure, Rebekah. Nice to talk to you.

Rebekah Emanuel:
Good to talk to you too. So you founded New Forests, which manages the land, cuts down trees, sometimes processes the trees into a range of products. Can you give us a sense of how large that is? How much land do you manage?

David Brand:
Well, it's almost a million hectares, which is about two and a half million acres. We operate across six countries. The U.S., Australia, New Zealand, Indonesia, Malaysia, Laos, we’re harvesting probably about seven million cubic meters of timber each year, which is about seven million telephone poles, if you think about it that way. We operate across all different types of forests, both temperate and tropical and we have a large part of our area is actually natural forests. We're managing that for conservation. So we have both production areas and conservation areas that we integrate together.

Rebekah Emanuel:
You've set yourself a challenge of reversing the forestry sector's historical role. In the past, forestry and land use were a major contributor to climate change. You not only want to stop that, but dial the needle completely the other way. You want to make forestry responsible for 30% or more of all climate mitigation, and soon, by 2030. Can you tell me what would key drivers of that be?

David Brand:
Well, I think there's two or three elements of this. The first is that we absolutely must stop converting natural ecosystems to production systems. What we have now in terms of land use, we need to just use better, make it more productive and make it operate in a way that we can keep up with human population growth and demand. Secondly, we need to be actively investing in degraded land and recovering that. And part of that will be reforestation, but also putting in things like coastal mangroves and so on that have the potential to help with storm surge and so on. Then thirdly, is to manage our production systems sustainably, and in the case of forestry to try to really push for the substitution of sustainable, low embodied energy materials into the built environment and into our materials supply chains so that we end up with really this circular bio economy linked to sustainable land use.

Rebekah Emanuel:
Yeah. You get paid for all of these three things. You're both getting paid in the carbon markets for the benefits of natural forests, like carbon capture and storage, and you've figured out how to get paid for recovering deforested land. Of course, you get paid when you intensively manage and harvest forests. Can you tell me how new is that?

David Brand:
So one of the key things in forestry has been over history, we've had these positive externalities. In other words, forests are holding more carbon than there is in the atmosphere, forests are the source of much of the world's fresh water. Forests provide biodiversity. Half of the world's biodiversity is within forest ecosystems. All those things are unpriced. So society uses them, in some ways, wastefully and what we have tried to do as a business is engage with the ability to price some of these externalities so that we can actually invest in them. We've been very active, for example, in the forests carbon offset market in California, where we've worked with a number of Native American communities to help them support conservation of their lands.

Rebekah Emanuel:
Yeah, tell me about that.

David Brand:
Yeah. Well, I suppose that when you look at most Native American communities, they have a conservation ethic and the challenge then is to find a way that we can actually economically reward that conservation ethic. It was great that the California AB 32 carbon market created a system of carbon offsets that rewarded land owners who had done the right thing and had conserved their forests.

Rebekah Emanuel:
So via California's carbon markets, you can get paid for reducing emissions. California caps how much carbon can be emitted by say, a given company. Then companies that need to emit more carbon than their cap allows for their business can actually pay someone else who reduces emission. That offsets the amount that they're over the cap. This is what these Native American communities could get paid for if they can verify the carbon impact.

David Brand:
For many of these communities, what they needed was the technical expertise of how you set up the carbon project, take it through a complex regulatory approval process and then actually get the carbon offsets and sell them. We do all that process and we do that on the basis that we'll put our money at risk, and then we'll just take a share of the proceeds at the end. As you say, we've worked with two or three American first nations in California, in Alaska, the Mescalero Apache in New Mexico and all of these projects I think have made a really significant difference to these communities in terms of giving them a significant economic asset that they can then use for community development. We see a new model of the forestry sector, where it's like a natural infrastructure. We're not only providing sustainable goods to society, but we're also getting paid for some of the ecological services that we're providing. And that really creates completely new investment strategies that can continue to be within the forestry asset class, but deliver different types of returns and more high sustainability outcomes.

Rebekah Emanuel:
It sounds like distinguishing the types of forests is key here and natural forest, unmanaged, uncut, as you were just describing, they sequester a lot more carbon than managed ones, even sustainably managed ones. So up to two times as much. New Forests says that it doesn't convert natural forest to plantations or to non-forest. How did you come about to make that decision? Was that controversial?

David Brand:
Well, it's absolutely important that we not convert any more natural ecosystems into production systems. What we have left needs to be maintained because of its carbon value, because of its biodiversity value, because of its value in watershed catchments. So that's a fairly easy principle for us. Frankly, when we're having our forests certified for sustainability, it's a requirement that you can't have converted natural ecosystems into plantation forests, for example. It's interesting economically, if you have a carbon price signal of $10 or $15, a ton of CO2, what you tend to do is just make changes at the edges. So you might plant new pine plantations on degraded land and still manage them as a forestry crop.

David Brand:
But then there comes a point where the price of carbon gets up to $20, $25, $30 a ton that you start to realize that you can make more money from permanent restoration of mixed forest types. There's a tipping point in the price where more conservation, long-term perpetual restoration work becomes economically attractive. That's what I expect will happen is we'll start to see an evolution in how landscapes are managed and invested in depending on the price of carbon or even natural climate solutions that may include biodiversity enhancement or watershed payments. So all these things are at, I would say quite an early stage, but we're starting to see evidence of how these market signals affect land management.

Rebekah Emanuel:
So you could say that, as we discussed it earlier, your first strategy is finding ways to get paid for not cutting down natural forests. And you've just described a second strategy, which is to actively invest in degraded land, which depends heavily on having a compelling price for carbon.

David Brand:
Yeah. As the price signal becomes persistent, pervasive, and strong enough, then investors will respond and capital will flow into different types of investment strategies that reflect those different markets signals. In New Zealand, we've had projects where we've reforested some of the marginal hill country back with trees and that we can then get funded through carbon offsets and similarly in Australia and Asia. So I think from our point of view, what we want to do is embed conservation and production together, and then carry on over time, holding what we have as natural forests and optimizing the performance of the production for us. The other aspect of this is that sequestration, in other words, trying to pull carbon dioxide back out of the atmosphere or remove carbon dioxide from the atmosphere is going to need us to expand both production forestry areas, but also restoration of degraded land. So there will also be a mixed reforestation and restoration component to our investment strategies going forward. We're looking now at designing that as we get a carbon price that whole process can become fully commercial.

Rebekah Emanuel:
What kinds of returns are you seeing there?

David Brand:
When we look at pricing, the risk of timber market exposure versus say a carbon market exposure, generally speaking at this stage, we're taking the carbon market exposure as an upside. So what that means is it's adding incremental returns to the underlying timber returns. In some cases, it shifts your management regime so that you have maybe a lower harvest rate and more sequestration in the forest and that gives you a higher total return. So these are the kinds of investment strategies that we're pursuing now.

Rebekah Emanuel:
What do you mean by that?

David Brand:
That's in my mind. Well, what I mean by that is that if you have tropical forest landscapes and they're just sitting out there, unused, unpriced, unmanaged, and slowly, they get whittled away, as people cut them down and plant palm oil or whatever it might be. But when you have a hundred thousand hectare area that has say 30,000 hectares of intensive production and 60,000 hectares of intact natural forest, and maybe 10,000 hectares of community plantations, whatever, and those are all integrated together and the core business is supporting that whole landscape, that's the kind of outcome that can be perpetuated over decades. It's that commercial engine in the center that allows that landscape to then become stabilized and carried forward over decades.

Rebekah Emanuel:
Now let's pivot a bit. Tell me about the materials part of your strategy and the importance of building with wood as a way to address climate change.

David Brand:
Yeah, I think it's really important when we look at the whole envelope of sustainability that not only are we trying to improve land use and ensure that we retain the important role of forests in carbon sequestration and carbon storage, but we also need renewable, sustainable materials in society. When you look at wood versus concrete and steel, it has a much lower embodied energy.

Rebekah Emanuel:
Can you tell me what embodied energy means?

David Brand:
So when you make a ton of steel, you have probably a ton of greenhouse gas emissions associated with making the steel. If you make a ton of concrete, there's a ton of greenhouse gas emissions associated with making that concrete. So wood actually is storing carbon, and it has a very low amount of energy needed to make timber products. When you look at the whole life cycle of a building, you can have greenhouse gas negative buildings by building them out of wood. There's been a forecast now that the rise of this mass timber construction system is doubling every 24 months. It actually stores carbon in its use. You look at things like paper and paper-based packages, and they can be recycled versus plastic, which more than 90% of that ends up in waste streams. So there's a host of opportunities to substitute bio-based materials for more unsustainable or fossil fuel-based materials in society and that's really part of the climate change and sustainability agenda. You could end up by the mid-2030s with a completely climate neutral built environment in North America, for example.

Rebekah Emanuel:
Are there examples of circular economy products that are coming out of either the whole wood or the waste streams that you see as up and coming?

David Brand:
There's a big substitution back against plastic, I think to more renewable materials. Now what's even coming out is bio-plastics, which are taking some of the molecular materials out of wood and making plastics that are then biodegradable. We're seeing a whole host of things like pharmaceuticals coming from wood, new fabrics like TENCEL, which are made from wood fiber or bamboo and substitute for say polyester, which is from fossil fuels. There's just a myriad of new materials that are coming from wood, fiber, and timber. Then in the built environment, we're seeing this idea of mass timber construction, where we create big cross laminated panels that can then be dropped in and built quite quickly into multi-story buildings, have high embodied energy, or have very low embodied energy relative to say...

Rebekah Emanuel:
Great. So with that background about your business model, can you describe how New Forests is different from an old school forestry company? What's new about New Forests?

David Brand:
Yeah, I think if we call it old school, it was really about regulating the supply of timber from the land. You would grow the trees. When they reached the age of maturity, they'd be cut down and replanted. It was a very mechanistic calculation of sustained yield and regulation of the forest. Now we're dealing with potentially multi objective systems where we're trying to look at not only timber production on a sustainable basis, but climate mitigation and carbon stock change accounting. We might be looking at the whole social infrastructure that we're operating in and how we're engaged with communities. We might be looking at quite different risk profiles emerging over time.

David Brand:
So the complexity of forest management is going up by a couple of orders of magnitude and the new software and forecasting systems get ever more complex. But out of that, we're actually extracting more value as well. I think what we have been able to demonstrate is that you can create this more complex environment with more option value, with more ability to report on impact metrics and align with things like the Paris Agreement goals, with the sustainable development goals. From that, you end up with a system that's going to be more robust. In other words, you'll reduce risk, but also you'll find new opportunities and from that generate higher returns.

Rebekah Emanuel:
Requires being smart though. It's quite a few things to balance.

David Brand:
Yeah, well, it's true. But I think this is the whole nature of a society that has the tools and information systems now that allows us to manage things that wouldn't have been dreamt of 20 or 30 years ago.

Rebekah Emanuel:
So part of all of this is a little bit of a time game, right? We don't just need to capture carbon generally in the future. We need to do it right now. The next five to 10 years is a super important window. But putting this in tree terms, researchers say that 70 to 125 year old trees are the best at grabbing carbon from the air. But in an odd twist of fate, for a lot of species, 70 years old is also the perfect size for the saw mill. So how do you think about that? Is that also based on the price of carbon or how you're already thinking about the land?

David Brand:
So from the perspective of looking at the optimal rotation age, if there's a price of carbon, you will grow larger, older trees inherently because that has a larger average carbon store over the cycle of the growing, harvesting, and replanting. So we see, for example, shifting from shorter rotation intensive eucalyptus plantations in Australia to longer rotation pine plantations, which store more average carbon stock. We'll also see, as I said, the restoration of permanent plantings where they will just keep sequestering carbon for decades.

Rebekah Emanuel:
So let's start out with the basics of your business. Can you explain briefly how your funds work and who are typical investors for New Forests?

David Brand:
Sure. New Forests is an investment management business that invests institutional capital into forestry assets and manages those for long-term, stable returns. So our clients tend to be large institutional investors- pension funds, insurance, and reinsurance companies, medical benefits, trusts, and so on. They're looking at matching their investments to their long-term liability. So paying people's pensions that they may owe in 30 years' time and they can map that out and then develop a portfolio of investments. Forestry has been very attractive as an asset class. The return comes from a process of biological growth. These real assets tend to have reasonable, steady cash yield. So when you look at all the fixed income area like government bonds and so on, there's almost no return. So we're looking at forests like a woody bond, if you will. It actually can provide some better yield than some of the fixed income assets at the moment.

David Brand:
From that, we've seen this whole area of real assets- forestry, agriculture, infrastructure, real estate has steadily expanded over the last 20 years as a proportion of these institutional portfolios. I think our clients as universal investors that are investing in all aspects of the global economy, they see these sustainability issues as systemic risk. If you can bring them well argued cases for shifting the investment strategy, trying to capture things like carbon value, they will come along on that. Particularly, if you can demonstrate success. I think now after 15 years, we have demonstrated success. I mean, we've gone from $50 million in assets under management to now something like $5 billion in assets under management.

David Brand:
So dealing with climate change is about getting to scale. Our view is that institutional investment capital is the scale of capital that's going to be needed to drive these transitions. So we've positioned ourselves as a manager of institutional investment capital and that's, in our view, the money that we want to channel these sustainability type investment strategies that will lead to climate mitigation at the scale that's necessary, conservation at the scale that's necessary, sustainable materials at the scale that's necessary and that's our purpose.

Rebekah Emanuel:
So despite the fact that natural carbon solutions could be hugely beneficial, maybe up to 30% of global carbon mitigation, somehow these solutions aren't yet attracting significant dollars, even just 3% of dedicated climate investments. Can you tell me how you see that changing?

David Brand:
Yeah, so I think forests are really a substantially mispriced asset. We have, billions of hectares of trees on earth, but many of these areas are worth dollars per hectare. I think what we're increasingly seeing is that as climate change starts to become central to everything, assets are going to be repriced. When you look at the greenhouse gas emissions challenge, if we want to take 40 million tons of current emissions down to zero by 2050, and we want 10, 12, 15 billion tons a year of that emission reduction to come out of land use, we're going to have to completely recast the nature of the asset class and bring new capital into things like restoration, conservation, sustainable management that really wasn't investible in the past.

David Brand:
That's really what we're trying to do with our business is develop those types of investment strategies. Firstly, through incremental changes to the existing asset class, but ultimately we can see the potential to create almost new, large scale natural infrastructure type funds that are blending together, conservation, production, community development programs, pan tropical investment strategies, and so on that can really get to the scale that's necessary to start to make a dent in that emissions profile.

Rebekah Emanuel:
As we wrap up, can you tell me where you see this field evolving in the next five to 10 years?

David Brand:
Yeah. I really think that there is going to be a central recasting of the forestry asset class. I was reflecting on this a couple of years ago that you could probably buy the entire forest cover of this planet for about 800 billion U.S dollars, and that's half the value of the real estate of Manhattan. That is such a mispriced asset when you think about it. I think what's going to start happening is that these natural assets are going to start to be repriced and they're going to become valued for their climate services and biodiversity conservation. What we want to be is helping design how that transition process occurs and it's step-by-step, but it's trying to look at different ways of deploying capital, different ways to engage with communities.

David Brand:
Land use change can be controversial. Part of what we want to do is find those pathways that are creating win-win outcomes for communities, for investors, and for the environment. I think we're making great progress and we're continuing to grow as a business, and I'm hoping that we'll see the whole forestry sector expand and potentially become five or 10 times more valuable over the next decade. That's what we need if we're going to really make a dent on the climate change issue.

Rebekah Emanuel:
David, thank you for joining us.

David Brand:
My pleasure.

Rebekah Emanuel:
Great to talk to you.

David Brand:
Great to talk to you, Rebekah.

Rebekah Emanuel:
That's it for this episode of Climate Rising. Next time, we talk with Steve Oldham, CEO of Carbon Engineering, about pulling carbon out of the air, not via trees, but through direct air capture technologies. Thanks for joining us. I'm your host, Rebekah Emanuel. This is Climate Rising, a podcast produced by the Business and Environment Initiative at Harvard Business School. This episode was created with the help of associate producer, Micah Macfarlane, HBS class of 2020, and producer, Mary Dooe. Thanks as always, to the amazing team from the HBS Business and Environment Initiative that created and support the podcast. Mike Toffel, Jennifer Nash, Lynn Schenk, and Elise Clarkson. You can subscribe to Climate Rising on Apple podcasts or wherever you listen, and please leave us a review. We really appreciate the feedback. You can also find show notes and links to resources discussed on this episode on the Climate Rising homepage, https://climaterising.hbs.edu.