The $300 million acquisition of the 3 million hectare Kimberley Cattle Company by New Agriculture, and ultimately its main Canadian pension fund backer, has put an exclamation mark on how strongly 'natural capital' is driving the investment landscape.
In taking over a property the size of Belgium, New Agriculture chief executive Bruce King said the manager would “focus on sustainability practices which allow for not only the protection and restoration of landscapes, but which also lead to the enhancement of natural capital over time”.
What is Natural Capital?
Natural Capital – which refers to elements of the natural environment that provide valuable goods and services to society, including geology, soils, air, water and all living organisms – is fast becoming a buzzword in investing circles, and a particularly influential one for the agricultural sector.
A key driver of the interest in natural capital are new global accounting standards, to come into effect next year, which will require companies to report their impact on the environment. That will mean placing an economic value on the components of nature used by a company such as water, crop pollination and soil nutrients but also biodiversity impacts, and increasingly social issues.
The investment community is increasingly concerned about the risk of environmental degradation, which is why 40 global institutions representing $31 trillion in assets under management were involved in coordinating the new accounting rules. Their concern is that 55% of global GDP, about $US58 trillion ($88 trillion), is either moderately or highly dependent on nature.
The early impact has been on what global funds won’t invest in, which is why there has been so much emphasis on reporting carbon emissions. Investee companies are rightly concerned that if they can’t show they are making progress on emissions, they will lose access to key sources of funding.
Why Australian ag is so attractive
That money, however, needs to go somewhere and increasingly investors are looking at the opportunities in the space. It's is one of the reasons why Canada's Ontario Teachers Pension Plan took ownership carbon developer GreenCollar at a $800m valuation.
GreenCollar is the tip of an iceberg in a new paradigm where investors are chasing commercial returns augmented by the potentially large returns from engaging in natural capital projects like environmental restoration.
Navigating Natural Capital: Pitfalls and possibilities was the theme of a talk hosted by AuctionsPlus and Clayton Utz in Brisbane on 23 November. Panelists included Andrew Saunders, head of natural climate solutions at Queensland Investment Corporation, Prue Bondfield, former director of Palgrove and current director at Bush Heritage and Australian Live Exporters’ Council, and Richard Heath, the executive director at the Australian Farm Institute.
In September last year, Queensland Investment Corporation launched a 15-year $500 million natural capital fund. It followed the 2016 acquisition of the North Australian Pastoral Company with 13 stations across the Northern Territory and Queensland.
Mr Saunders said agriculture was such a promising investment because it de-risked the issue of meeting environmental targets in their regulatory infancy. He said QIC built their portfolio around commercial agriculture because it has such an “extremely reliable, long-term return".
“We had one investor actually ask, ‘I don't really understand all this in natural capital markets, or biodiversity markets. What if they blow up? What, what am I left with?’
“A commercial agricultural return,” Mr Saunders said. “So we see that as de-risking the platform. Natural capital, carbon, biodiversity - what if they don't take off like we think they will? Then your worst outcome is a commercial return.”
‘Woke bank’ narrative misses the point
Richard Heath of the Australian Farm Institute said the recent pile-on on Westpac for declaring it won’t be lending to farmers who are engaged in deforestation missed the bigger picture on investment pressure on emissions.
He said new targets by Westpac for a 10% reduction on emissions for beef, lamb and dairy would have a far more significant impact and believed that the furore over the announcement was indicative of the poor way that changing regulations for reporting on nature was being communicated to farmers.
“It’s being communicated spectacularly poorly, incredibly poorly,” he said. “It's just become a political wedge. So much of this discussion, it is such an easy political leap for people to jump on things like deforestation and ‘banks gone woke’ and dictating all these terms on farming that they don't want to comply with,” he said.
“Deforestation is nature risk, nature risk is climate risk, climate risk is financial risk. Banks need to manage financial risk to protect your money."
Prue Bondfield, who was the first chair of the Beef Sustainability Framework, said the constant iteration of new rules and norms was ‘frightening and scary’ at first, but as processes were put in place, the industry had responded very effectively to the changing standards.
She believed the early conversations around carbon have helped prepare Australian farmers to navigate this next evolution of the market.
“Farmers now are starting to understand carbon. That makes that journey into the next phase, which is nature capital, restoration, repair, ecological management makes that a little bit easier because it doesn't look as frightening," she explained.
But she believed that Australia needed to seize the opportunities and lead in terms of all the elements of natural capital — including biodiversity and social outcomes — beyond just carbon accounting.
“In Australia we have to be really careful because the rest of the world sees our potential for sequestering carbon because we haven't been farming for 600 years,” she explained.
Ms Bondfield worried that the biodiversity component of natural capital needed to be rapidly developed as well to ensure that the protocols around it were influenced by Australia and not pushed onto it by other government jurisdictions.
”If we're going to work towards it, it has to be done fairly quickly while it's hot. And biodiversity is a hot topic, natural capital is a hot topic. You hear it in every local community hub. So let's get it right before it gets too confusing and farmers walk away from it.”
Will wave of investment distort the market?
Recent purchases of properties by institutional investors who intended to deliver natural capital returns were certainly affecting prices at the top end, the panelists concluded, with the $53.3m acquisition of Palgrove’s Gilgal Station near Cootamundra — for 73% more than it sold for four years earlier — cited as an example of the exuberance in the sector.
Ms Bondfield (who no longer serves as a director at Palgrove) said the excessive valuations created by the wave of institutional investment would make life more difficult to generate a return.
She worried the talk about sustainability, and the impending regulations, could perversely end up making economic sustainability less of a likelihood.
“Part of sustainability is maintenance of your economy and your profits. If that can't be tied in, we're losing the race before we start.
“If I want to do a return on investment on my property, for example, now in the east coast of Australia, that return on investment would look pretty, pretty poor because the valuations are so high.”
Mr Saunders said it was very possible the new rules would create completely out of whack distortions as companies scrambled to meet their environmental commitments in completely unrelated markets.
He cited the case of the Green Building Council, who required any developer wanting to achieve a six-star rating to restore a land area equivalent to the building's total flooring footprint.
“If you're putting up a high rise in the middle of Brisbane City, the large property developers have got to be thinking, ‘okay, we're going to go and buy some bush blocks’, or do they engage with the bush heritage to start running projects on their behalf? You've got investors entering the space, so there is going to be increasing demand.”