Talking Heads podcast with Celine Claudon
Andrew Craig: Hello and welcome to BNP Paribas Asset Management’s Talking Heads podcast. Our goal is to bring you deep insights and analysis on the topics that really matter to investors. In this episode we discuss the role that natural capital can play in the portfolios of institutional investors. I’m Andy Craig, Co-Head of the Investment Insights Centre, and today I’m joined by Celine Claudon, Chief Commercial Officer of the International Woodland Company, also known as IWC.
By way of introduction, I would like to explain that IWC, based in Copenhagen, is a leading natural resources investment company with deep experience in global timber agriculture and responsible investments. The BNP Paribas Group acquired a majority stake in IWC in 2023. They bring their long experience and expertise in the field of offering investment services for natural resources.
Welcome, Celine, and thank you for joining me today.
Celine Claudon: Hello, Andy. Great to be here.
AC: Let’s start by talking about the factors driving institutional investor interest in forestry today. Would you say they are purely financial or are they also linked to broader sustainability goals? And how have they evolved over time?
CC: Yes, of course. When I started working with natural capital twenty years ago, institutional investors invested purely for the financial characteristics of the asset class. These are mainly inflation hedges, diversification due to the fact that forest land in particular, and also agriculture, have no correlation with bonds and equities. And the attractive risk-return profile. That was 20 years ago, and until probably 10 years ago, [that] was the case: purely financial considerations of investors. Nowadays, the importance of climate change, the ecological footprint and lately the biodiversity crisis are increasingly entering the minds of investors. They may even have become the main reasons for investing in natural capital.
AC: Timberland has traditionally been seen as a good hedge against inflation and as a means to diversify portfolios. The investment case is strengthened by the sustainability characteristics of the investment category. What about the misconceptions investors may have about forestry as an asset class?
CC: First, I will say that many investors still assume that forestry is an illiquid asset in the long term. In reality, however, you can design a diversified portfolio across age, class, turnover and structures to actively manage liquidity. Sustainable forestry typically offers an annual cash return of 2 to 4%, which is highly valued by pension funds and insurers as it fits well with their long-term obligations. The cash return can be even higher when investing in agricultural land, for example.
Another misconception is that returns depend primarily on carbon credits. In fact, timber, the sale of timber, remains the key value driver for most forestry investments, with carbon revenues providing an optional benefit. Although specific carbon strategies exist, the main revenue and return driver of most sustainable forestry investments is still the sale of timber to meet rising global demand for renewable materials.
As for the main barrier for new investors today, it’s simply a matter of where to place natural capital within their strategic asset allocation. Many are wondering: does this belong to the bucket of alternatives? Is it real estate, green infrastructure, inflation hedging strategies? My hope and expectation is that in the coming years, natural capital will become an allocation in its own right and that its unique characteristics will be fully recognized.
AC: The idea of ​​investors having a stake in natural capital would make a lot of sense, and it would probably be something we could expect to see in the coming years. What do you currently see as the main trends or forces working in favor of investing in natural capital?
CC: First and foremost, more and more investors are considering investments in natural capital as an investment that can contribute to solving climate change and biodiversity loss. It usually takes a long time before they actually make the first investment because it is so niche. But we are seeing a revival in investor interest.
On the revenue side, there are more new revenue streams that make returns attractive, not just from the sale of the wood, but also from carbon credits, possibly biodiversity credits and other revenues. Then there’s technological advancements, AI, remote sensing, blockchains, more from an operational perspective. That is crucial when we measure the impact. We can actually provide detailed reporting to investors on things like carbon sequestration and biodiversity improvements.
And perhaps finally regulations. Regulation can be a burden, but for investments as sustainable as natural capital it is a boost. The regulatory framework effectively supports natural capital as an asset class.
AC: To wrap up my questions, what if you had one piece of advice to give to investors considering an allocation to natural capital or forestry? What would it be?
CC: I’d say don’t let that lack of money stop you from investing in an asset class that delivers financial and environmental benefits to your portfolio. Please look beyond the bucket, and I can’t do it because it’s not within my strategic allocation. The second will be: there are numerous strategies within natural capital. You need to make sure you familiarize yourself with what these strategies are and the different managers offering them, and decide what is the ideal balance of risk, return and impact you want to make. For example, investing in a core forest area in the US may be great for one investor, but another would rather invest in regenerative agriculture in Brazil. There are many opportunities within natural capital.
AC: It sounds like a compelling argument for both natural capital and forestry. Thank you very much, Celine, for joining me today.
CC: You’re welcome.
AC: That’s it for this week’s episode of Talking Heads. If you would like more information about natural capital or investing in forest land, please contact your contact at BNP Paribas Asset Management or visit Viewpoint, our investment insights website @ viewpoint.bnpparibas-am.com. You’ve listened to BNP Paribas Asset Management’s Talking Heads podcast with Celine Claudon from the International Woodland Company. Please join us again next time. Until then, be careful.
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