Forestland Group: ‘a carbon deal is not a free lunch’

Forestland Group, the sixth timberland investment management organisation is the US, is the country’s biggest seller of forest carbon credits, according to chief executive Chris Zinkhan. Here, he tells us about the carbon market, and his long-term investor base.

Where do carbon deals make the most and least sense?
Carbon value is calculated relative to common practice. If you are a natural forest manager like us, even then not all properties suit carbon deals. They [would have to be] well-stocked, with significant carbon to be sold. We have only undertaken deals where we have already encumbered that property with a working forest conservation easement … a carbon deal is not a free lunch.

We have never done a deal where there was any real chance the property was going to be harvested at a level inconsistent with what we agreed in an easement deal.

What is your investor base?
Most of the pension fund money that we have is from our other institutional investors: large universities and endowments that also have to fund benefit plans. We also have some insurance company capital, both from their general accounts and pension plan funds. The investor base has varied fairly dramatically over time, but today it is about 85 percent institutional, 15 percent families. The family component is growing more rapidly. Families have seen what some of the institutions in the US have done and are patient. It is attractive in a very low interest rate environment, as well as with the tax attributes.

How do the payments you receive for carbon sequestration work?
We have been active in the California marketplace. We are going to be selling a property with a 100-year-deal period to somebody else, so we look at it from the buyer’s vantage point.

There are two forms of payments. One is an initial payment where the landowner is compensated for the carbon they have sequestered versus common practice, which tends to dwarf subsequent payments. For the second tranche there could be multiple payments over 100 years.

The California market is on course to expire in about five years, but the expectation is it will be extended. If it is, where we have already sold the upfront CO2, we could also sell an annual delta relative to common practice, if we incrementally sequester carbon more robustly. You could also store that carbon on the stump.

What are the risks?
If carbon prices crash, that would only affect the going-forward marketplace or future deals. Carbon is trading at $10 to $11 per metric tonne in California. We expect prices to go up long term. When the government does cost-benefit analyses of federal projects, they put carbon at a rate three times where the market is. That embeds externalities that the market doesn’t recognise yet, which provides a marker suggesting potential for some increase.

There is also the global unregulated market. We are looking at that for some of our foreign ownerships in Central America. Since it is voluntary the prices involved are quite a bit lower than in the California market.

What do you think of LPs using the NCREIF timberland index as a benchmark?
We in the trade probably recognise that we have not done a good job of communicating what exactly is included in the index and what is not [such as returns while a property is being planted]. There is a lot of misunderstanding about the index. It is imperfect because the asset class doesn’t trade publicly, and reflects a sample of TIMO managers; some participate and some do not.

It does reflect returns from the North, the South East, the Great Lakes and the Pacific Northwest, the four components in the index. What has propped up the index over the last ten years is the Pacific Northwest. If you did not have exposure there you would probably trail the index.