JPMorgan’s 2021 acquisition of veteran timber investment management organization Campbell Global has been viewed as part of the financial behemoth’s move to broaden its variety of ESG offerings, by harnessing timberland’s potential for carbon sequestration.
In all fairness, observers could be forgiven for assuming carbon was an immediate focus area for the bank given the time during which the deal was closed – interest in natural capital remains hot – and the language used by the bank to describe its forays into forestry.
In the statement announcing the initial acquisition of Portland, Oregon-headquartered Campbell – established in 1981 and managing a $5.3 billion global portfolio of more than 1.7 million acres in the US, Australia, New Zealand and Chile – JPMorgan said it “expects to become an active participant in carbon offset markets” and was motivated in part by a desire to “directly impact the transition to a low-carbon economy.”
The announcement for its February acquisition of 250,000 timberland acres stretching across three Southeastern states for more than $500 million highlighted that the properties had stored 18 million metric tons of CO2 equivalents in 2021 alone, and would be “continually managed for both carbon capture and timber production”.
Anton Pil, global head of the $216 billion Global Alternatives unit that carried out the acquisitions, tells Agri Investor that while the long-term need for a natural carbon sink did play an important role in motivating the investment, it will likely take five to 10 years before the carbon aspects of the Campbell deal are material.
It turns out the timing of JPMorgan’s entry into timberland was driven – at least for the next few years – by one of the asset class’s more classic attributes: inflation hedging.
“We were beginning to realize the cost of inflation protection through real assets had fallen to a point where it was becoming like a reasonable insurance contract for portfolio construction. We actually looked at timber and forestland through that lens first,” said Pil, whose responsibilities since joining JPMorgan in 1996 have included roles in fixed income, emerging markets and leadership of alternatives since 2016, according to his LinkedIn profile. “The lens of carbon, we almost view as an option; by the way, an option that is becoming more valuable.”
Speaking to Agri Investor soon after Campbell’s $500 million February acquisition, Pil described how his view on timberland’s fundamental demand drivers is informed by visibility into real estate construction trends; the important near and long-term issues facing forestry carbon markets and what he called a “fascinating” 10 to 15 years of close observation of ag and timberland that preceded JPMorgan’s landmark entry into the asset class in 2021.
“We’ve kicked the tires on ag,” he said. “It’s not for tomorrow. It’s quite challenging to scale. That’s part of the reason I’m very much into forestry.”
Timber’s unique natural growth
Campbell managed $5.4 billion for pension plans, insurance companies, funds of funds, sovereign funds and other institutions through its core timberland management business at the time of its acquisition by JPMorgan, which did not impact existing strategies.
Pil explained that the notion the economy was in a secular period with minimal inflation had long been a factor keeping JPMorgan from investing in both timber and ag. After inflation fears more recently came to dominate discussions across the bank’s varied collection of clients, he explained, the unique role timber has played for a variety of institutions came to the fore.
“The value of having an asset that has natural growth associated with it is very different than a lot of other commodities.”
Anton Pil, JPMorgan
“The inflation aspect was much more tangible and real and in hindsight turned out to be quite prescient. Whether it’s lucky or prescient I’m not sure,” said Pil. “If you look at performance of timber more broadly last year as an asset class, it did very well and it did very well in the context of its previous decades’ performance. That has to do with inflation fears coming back into markets.”
Even among inflation hedges, he added, forestry proved especially attractive in part due to the opportunity to invest in regions where trees grow at rates as high as 8-10 percent per year.
“Whether the Fed is raising rates or not raising rates. It doesn’t really matter if there is a recession or not a recession,” said Pil. “The value of having an asset that has natural growth associated with it is very different than a lot of other commodities. If I put gold in a box and put it in a drawer, make sure no one steals it and come back a year later, it’s the exact same little pile that was there a year ago. This asset class is somewhat unique in the sense that is not the case.”
Pil said his visibility into construction trends through other of JPMorgan’s investments also help convinced him that the increasing use of timber for tall-building construction through cross laminated timber (CLT) and other new materials constitutes a fundamentally new demand driver for forestry markets.
“Historically, people tended to think about lumber as something for single family homes. Now, with the changing building codes across the country, the speed of construction is so much faster and cost of construction is lower and the building codes have changed to make timber a broader demand cycle,” he said, highlighting examples of wood buildings as tall as 16 floors.
“A lot of the work we had done on carbon capture showed that realistically, forestry was the most efficient form of carbon capture and that a lot of the industrial carbon capture was somewhat theoretical.”
Anton Pil, JPMorgan
Pil added that another factor driving increased use of wood in construction is the potential carbon footprint savings in comparison to alternatives like cement and steel, which are becoming an especially important factor of decision-making within European markets. All these factors, he said, suggest the use of CLT and other wood products is likely to continuing growing across property categories.
“Our team manages $81 billion in real estate and I see it happening real time in the things we are building,” he said. “I am a natural consumer of some of these products and an increasing consumer.”
Carbon offsets will be a long-term driver of returns
Though Campbell’s focus will remain on forestry products in the near term, Pil said, the long-term need for a global carbon sink amid a proliferation of net-zero pledges did factor into the thesis of JPMorgan’s investment.
“A lot of the work we had done on carbon capture showed that realistically, forestry was the most efficient form of carbon capture and that a lot of the industrial carbon capture was somewhat theoretical. Even today, the prices are often 50 times higher than if you just buy a forest and put it away,” he said. “You can kind of see that coming over the next decade, the need for some form of carbon sink, globally that requirement is going to come. That is going to be a driver of returns longer-term.”
In the meantime, certain of the more recent transactions motivated by timber’s potential for carbon sequestration, according to Pil, have failed to take into account the extent to which much of the timber industry has, in recent decades, clustered around the fastest-growing regions. As a result, he explained, some investors have purchased timber properties in slow-growing areas that might not have been developed anyway, calling into question the “additionality” standard that sits at the heart of many carbon credit certification protocols.
“People are buying tracts of forest that you really probably couldn’t harvest because there is no place to go with the harvested timber. Then, they are re-circulating that as carbon. Sure, that’s kind of intriguing, but it’s not what I’m interested in,” said Pil. “If you don’t have a sawmill or some form of wood processing close to the forest you bought, by definition you are going to love carbon, because even if you don’t love carbon, you basically have a national park and can’t do anything with it.”
“The bulk of our presence through Campbell is in OECD countries and a lot of the reforestation and other things are going to be in emerging markets.”
Anton Pil, JPMorgan
Another effect of recent market focus on forestry’s carbon sequestration potential, according to Pil, has been to bring to light a much more diversified potential buyer for the industry.
“Everything from sovereign wealth funds to insurance companies to high-net-worth and pension plans, the common theme initially is more inflation,” he said. “They each have their nuances from there. Income is still important for a lot of them and there’s not that many saying: ‘Give me carbon’. I’d like to tell you there’s many of those. Those conversations are taking place, but I’m not sure it is the most urgent.”
While it is already possible for timberland owners to create a few percentage points of extra growth through carbon offsets, Pil said, the market for such credits holds potential for returns “many multiples of that” over the coming decade, provided important remaining questions are addressed.
“Some people are thinking of it as stored carbon. We don’t. For us, carbon capture has to be marginally captured new carbon. Think of reforestation, not just locking up existing forests,” he said. “Sustainable forests are going to be needed globally, longer term. The notion of taking all our forests and never using them as a product for renewables probably doesn’t make a lot of sense either.”
Other key issues, Pil added, will surround the role of natural assets located in the developing world.
“The bulk of our presence through Campbell is in OECD countries and a lot of the reforestation and other things are going to be in emerging markets,” he said. “How that plays out in carbon markets still remains to be seen.”
So, while the potential for higher returns over the long-term could come as a result of growth in carbon offset markets, Pil said widespread uncertainty about the future path of inflation means Campbell’s near-term focus will remain on wood.
“I think we are going to make plenty of money on the timber associated with the forestry products and we may just get much higher returns if we actually have a carbon play associated with it, but I don’t think it’s conditional,” he said. “A lot of the assets today, I would argue, are not trading yet through a carbon lens, and I think they will over the next several years. If they don’t, that’s fine too, because the intrinsic characteristics of timber are still very much the case, as we saw last year when inflation finally came back and: guess what? Timber had really great year.”