New Emerging Markets: Carbon, Cocoa and Forest Preservation
By Dr. James Tansey, CEO NatureBank Asset Management
The world of sustainable investing and demand from consumers has changed dramatically in the last five years. While we continue to have a vibrant carbon business and portfolio, in 2014, we recognized there was an opportunity to expand our focus beyond carbon offset development. Having successfully developed a wide range of carbon offsets, primarily in forestry and land based projects, we recognized that fully functioning forests can provide more than just timber and carbon. In fact, when done properly, and in an environmentally sustainable way, you can re-establish a functioning forest that integrates a wide range of commodities and delivers value beyond carbon sequestration.
The basic logic is simple: protecting and restoring land and forests increases carbon storage but also provides opportunities to produce other valuable commodities, from cocoa to coffee to timber.
While carbon offset sales can drive additional revenue to landowners and communities, basic commodities provide a more stable platform for landowners to generate revenue from agro-forestry activities and for investment. We spent the last six months of 2015 evaluating a wide range of project-based investments, and that work is driving our strategy today.
The market for sustainable commodities has grown dramatically over the past decade, driven by consumer demand for higher quality products ranging from bananas, to free range eggs to chocolate. Demand for sustainable commodities has been growing at 41% annually according to the International Institute for Sustainable Development, and the total market size for the ten largest commodities is around $32bn. While this number is significant, it hides the fact that when those commodities are turned into in consumer products, the market size is much larger. For instance, the value of cocoa beans is around $8.3bn but the total global market for chocolate is ten times larger. Around 22% of global cocoa production is already from sustainable sources and some of the largest companies in the world have committed to 100% sustainable cocoa by 2020.
China accounts for more than 10% of global chocolate demand today, yet the average Chinese citizen consumes less than 5% of the volume of European consumers – a gap that is closing over time. A cursory glance at the growing Asian marketplace provides an indication of where markets are moving. The emerging middle class in China has a big appetite for middle class luxuries. We know demand for commodities will grow, and we firmly believe that a growing proportion of that demand will be met by sustainably managed commodities.
The investors capitalizing on these growing markets come from a number of quarters. Family offices, traditional agro-forestry investors, and pension funds are increasingly drawn to sustainable agriculture as it offers investment grade opportunities with high levels of environmental integrity. Many consumer facing companies have been among the first to invest in sustainable operations, as they look to improve their ability to access sustainable and certified commodities to meet customer demand. Starbucks has been a global leader in the sustainable sourcing of coffee beans and now works directly with farmers to improve the quality and sustainability of their crops, while also improving farmer income. Similar initiatives are underway in the cocoa sector. While such sustainably driven investment makes economic and environmental sense, it also helps drive fundamental social change within sectors such as cocoa, which has been suffering from child labour and slavery abuses in the African countries that dominate as producers (such as Ghana and the Ivory Coast).
Building on our experience, and following an extensive financial review of agro-forestry commodities, we decided that cocoa has the most robust opportunities for future growth. Prices have remained resilient in a period when most other agricultural commodities have been depressed and the global demand for chocolate seems to be recession-proof. Our cocoa and forestry team has built up world-class expertise in production and certification.
Based on our expertise, we have developed a large-scale business plan to develop and enhance cocoa plantations in the Dominican Republic and Latin America. We are engaging with family offices, direct investors, pension funds and public market investors, to develop investment opportunities in cocoa that deliver sustainability and investment grade returns. Whether motivated by supply chain issues or impact investment mandates, NatureBank Asset Management will continue to do what we excel at – investing in and developing sustainable agro-forestry opportunities.