Report: Our Sustainable Future; Mobilising Queensland’s Financial Opportunities

The Queensland Futures Institute’s Forum – Our Sustainable Future: Mobilising Queensland’s Financial Opportunities – outlined the breadth of Queensland’s natural capital and the imperative to develop solutions to adequately quantify and value the benefits of these assets.

Appropriately valuing and investing in our state’s natural assets will require market-based solutions to align investment incentives with sustainability goals and drive long-term economic and environmental value.

SPEAKERS

Professor Mark Brown
Director, Forest Research Institute; Director, Forest Industries Research Centre; Professor of Forestry Operations
University of the Sunshine Coast

MODERATOR: Elizabeth Rose
Partner, Climate Change and
Sustainability Services
EY

Elizabeth Rose

• Queensland’s economy is based on our plentiful natural resources, spanning mineral
  and resources, the natural capital of the Great Barrier Reef, our plentiful sun and wind,
  fertile land and vast forests.
• These natural assets underpin the diversity of Queensland’s economy and support the
  mining, tourism, fisheries, forestry, and renewable energy industries. They also provide
  the biodiversity which Queensland is known for.
• Our economy is deeply connected to natural capital, but this is not appropriately valued
  in investment decision making. As we face the twin crises of climate change and
  biodiversity loss within our economy, it is critical to consider these natural assets into
  the future as we continue to grow a prosperous Queensland economy.

Maree Adshead

• The biggest natural capital investment opportunity in Queensland is the
  Great Barrier Reef.
• The reef is valued at around $56 billion, supports 64,000 jobs, and contributes
  $6.4 billion annually to the economy.
• However, poor water quality is the second largest threat to the reef’s health behind
  climate change. This is why the Commonwealth and Queensland Governments
  have set targets to enhance water quality by reducing soil sediment (by 25%) and
  dissolved inorganic nitrogen (by 60%) by 2025.
• Meeting these targets has been estimated to cost $8.2 billion to achieve and will
  require more than grant funding or regulatory intervention alone. There is a significant
  role for market development around sustainable opportunities which will contribute
  to protecting our natural capital.
• One example of this is the Reef Credit Scheme, which has been instrumental in
  pioneering environmental markets and testing the robustness of their methodologies
  for six years. The Scheme is a standard that sets out the rules, eligibility and
  accounting methodologies to value and quantify outcomes – which in this case is
  removing one kilogram of dissolved inorganic nitrogen or 538 kilograms of sediment.
  We independently audit and administer the scheme to measure and verify pollutant
  reduction. This process results in the issuance of reef credits, which are tradable
  certificates – not unlike a carbon credit – that correspond to a verified outcome. Projects
  and the Reef Credits generated are tracked through our publicly accessible Registry.
• Through this process, we have identified several barriers around the effectiveness
  of the scheme and scaling investment, including insufficient methodologies and
  difficulty in engaging landholders. This results in difficulties in generating the supply
  of reef credits which results in inability to balance the market and achieve the desired
  outcomes, regardless of the amount of investment we can attract.
• There is a strong need for better explanatory material to educate participants on the
  opportunity of this market and ensure robust certificate supply. On the demand side,
  government investment in credits would provide a strong signal and boost market
  confidence in the integrity of this market.
• While the Queensland Government has committed $10 million to reef credits,
  there remains a significant financing gap which must be met in order to meet
  the estimated $8.2 billion required to achieve the work and activities required
  to protect the reef.

Anna Marsden

• The biggest natural capital investment opportunity in Queensland right now is in
  nature repair markets.
• Queensland possesses significant and iconic natural assets, including the Great
  Barrier Reef, making it crucial to protect and repair our natural capital.
  As such, there is a unique opportunity for Queensland to lead in crafting
  investment programs beneficial for nature, business, and society.
• While there is a lot of work which needs to be undertaken to support terrestrial
  ecosystems, the Great Barrier Reef Foundation is focused on coastal ecosystems
  – which includes ‘blue carbon’ initiatives, and protecting mangroves, sea grass and
  wetlands – and marine ecosystems particularly in combating coral bleaching events.
• The goal is to create a circular, conservation economy where nature repair and
  conservation initiatives are funded by nature capital investors rather than relying
  solely on government support. This would see Traditional Owners, tourism operators
  and regional communities supporting activities which protect the reef and generate
  marine biodiversity credits.
• Barriers to supporting and scaling these initiatives include the lack of critical
  technology, methodologies and capabilities needed to build a robust and deep market
  and attract the investment required.
• Additionally, developing these initiatives and markets will require partnership and
  collaboration across various sectors. NGOs and environmental conservation groups
  will play a critical role in bringing valuable local knowledge and expertise to facilitate
  and scale these natural capital investment programs.

Professor Mark Brown

• The biggest natural capital investment opportunity in Queensland, from a forestry
  perspective, lies in managing the significant amounts of land currently utilised for
  agriculture, timber production, forest management, and grazing.
• Land managers are interested in diversifying land use for both commercial outcomes
  and long-term sustainability, and already have a very strong base of knowledge
  around the opportunities to diversify land uses and protect natural capital.
• Convincing land managers to adopt new practices to protect natural capital will require
  building on existing knowledge of communities and First Nations by empowering
  them with new information, skills, and technology. This collaborative approach to
  land management will support dual outcomes in both primary use and well as carbon
  reduction or biodiversity.
• A key barrier to this is the challenge of ensuring the stability of legislation and policy
  required to facilitate long-term investment. This is particularly relevant for forestry
  given the multi-decade commitment of land managers.
• As such, providing stability and confidence through future policy is essential to unlock
  these investment opportunities.

Katrina King

• QIC manages $100bn for our clients, with a significant footprint in Queensland assets. This includes $13bn in infrastructure and $5bn in real estate, as well as private debt and equity and recently, natural capital.
• We consider that natural capital investments are critical for solving energy
  transition and biodiversity challenges at scale. This is why we have established the
  Queensland Natural Capital Fund in partnership with the Queensland Government.
• The fund aims to stack returns, ensuring investors receive appropriate risk-adjusted
  returns by including agricultural commodity returns, which comprises a significant
  component of the fund given the strength and complementarity of this asset class
  with natural capital investments.
• Agriculture is considered a robust asset class, and its value proposition is bolstered
  by a growing global population and protein demand, but with finite arable land.
  These strong supply and demand factors will continue to underpin the prices of
  agricultural commodities.
• Through the fund’s stewardship, we ensure investments are managed to deliver
  sustainable outcomes, including biodiversity benefits, carbon offsets, water quality,
  and soil quality improvements.
• The markets and opportunities around these outcomes are still nascent and cannot
  currently be comprehensively measured. As such, the fund offers a risk-adjusted
  return reflective of these conditions, which may eventually grow toward
  larger returns.
• Queensland is favoured for natural capital investments due to supportive political
  landscape, from both State and Federal Governments. This is particularly important for
  technology investments – which is exemplified through our investments into AgTech.
• It is also blessed with a vast land area, of which 88% is pasto ral land. This presents
  significant propensity and opportunities for generating carbon credits. For scale,
  the size of the opportunity in this area is six times larger than New South Wales or
  Victoria, and five times larger than Western Australia. This is driven by the state’s
  biodiversity, diverse ecosystems, climate, and rainfall, which all contribute to its
  potential for natural capital investment.

Nicole Bradford

• As a superannuation fund, our primary goal is to help our members retire well with
  confidence, with approximately 65% of our more than 2.3 million members located in
  Queensland. ART works with approximately 120,000 employers across Queensland
  to help their employees with superannuation obligations.
• We manage over $280bn in assets globally, with over half of these funds invested in
  Australia and several billion dollars invested in public and private markets
  in Queensland.
• While we invest in various asset classes – including private equity and credit, listed
  equities, fixed income, infrastructure and property – natural capital is not currently
  included as one of our defined asset classes, given the need to seek risk-adjusted
  returns for our members.
• We balance ESG considerations with our obligation to invest in accordance with
  members’ best financial interests. As such, our Sustainable Investment Policy and
  Net Zero 2050 Roadmap guide our current approach. In practice, this sees ART
  focusing on stewardship and ESG integration throughout the investment process.
• We engage with companies and assets to seek to promote environmental, social,
  and governance outcomes, and assess fund managers based on their integration of
  ESG factors into investment decisions. This process sets the expectation that fund
  managers consider the different parameters of ESG which are financially material.
• Queensland Treasury’s recently released sustainability report shows ambition and
  targets for climate change and natural capital, but implementation will be crucial
  to realising these ambitions. Investors require certainty and opportunities with
  appropriate risk-adjusted returns to effectively deploy capital, highlighting
  the importance of implementation for realising these sustainability targets.

Maree Adshead

• Credibility and measurability are vital for the reef credit water quality market to
  attract investors. Investors require confidence in the realness, permanence, and
  scientific validity of the outcomes they are buying. Additionally, participants such
  as landholders or wastewater treatment plants need assurance of returns on their
  investments and potential impacts on their operations in generating reef credits.
• A strong investor pipeline is critical to generate both supply and demand for reef
  credits. To achieve this, independent oversight is needed to ensure the integrity
  of the market and credibility of outcomes and maintained investor confidence.
• Market finance mechanisms augment existing, or traditional government support
  through grant funding, or setting appropriate regulatory intervention.

Anna Marsden

• The Great Barrier Reef Foundation supports investment in natural capital in
  Queensland by validating and authenticating co-benefits to biodiversity and nature
  repair. This work supports the development of the market and helps to fi rm up the
  methodologies of investment products and opportunities for investors such as ART
  and QIC through its Natural Capital Fund.
• We are currently working across several coastal restoration projects, including a
  seagrass nursery in Glasgow which will eventually support the establishment of six
  similar projects across the Great Barrier Reef. These nurseries have the potential
  to sequester four tonnes of carbon each year but require development of improved
  techniques to collect and plant seagrass seeds.
• These projects are well received as high-quality blue carbon projects given their
  potential to involve traditional owners and local communities. This work also lends
  itself well to conservation economy start-ups.
• The GBRF is also piloting and approving programs to address gaps in the market
  and attract future investment. This includes corporate philanthropy, including
  support from companies like Coles, L’Oréal, and Airbnb. These investment partners
  help to underwrite these initiatives.
• These opportunities highlight the importance of catalytic investment in the natural
  capital space which signals to investors and corporations that they can deploy
  capital from their green funds with the intention of earning returns, rather than
  investing philanthropically from CSR funds.

Professor Mark Brown

• Forestry sector has a long history with sustainability certification globally, having
  dealt with two global standards for over two decades. The industry therefore
  understands the commercial implications and impacts on operation of these
  certification standards.
• There is clearly a growing interest in understanding the impact of natural capital
  investments, which is driving corporations and investors to seek tangible outcomes
  for the projects they invest in.
• We are currently working on a project in the Philippines which is focused on natural
  forest restoration and conservation. This is a result of 23 years of research around
  the social, environmental, and commercial implications, as well as a strong
  commercial understanding to deliver the project.
• There are also significant opportunities for similar projects in Queensland and across
  Australia, with over 1.7mn hectares of plantations across the country. Companies
  and investors are seeking to leverage this opportunity and diversify their portfolios to
  include carbon management, with a focus on carbon accounting and the biogenic
  carbon cycle that can be delivered through forestry initiatives.
• Development around understanding the biogenic carbon cycle is critical, especially
  in the context of utilising timber for construction, where carbon sequestration can
  occur for hundreds of years with the right carbon accounting of the entire process,
  from forestry through to timber utilisation which considers the embodied carbon in
  buildings and resource recycling.
• An example from Western Australia involved introducing trees to combat dryland
  salinity issues in cooperation with the agriculture industry, showcasing success
  in natural capital initiatives in forestry. This project highlighted the importance of
  managing expectations and building confidence in investment outcomes, particularly
  given the time investment of multiple decades required by landholders.

Katrina King

• Ensuring robust valuation and quantification methodologies through the correct
  market design and regulatory mechanisms is key to the opportunities we have
  discussed. As such, it is critical to ensure the right reporting, measurement and
  transparency frameworks for the biodiversity and reef credit schemes.
• When this is successfully achieved, the demand for these initiatives can significantly
  influence the business plan of companies, as equity holders can be confident that
  they will deliver tangible outcomes.
• Another challenge is the relative lack of expertise of Australian institutional investors
  in agricultural investment and the initiatives we have discussed, as compared
  to international investors such as Canadian pension funds. To overcome this,
  investment teams must collaborate with agricultural consultants to help develop
  their knowledge of these investment products, as well as to help in assessing yield
  forecasts. The use of these third parties helps to provide confidence to in vestment
  committees internally when investing in these products.
• A key challenge is that of superannuation investment regulation, given there is no specific bucket for ESG investments. This gives rise to tracking error given natural
  capital investments are assessed against performance benchmarks of existing asset
  classes such as infrastructure, real estate or private equity. For the purposes of
  these comparisons, these investments are best compared to real estate, given the
  significant component of return derived from capital gains from land.
• Government advocacy and support is critical to address the issues around
  performance benchmarks and help to unlock investment in natural
  capital opportunities.

Nicole Bradford

• The Australian Government’s Sustainable Finance Strategy marks a significant
  shift toward directing capital into a net-zero emissions economy. This comprises
  three pillars: transparency, finance capability – including policy and regulation, and
  government leadership.
• The taxonomy proposed within the strategy defines climate transition and climate
  solutions, aiding investors in making informed decisions by categorising activities as
  either transitioning or green solutions.
• This will also regulate the disclosures that will be required across both public
  and private organisations. This reporting will also be required to include their
  strategy, their risks, and how they produce services and activities for the economy.
  Together, these outline the impacts of the company on climate change as well as
  their contribution to the trajectory towards a net-zero economy. This will clarify and
  standardise the definitions and approaches towards investing in the
  climate transition.
• Additionally, the taxonomy will introduce a “do no significant harm” consideration to
  investment decision-making. This will ensure investments in climate solutions do
  not negatively impact other important areas, such as biodiversity. This concept is
  important and will mandate that investment decision-makers appropriately balance
  positive and negative outcomes, mitigating negative impacts.
• Queensland’s Climate Action Plan aligns with the taxonomy’s focus areas, including
  energy, mining, metals, materials, and the built environment, positioning the state
  to benefit from the strategy’s implementation. In energy, this will place the state on
  track for 2035 emissions reduction targets.
• The state is well positioned to benefit from the taxonomy proposed by the Australian
  Government and the strategy more broadly.

Nicole Bradford

• Superannuation funds cater to a diverse membership base, from young to older
  members, each at different stages of their retirement journey. From an investment
  perspective, the varying needs and risk profiles of our members is reflected through
  a range of asset classes, such as fixed income and infrastructure. Through these,
  we can consider how to best support projects that deliver climate outcomes.
• We are also guided by our Net Zero 2050 Roadmap, through which we have set our
  target for achieving net zero greenhouse gas emissions in our investment portfolio
  by 2050, in addition to interim targets including 43% emissions reduction by 2030
  across various asset classes. A climate investment target across our portfolio will
  also be set in line with our Roadmap, later this year.
• Other superannuation funds are also actively setting climate investment targets and
  engaging in transition strategies to align with their net zero emissions objectives.
• To ensure credibility and avoid greenwashing, investments will be made based
  on evidence-supported targets which guide our overall stewardship efforts of our
  investments. This will see us engaging with companies and assets to facilitate
  the transition.
• The Australian Government’s introduction of the taxonomy, specifically incorporating
  the concept of the transition, is seen as beneficial as it provides a framework for
  evaluating investments in this context.

Katrina King

• There is a diversity in natural capital investment opportunities overseas, each with
  various return streams and risk profiles. This spans what might be considered
  traditional natural capital investments, to AgTech, to infrastructure projects.
• Through the Australian Government’s current consultation paper, we have an
  opportunity to outline solutions and new areas, building on traditional definitions of
  natural capital to encourage investment while ensuring transparency. This presents
  a prime opportunity to establish natural capital as a distinct asset class in Australia,
  leveraging the initiatives currently underway.

Maree Adshead

• Businesses are awakening to the realisation that nature must not be considered as
  free and are consequently shifting their perspectives.
• The reef credit scheme is a nascent market, and there is a clear need to
  better understand and value reef credits. To do this, and drive interest in such
  opportunities, it is critical to have faith in these pioneering initiatives, encourage
  participation and investment in schemes like the reef credit market in order to drive
  traction and develop deeper understanding.

Anna Marsden

• Consumer demand is a key driver for creating a compelling commercial imperative
  and building markets of the future.
• Currently, environmental concerns often take a backseat to other pressing issues
  like cost of living. But unless environmental issues become a top priority for
  consumers, investing in nature repair programs will remain a secondary concern.

Professor Mark Brown

• Properly recognising and valuing sustainable forestry practices in the market is
  critical to continual improvement of these initiatives.
• While there may be pressure to remove native forests from timber production, this
  does not eliminate their natural capital potential. Changing the way these assets are
  managed is a result of a changing business model.
• Currently, sustainable forest management efforts are undervalued in the market. As
  such, appropriate incentives will be required in order to drive sustainable natural
  capital outcomes. For example, to shift from timber production would require an
  understanding of how to monetise outcomes such as biodiversity and
  carbon abatement.
• A counter example is the value created by timber production management in fire risk
  mitigation. The value created by this must be balanced against all other elements of
  natural resource management, and appropriately valued in markets.

Katrina King

• While regulatory incentives or penalties may encourage participation – creating
  deep and liquid markets with the right incentives is critical to creating a
  compelling commercial imperative to invest in the initiatives and opportunities
  we have discussed.
• This requires standardisation to achieve; it is essential for the industry to avoid
  overcomplicating the definition of biodiversity and carbon credit units. This also
  requires alignment among states and governments.

Nicole Bradford

• Disclosure will be a critical component to unlocking the opportunities we have
  discussed. Investors require reliable information and certainty to make informed
  investment decisions.
• The Australian Government’s legislated sustainability disclosures will be crucial
  to achieving the required level of disclosure. These are already proposed to include
  climate change and may soon also include biodiversity impacts. These will introduce
  standards which are equivalent to accounting standards, requiring director’s
  declarations and auditing. These disclosures will be released alongside annual
  reports and financial statements.
• Together, this will give rise to the disclosure of information needed to facilitate
  investment in these markets.