Saturday, July 13, 2024

Morrison & Co’s Growth Infrastructure Fund makes Australian carbon farming investment

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Morrison & Co has made a move into carbon farming, building out a portfolio of Australian farmland through which it plans to generate significant amounts of Australian Carbon Credit Units.

The firm acquired Pastoral Partners Australia in 2022 through its closed-end Growth Infrastructure Fund and has continued to add properties to its portfolio, all located in Queensland. The portfolio consists of eight properties covering around 100,000ha.

The PPA team will pursue revegetation on the farms it owns to generate ACCUs – each of which represents one tonne of carbon dioxide equivalent net abatement – by focusing on regenerating forests and revegetating landscapes that have previously been cleared. The firm is also generating income on the farms through the agistment of livestock.

Speaking to Infrastructure Investor, Morrison & Co partner and head of asset management Steven Fitzgerald explained that the firm is comfortable with classifying carbon farming as an infrastructure investment because it believes carbon credits will be a highly valued, in-demand product that can be reliably produced for many years to come.

“We start every investment decision by asking two questions: is this an idea that matters and is it infrastructure? Being consistent with our broader decarbonisation theme, which includes our global renewables portfolio, it is a clear ‘yes’ for being an idea that matters. But the concept of buying farms within an infrastructure mandate generated some interesting debate,” he said.

“Stepping back and looking at the fundamentals, we are investing in large-scale assets that will be absorbing carbon from the atmosphere for 25 years and beyond, and reliably generating tradable instruments that are needed by third parties to meet net-zero emission targets. That’s fundamentally why we consider this has the characteristics of infrastructure.

“The Australian government is a buyer of ACCUs through regular auctions and has committed to purchasing A$2.7 billion ($1.7 billion; €1.6 billion) of ACCUs to date. This helps underpin the market. Some of the seed properties have an offtake agreement with government, so there is a contracted revenue stream there.”

Morrison & Co’s due diligence prior to investment led it to build a case that the Australian government’s Safeguard Mechanism, a policy that requires the country’s largest emitters to reduce emissions by a certain amount each year and purchase carbon offsets to cover their allowed threshold, would be strengthened. This was proved correct – the government passed legislation in March 2023 that reformed the Safeguard Mechanism to widen its scope and increase its ambition.

He added that the Chubb Review, an independent review into the integrity of Australia’s carbon credit market, also gave the firm confidence.

“The Chubb Review found high-integrity credits are fundamental to Australia meeting its emission reduction targets. The review recommended changes to amend or remove some of the more questionable methods, which clearly starts to restrict supply, which puts upwards pressure on price. Our investments are focused only on high-integrity nature-based sequestration and we are actively engaged in the consultation on new methods,” he said.

“The big wave of voluntary buyers of ACCUs is something we don’t see reversing, as corporates and individuals look to offset their carbon emissions and increasingly want to do that in a way they can be really confident is effective. Buyers are increasingly also looking for ACCUs that are traceable to high-integrity schemes that deliver additional community and environmental benefits such as local employment and biodiversity. Our approach neatly fits that bill.”

The firm will also explore opportunities to generate carbon credits through sequestration of carbon in the soil, as well as biodiversity credits in what is still a nascent market but has not factored either of those types of credits into its return assumptions for PPA.

Fitzgerald was clear that Morrison & Co “has no intention of owning any animals”, or even managing livestock herds directly, instead leasing the assets to carefully selected partners. He acknowledged that the firm had recognised it may have to accept lower rents in exchange for maintaining more control over how the properties are grazed and used, in order to ensure revegetation targets are met.

9/10/23: This article was amended to reflect that the Morrison & Co Growth Infrastructure Fund is closed-ended, not open-ended.

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