Nature-based solutions and the evolution of agriculture

14 March 2022

Farming intensification has increased over the past half-century, driven by advancements in machinery, technology, agronomy and precision techniques, and motivated by the need to feed a growing population. In parallel, there has been a rising societal awareness of the importance of managing natural resources in a way that preserves them for current and future generations1.

Instead of pitting the needs of nature and humankind against one another, however, this divergence has renewed recognition within the agricultural community that productivity, profitability and sustainability can go hand-in-hand. That actively embracing land, water and biodiversity programs can be done in a way that satisfies local and investment communities and allows for competition in the global marketplace for agricultural commodities all at the same time.

The duty to act as custodians of the natural resources that farmers are both dependent upon and intrinsically linked with has long been accepted as a core component of an agricultural strategy – not least because of the correlation between the health of a land’s biodiversity and the quality of its output.

What is changing, though, is the way in which that responsibility is playing out and the scale and breadth of the opportunity it is opening up for the farming sector. Research and innovation continue to expand the range of solutions available to the sector's micro environmental challenges. However, deployed at scale, those solutions could expand its already-outsized role in environmental management and tackling the most pressing challenge of the day – climate change.

Agricultural operations are responsible for 14 per cent of Australia's greenhouse gas emissions2, yet the land they use accounts for 55 per cent (427 million hectares) of the country’s entire landmass3. As well-managed land has a high carbon sequestration potential, the opportunity exists for the nation’s pastoral and arable businesses to play a lead role in helping Australia meet its commitment to achieving net zero emissions by 2050.

The storage of carbon in vegetation and soils is now one of the priorities within the Australian Government's emissions reduction roadmap. Its inclusion as one of six focus technologies is expected to drive new demand for low cost, high-impact carbon mitigation activities as soil carbon sequestration. Sectors able to expand their use of these techniques and grow their negative emissions impact – like agriculture – will play a key role in decarbonising the nation.

Negative emissions are needed to limit global warming

Source: Adapted from ‘A blueprint for scaling voluntary carbon markets to meet the climate challenge’, McKinsey, 2021.

Nature-based solutions

The greater importance now placed on ecological custodianship by society and governments alike is increasingly allowing the costs of environmental management to be shared more broadly. Public subsidies, biodiversity incentives, carbon credits and a premium placed on organic produce by consumers have allowed land managers to make ‘active sustainability’ a central tenet of their commercial strategy.

Elizabeth O'Leary, Head of Agriculture and Natural Assets with Macquarie Asset Management, says this shift in public perception has expanded how landscapes are managed.

“Twenty years ago, running a viable agricultural business meant a focus on maximising the amount of land available for grazing and arable purposes to produce the most valuable output: a food or fibre commodity. But things have changed, and the market now also sees value in the active management of the landscape and having a dual focus on productivity and sustainability, and there is a willingness to pay for the protection and enhancement of the natural enviornment.”

Agriculture's carbon journey

A new generation of active sustainability practices has emerged as a result: nature-based solutions (NBS), which use ecological activities such as tree planting, revegetation and watershed protection to address societal challenges like climate change, food security and disaster risk reduction. These activities allow the sustainable expansion of agricultural production by simultaneously increasing output, improving land management, enhancing biodiversity and lowering carbon emissions.

“Nature-based solutions are changing the way the sector manages the landscape by giving rise to alternative land-use choices where previously there were few. Areas of arable land that are susceptible to lower production and require higher levels of inputs to make them viable, for example, now have an alternative use as an environmental asset,” says O’Leary.

Exploring the concept

Paraway Pastoral Company (‘Paraway’) – one of Macquarie Asset Management’s operating companies – manages 4.4 million hectares of agricultural land across Australia, with the capacity to run more than 220,000 cattle and 250,000 sheep, and it has taken an active role in trialling nature-based solutions in the carbon and biodiversity spaces.

This has seen it become an early participant in programs run by the Australian Government to explore how multiple, on-farm land management practices can be incentivised to increase biodiversity outcomes and diversify and bolster farm incomes while not losing productivity or output.

One such initiative is the Agriculture Stewardship Package, which explores the benefit of ‘stacking’ financial payments for environmental stewardship programs on top of those received for carbon abatement activities under the Emissions Reduction Fund. Still undergoing trials, the package could help demonstrate the importance of the interrelated nature of the work needed to enhance biodiversity, reduce carbon levels and maintain productivity at the same time. Paraway was among the first agricultural land managers to have a project approved by the program.

“Stacking is appealing as it seeks to balance capital being invested in carbon removal strategies with the preservation and, in some cases, the restoration of biodiversity. We need to be careful that carbon offsetting programs don’t inadvertently solve one problem but promote another through the destruction of biodiversity; there’s a need to understand the benefit and ways of achieving both. It’s both a complex and interesting space, and one Paraway has taken a lead role in exploring – both directly and by working with small and medium-sized pastoral businesses,” says O’Leary.

Paraway also continues to participate in the Emissions Reduction Fund itself under an Australian Government initiative exploring how to reduce the emissions intensity of beef cattle production by improving the way herds are managed.

The company is also exploring opportunities presented by new techniques such as using seaweed-based feed supplement to inhibit the production of climate-detrimental methane emissions by ruminant livestock, and has invested in Australian ecotech cultivation company Sea Forest. As well as reducing a herd’s climate footprint by cutting methane production, because the metabolic conversion of the gas uses a fifth of feed energy, limiting it can also increase productivity with a reduced amount of feed – creating more food with less environmental impact.4

“Sea Forest is a prime example of how we are looking for opportunities up and down the supply chain – at where there is greatest opportunity to effectuate change – and investing in trialling and scaling those up for the potential benefit of both our own operations and the broader sector,” says O’Leary.

Sea Forest

Sea Forest’s Asparagopsis supplement serves to address two of the most significant challenges of our time: creating solutions that help fight climate change and generating more food with fewer resources.

When included in very low quantities as a feed supplement, Asparagopsis greatly reduces the production of methane by livestock during digestion. It acts to convert what would have been expelled by the cow as a gaseous waste product into energy, which the animal uses to grow. The result is a positive environmental outcome as well as increased profitability for farmers.

Seaweeds photosynthesise, much like trees, but they can grow up to 30 times faster and they don’t require any of the inputs that land plants do – such as fresh water, fertiliser and pesticides.

The Sea Forest team is dedicated to fighting climate change by being the first in the world to cultivate Asparagopsis at a commercial scale.

Source: Sea Forest

Meanwhile, Macquarie Asset Management’s row cropping operating company, Viridis Ag, had a leading role in the development of FarmPrint, a digital tool that will allow farmers to input operational information about their cropping practices and calculate the intensity of their current emissions footprint.

Making commercial sense

Alongside a demonstrable impact on the environment, these projects can now generate bottom-line returns for the farms involved, says O’Leary. This is a critical element, she highlights, if they are to attract investor interest and see their usage expand across the industry more broadly.

The market for NBS has potential for large growth

Source: 1. Voluntary demand could grow from 0.1 – 1.5-2 GtCO2 of carbon credits per year in 2030 - Final Report, The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), launched by Mark Carney and sponsored by the Institute of International Finance (IIF) with knowledge support from McKinsey. Demand from compliance market is not included. 2. Potential annual size, from The Institutional Investor’s Guide to Natural Climate Solutions, Vivid Economics 2021, referring to Financing Nature, TNC et al 2020.

“The scale and reach that we have across most cropping and pastoral regions in Australia gives us the unique ability to pioneer new initiatives that have the potential to be game-changing if they can be proven and scaled. By doing so – both independently and in partnership with smaller farms – we are helping to pave the way for the broader industry to participate,” says O’Leary.

Combining the environmental and commercial potential of these projects with the agricultural sector’s proven flexibility in responding to changing macro dynamics – such as adapting itself to the effects of climate change – and the ability to implement new technologies and techniques, could allow it to play a bigger role in broader efforts to decarbonise the planet.

“Our environment has finite natural assets, and we don’t have an endless amount of time to increase our protection of them. Demonstrating that it can be done in a way that is beneficial to the bottom line shows how genuinely synergistic with productivity and profitability sustainability can be,” says O’Leary.

Carbon sequestration projects began as a way for the sector to reduce its own emissions but expanding their use to meet the growing demands of other sectors for climate change mitigation activity – especially those classed as ‘hard to decarbonise’ – can be done with relative ease and has inherent value.

“Unlike some other industries grappling with a net zero commitment, with agriculture, all of these initiatives enhance returns,” says O’Leary.

Carbon credit where it’s due

A growing number of public and private entities worldwide are making carbon neutrality commitments as part of setting voluntary net zero targets. While the necessary structural decarbonisation solutions with a longer lead time are developed, the voluntary offsets market offers a more immediate solution for carbon abatement.

Carbon markets are – accordingly – experiencing considerable growth in demand, including here in Australia where voluntary demand for Australian carbon credit units (ACCUs) in the June 2021 quarter was almost 40 per cent higher than in the June 2020 quarter.5 The constrained supply of eligible offset credits has seen their open market price recently hit a record high of $A57/mtCO2e.6

Source: Clean Energy Regulator

Agricultural soils could offer a cost-effective way of expanding the availability of voluntary offsets through projects such as carbon sequestration. By capturing additional CO2 from the air in a natural way and storing it in plants, soils and sediments, the surplus credits can be sold as high-integrity voluntary carbon offset credits, allowing farms to diversify their revenues.

With a large and actively managed land asset base that’s predominantly pastoral, Macquarie Asset Management can itself sequester in a way that’s comparatively simple to achieve in comparison to cropping farms, due to the perennial nature of pasture. As such, Macquarie Pastoral Fund (MPF) has two pilot projects underway and is supportive of the ERF’s developing methodology.

“As a land manager, we aim to deploy low emissions technology to reduce our baseline and potentially create a surplus of carbon offsets. We are pursuing a variety of NBS projects to generate carbon offsets and significant co-benefits, allowing us to identify the best use of land,” says O’Leary.

Capital intensity and abatement cost

The capital intensity of abatement refers to the additional upfront investment relative to the business as usual methodology, divided by the total amount of avoided emissions over the lifetime of the asset. The adatement cost is the average cost of avoiding 1 tonne of COby 2030.

Source: 1.McKinsey, World Economic Forum. 2. McKinsey Pathways to a Low Carbon Economy, Version 2 of the Global Greenhouse Gas Abatement Curve

Alongside the additional income, a direct benefit for the sector is the transitioning of funding for environmental projects to the private sector, thus expanding its scale and predictability.


Macquarie Asset Management recently acquired Forliance GmbH (Forliance), a leading nature-based carbon developer focused on projects that utilise natural assets such as forest, wetlands, grasslands and agricultural lands to generate carbon credits.

With a development pipeline across South and Central America, Forliance’s projects comprise of Afforestation and Reforestation (ARR), projects that reduce the emissions from deforestation and forest degradation (REDD+), and other natural climate solutions to enable greater ecological management of the landscape, and simultaneously have the potential to unlock several benefits for the local population, biodiversity, and global climate.

The business is active across many parts of the carbon offsets value chain, advising local governments, producing earth observation analysis, partnering with landowners on developing projects, and trading high-quality carbon offsets. Additionally, Forliance advises corporations on strategies to achieve their net zero and carbon neutrality targets.

The future of farming

Australia’s crop and grazing industry has made among the most significant reductions in emissions of any of the country’s major industrial sectors – cutting them by around 71 per cent over the past three decades7. Much of this decrement has come about through changes to land management practices, however the growth of the use of nature-based solutions is playing an increasingly important role.

As one of the priorities within the Australian Government’s emissions reduction roadmap, soil carbon projects specifically will play an important role in offsetting the residual emissions from other sectors of the economy – such as industry and heavy transport8 - while solutions for their long-term abatement are developed.

Proposals under consultation would make it easier to develop and get support for voluntary carbon projects under the Emissions Reduction Fund, which would financially incentivise farmers, businesses and communities to undertake voluntary projects that store carbon or avoid emissions and provide economic benefits.9

Though estimates vary, up to a quarter of crop and grazing lands could be used for various forms of soil carbon sequestration projects by the middle of this century – potentially extracting between 35 and 90 million tonnes of CO₂ per annum from the atmosphere, all while still allowing for improved agricultural productivity and soil resilience.10 11

Such an expanded contribution would be just another example of the agricultural sector delivering on its long-held commitment to act as custodians of the environment and to grow the land’s productivity in a way that has a positive, outsized impact on society more broadly.

“Sustainability has always been a driving factor in the management of our agricultural assets,” concludes O’Leary. “However, we have a clear initiative to go beyond standard farm practices to leverage and enhance our natural capital to create resilient production systems and be an industry leader in farm-based decarbonisation.

“It’s exciting to be paving the way for the future of the sector by exploring – and hopefully proving – how new techniques can have a positive impact not only on farm productivity and operations but also materially contribute to a net zero future.”

Elizabeth O’Leary is a Senior Managing Director and Head of Agriculture and Natural Assets in Macquarie Asset Management Real Assets. In this role, Elizabeth has successfully driven growth in assets across Australia and Brazil. She sits on each Agricultural fund’s investment committee and is a board director of Paraway Pastoral Company Limited, Lawson Grains Pty Limited, Viridis Ag Pty Limited and Cruzeiro do Sul Graos Ltda.

Learn more

Agriculture: demand tailwinds, risk-adjusted returns, and its inflation hedge characteristics

Investing in agricultural assets has been growing in popularity in recent years, in recognition of the two important roles it will play in the decades ahead.

A growing global population and rising incomes are driving demand for protein-rich foods and the land that it is grown on. At the same time, decarbonisation policies are pushing for the wider deployment of biofuels and greater use of land-based carbon removal strategies.

In this report we examine agriculture as an asset class, with a focus on the issues relevant for investors – farmland demand and supply dynamics; the impact the drive to net zero could have on incomes; long-run returns; the diversification benefits of an investment allocation to agriculture; and its inflation hedge characteristics.

  1. ‘Regulation of Australian Agriculture, Productivity Commission, Report no. 79, 15 November 2016,
  2.  ‘Agriculture’s contribution to Australia’s greenhouse gas emissions’, Climate Council, 15 June 2021,
  3.  ‘Snapshot of Australian Agriculture 2021’, Australian Government Department of Agriculture, Water and the Environment,
  4.  ‘How seaweed works to combat climate change’, Sea Forest,
  5.  ‘Australia’s long-term emissions reduction plan’, Australian Government Department of Industry, Science, Energy and Resources,
  6.  ‘Elouise Fowler and Angela Macdonald-Smith, 'Australian and global carbon prices surge', The Australian Financial Review, 9 February 2022,
  7.  ‘Australia’s long-term emissions reduction plan’, Australian Government Department of Industry, Science, Energy and Resources,
  8.  ‘Australia’s long-term emissions reduction plan’, Australian Government Department of Industry, Science, Energy and Resources,
  9.  ‘Low Emissions Technology Statement 2021’, Australian Government Department of Industry, Science, Energy and Resources,
  10.  ‘Australia’s long-term emissions reduction plan’, Australian Government Department of Industry, Science, Energy and Resources,
  11.  ‘Technology Investment Roadmap: First Low Emissions Technology Statement, Australian Government Department of Industry, Science, Energy and Resources, September 2020,