Investor demand for natural capital ‘surging’: study

Investor demand for ‘natural capital’ is at an “all-time high”, according to a new study from independent global investment consultancy bfinance, with more than 50 asset managers globally now offering one or more strategies in this sector.

Last year, according to the London-based consultancy, for the first time natural capital manager searches for bfinance clients outpaced real estate manager searches.

Asset managers, it said, are hoping to benefit from the surging appetite for this asset class from pension funds, endowments and other institutional investors.

‘Natural capital’ broadly refers to investments in renewable and non-renewable natural resources such as land, air, water, soil, minerals and living organisms, the consultancy notes.

“They are responsible for ecosystem services that drive the global economy and human wellbeing,” bfinance said – though the term, it added, should not be considered synonymous with ‘biodiversity’.

A natural capital asset effectively involves direct ownership of an asset whose value relies on natural capital. This may include forests and farms, which rely on soil, water and microorganisms to derive economic value.

These assets play an “instrumental role in safeguarding and enhancing positive environmental and social benefits, and/or reducing the – often heavy – damage associated with land usage.

“This involves facilitating more sustainable and regenerative practices, supporting carbon sequestration and more.”

According to Sarita Gosrani, director of ESG and responsible investment at bfinance, “investing in natural capital allows investors to capitalise on strong market fundamentals and have tangible environmental and social impact on the ground.”

Bfinance concedes, however, that the term ‘natural capital’ has yet to gain full acceptance as an ‘economic asset’.

According to the consultancy, investors can now access a wide variety of pooled funds from more than fifty asset managers, many of whom offer multiple strategies or separately managed accounts with an appropriate mandate size.

Among the natural capital strategies currently available include:

• timberland funds – the “most mature sector of the market”, according to bfinance, with offerings that span the “risk-return spectrum” – that provide exposure across timber production and timber supply chains as well as carbon credit creation;
• agriculture funds, which span low-risk strategies, such as the buying and leasing of assets to agricultural operators, to higher risk investments in direct farming operations;
• ‘nature-based solutions’, which prioritise the protection and restoration of ecosystems (including biodiversity benefits) while addressing societal challenges such as food and water security to enhance human wellbeing; and
• diversified funds.

The nature-based solutions group, bfinance notes, also “demonstrates heavy overlap with newer forestry/timberland offerings”.

bfinance’s director of Australia and New Zealand, Sebastian Mays noted that natural capital “also provides embedded carbon reduction within their strategies and oftentimes a positive carbon capture”.

“Interest in exploring strategies that have a positive impact on the net carbon of a portfolio is becoming increasingly important, particularly as the majority of institutional investors within Australia have a net zero target.”

Among the rapidly growing roster of available funds, the consultancy said, are 32 strategies that generate carbon credits for their investors – an emergent group that is now collectively seeking to raise US$19 billion (AU$28 billion) in equity commitments.

“Several of these funds offer very low or no recurring yields, with 16% of funds’ returns almost entirely driven by carbon credit production and the rest seeing commercial returns supplemented with carbon credit revenue,” according to the consultancy.

bfinance is a London-headquarterd consultancy providing investment implementation advice to pension funds and other institutional investors.