Natural Capital Emerging as a New Asset Class
May 31st 2024. 4 min read.
As the world grapples with unprecedented environmental challenges, investing in natural capital has emerged as an urgent priority and is on its way to becoming an asset class on its own. Investing in natural capital is not a new concept, as there has long been financial involvement in sectors like agriculture, timber, mining, and ocean-related activities. However, the focus of these investments has shifted towards achieving sustainability outcomes. Today, natural capital investments consider additional revenue drivers such as carbon credits, biodiversity benefits, and conservation easements.
Natural capital encompasses the planet’s stock of renewable and non-renewable resources such as land, air, water, soil, minerals, and living organisms. These assets play a crucial role in safeguarding and enhancing positive environmental and social benefits while reducing the often heavy damage associated with land usage. Despite the growing recognition of its importance, allocations to natural capital strategies currently account for just 0.2% of total assets under management globally. The current market urgently and significantly needs to be expanded, and nature-based solutions, despite being early stage, are a key element. According to the United Nations Environmental Program (UNEP-WCMC), while 154 billion USD is currently annually allocated to safeguarding the environment, more than double that amount—384 billion USD—is actually required to protect our natural world, with some estimates from The Nature Conservancy reaching as high as 845 billion USD.
Fortunately, the investment landscape is evolving rapidly, with more than 50 asset management firms active in the natural capital space, often running multiple strategies: forestry/timberland funds, agriculture funds or, more recently, nature-based solutions. Investors searching for natural capital strategies can involve different return strategies: some will seek stable cash flows, others high annualised returns or capital preservation.
Nature-based solutions are projects that protect and restore nature to reduce GHG emissions and store carbon and produce returns through carbon credits. However, the speculative nature of future carbon credit pricing presents both risks and opportunities. While high volatility and dependency on carbon pricing expectations make investment decisions challenging, the potential returns are substantial when intended outcomes are realised. To mitigate these risks, NatureRe Capital AG supports pricing analysis with internally developed forward-looking models, leveraging both external data and in-house expertise. This approach ensures that our investments are resilient and well-informed.
Additionally, predictions from well-known organisation, such as the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), expect the Voluntary Carbon Market to grow from USD 2 billion to USD 50 billion in 2030, due to the surging demand for high quality removal carbon credits from corporates and institutions.
This expected growth has spurred a notable increase in the number of funds targeting carbon projects over the past two years. Currently, 32 funds are aiming to secure 19 billion dollars in equity commitments, with 16% of these funds focusing exclusively on generating returns from carbon revenues. Furthermore, asset managers involved in generating carbon credits through their investments often emphasise their commitment to producing high-quality credits. These include carbon removal credits with additional benefits, which are expected to fetch higher prices and minimise potential reputational risks for investors.
Investing in natural capital requires an imperative focus on quality and transparency. Currently, only 10% of projects meet or exceed the standard of high quality, as reported by Carbon Direct. At NatureRe Capital AG, we prioritise nature-based solutions (NBS) that not only remove carbon from the atmosphere, but also restore ecosystems and address societal challenges such as water security, enhancing human wellbeing. Our high-return projects offer promising avenues for investment. To ensure quality, we work closely with local communities, leveraging their valuable knowledge in the project plan, implementation and monitoring. We incorporate buffers to mitigate potential risks of reversal and focus on building resilient forests with assisted natural regeneration and planting native trees. By recognising the urgency, understanding the risks, and prioritising high-quality investments, we can create a sustainable and prosperous future for all.
We believe that restoring ecosystems is not only a moral imperative but also a compelling business opportunity. According to the World Economic Forum, 50% of global economic output is moderately or highly dependent on natural capital. This underscores the critical role of natural resources in sustaining economic activities worldwide. By recognising our shared responsibility to protect the Earth’s ecological treasures, we can make investments that are both financially rewarding and beneficial for the planet. At NatureRe Capital AG, we aim to bridge this gap by turning ecosystem regeneration into a high-yield business model. We bring together investors, corporate off-takers, and biodiversity experts to restore nature at scale and allow depleted land to regenerate.