Nature-based Investments: Exploring the Opportunities 

Environmental degradation is not a new challenge, but the scale of biodiversity loss, degradation of ecosystems, soil depletion, pollution, and loss of arable land resulting from land use, natural resource exploitation, pollution, invasive species, and climate effects is unprecedented.

Biodiversity loss and ecosystem collapse are identified as one of the top longer-term risks (10 years) in The Global Risks Report 2024. Loss of biodiversity is exacerbating many critical challenges associated with human health, supply chain reliability, and food security. With this comes the expectation from stakeholders, including investors, policymakers, and regulators, for companies to prevent nature loss and to help restore nature.

Nature is becoming a major theme for investors as policymakers, campaigners and wider society seek to preserve and restore the world’s oceans, forests, species, and natural habitats.

The expectations on investors were made clear in September 2023 when the Taskforce on Nature-related Financial Disclosures (TNFD) published its final recommendations. You can read our article on the TNFD’s guidance here.

Most investors are just beginning to consider how to embrace nature in their strategies. In February 2024, we held a seminar on nature and biodiversity for asset owners to discuss the issues and opportunities arising from this rapidly developing theme.

Most asset owners and asset managers have carried out extensive work on understanding the risks and opportunities associated with climate change. The risk management and reporting frameworks on climate provide a useful way to think about nature.

TNFD is the nature equivalent of TCFD — the Taskforce on Climate-related Financial Disclosures. TCFD reporting is mandatory for larger UK occupational pension schemes and insurers (particularly life insurers) as well as for UK asset managers. TNFD reporting is not yet mandatory, but investors should prepare for this.

TNFD and TCFD share the same four pillars that serve as a starting point for engagement: governance, strategy, risk and impact management, and targets and metrics. But the discussion at our seminar highlighted some important differences:

• It’s important to get started on education. Some asset owners are already taking steps to understand the impact of nature on their investment portfolios by reviewing their exposure to key sectors.
• Beliefs help asset owners determine what their priority focus areas are and are often connected to net zero ambitions through themes such as deforestation and water preservation, as well as biodiversity loss.
• On the process side, start thinking about integrating nature considerations into your risk management framework. 
• Within your portfolio, stewardship, such as voting and engagement, is extremely important.  Asset owners should ask their asset managers which nature-related issues they are engaging investee companies on.

The discussion at our seminar established that asset managers are also at the start of their journey when it comes to investing in nature and biodiversity, but positive progress is being made.

In public markets, a subset of sustainability focused asset managers are starting to engage with nature from a stewardship perspective, but most are still focused on nature-related risks to the companies in their portfolios. 

In contrast, we believe private markets specifically appear well placed to tap into this opportunity. Private market funds usually only hold around 10 investments in their funds and take controlling stakes in these assets, enabling them to put direct influence on companies based on greater awareness of the risks and opportunities presented by nature. 

We think investments that support nature have the potential to also generate solid returns — for example by rewilding land to generate high-value carbon credits or growing biodiverse, organic crops that sell for higher prices.

Climate, biodiversity, and social impacts were once seen as distinct segments of sustainability, but our discussion highlighted how interconnected they are. The challenge for our industry is how to link these elements to generate the most impact on portfolios.

In conclusion:

• When reporting on nature, asset owners should keep their stakeholders in mind. Talk about real-world impact so your stakeholders can understand your decisions — and focus on actions and outcomes over metrics.
• If you are struggling to take the first step, your governance approach to climate is the easiest way in. There are many ways to tie nature into your net zero or climate-related beliefs and learn from the risk management frameworks you have in place for climate.
• The market is developing rapidly and lots of strategies are popping up. Many are exciting but some have risks such as single revenue streams and poor track records. Exercise caution and don’t rush: more asset managers are entering the market and there will be plenty of options.

Please contact us if you would like to talk about the issues raised in this article and for help with beginning your journey in integrating nature into your strategy and decision-making process.