Sourcing suitable projects for investment, monitoring them and ensuring credibility and a market for monetizing the assets — such as carbon or biodiversity credits — must be carefully considered, industry sources said. And external agencies such as governments and regulators have a role to play in creating a truly investable market.
Nonetheless, the topic is getting more attention. In November, investment consultant Redington hosted an teach-in event with a number of U.K. local government pension funds to talk about natural capital. That event followed news that London CIV, a pension fund pool that managed £14.3 billion ($17.7 billion) of London borough public fund assets as of March 31, had hired Redington to help it explore an allocation.
In March, the Environment Agency Pension Fund, Bristol, England, carved out a 4% strategic allocation to natural capital, said Marion Maloney, head of responsible investment at the £4.1 billion pension fund. And the £2 billion Cushon Master Trust, London, announced it was exploring natural capital in January.
Working closely with money manager Schroders, Cushon is now in the final stages of due diligence to bring its first natural capital partner in North America on board, investing in sustainable timber production and management starting next year, said Julius Pursaill, scheme strategist. The natural capital allocation is about 1.5% of the portfolio, and sits within Cushon's private markets — illiquid real assets — with a target exposure of 15%.
Executives "haven't quite sized" exactly what the natural capital allocation will be, as it will depend on variables including how sensitive the mandate is to carbon and the carbon price. His intuition is that the exposure will be somewhere between 2% and 5%, he said.
Cushon is also talking to two other natural capital managers "as we pursue investments in this high-potential sector," Pursaill added.
"There's a ton of interest from investors who … are going to be interested in the possible revenue streams that could come from this," said Connel Fullenkamp, professor of the practice of economics at Duke University. "The opportunity or the motivation is really tremendous: You've got natural assets that have a tremendous capacity to absorb carbon, and they also provide lots of other kinds of environmental services that we are increasingly understanding the value of. At the same time, we have this tremendous threat to biodiversity — species are vanishing, habitats are vanishing. I think … one of the things that makes it super attractive to investors is that you get this multiple benefit from investing in natural capital," Fullenkamp said.
Money manager Schroders' Institutional Investor Study 2023 of 770 global investors representing $34.7 trillion in assets found that natural capital and biodiversity were deemed the best-suited asset classes within private assets to deliver on their sustainability and impact objectives. And 26% of respondents expect to increase or significantly increase their allocation to natural capital over the next 12 months.
Investment consultants and money managers agreed that interest from the investment community is growing.
About 45% of the $12.4 billion assets that Nuveen's natural capital unit manages is for parent company TIAA's general account. The remainder of those assets is run on behalf of investors including pension funds.
Martin Davies, global head of Nuveen Natural Capital, said 2% of the TIAA general account is invested in natural capital assets covering farmland, timberland and nature repair.
The allocation dates to 2006 when natural capital was more thought of in terms of the provisioning of ecosystem services — food, fiber, timber and water provided by a farm or forest — rather than in its fullest sense, Davies said.
"Today, we think about all the other dimensions that come with natural capital assets," including regulating services, such as carbon sequestration, flood control, water sanitation and cultural benefits. Markets have been developed "whereby we can derive value from other ecosystem aspects — regulating aspects of carbon sequestration," monetizing and selling carbon credits, for example.
"Thinking about this holistic and integrated approach is pretty critical — we are not going to solve the problems we face today if we look in isolation," Davies added.
Russell Investments' manager due diligence teams have been monitoring for the emergence of natural capital trends and solutions, said Kris Nelson, Russell's senior director and head of ESG investment management, in an email. "We are tracking a small but growing set of listed products (i.e. equities and green bonds) which are aimed at investing in companies or projects which promote biodiversity or efficient natural resource usage, but this is still a very small universe. More often, we see these types of investments included in more broadly designed climate or environmental solutions strategies. This creates a more investable opportunity set, allowing for a better balance of risk and reward."
The firm is also sourcing opportunities in private markets, including where natural capital is core to a strategy, such as sustainable timber or organic farming.