The fund has always had allocations to sustainable agriculture and forestry, and has been looking at investment proposals that protect native trees, increase bee populations and restore soil quality. This has now broadened, with executives also analyzing investment proposals across restoring peat bogs, salt marshes and oceans.
Negative media reports in 2021 around a holding in a listed company that produced pesticides was a wake-up call for EAPF executives, said Marion Maloney, head of responsible investment and governance. Executives realized that the investment, which was in a low-carbon portfolio, may have statistically been good on the carbon front, but not when it came to nature.
"Each investment presents issues and challenges. When we look to invest, it can be in opportunities that are quite new to the market. We have to really do our homework, as we know we will get a kicking from our members if we're not doing it well, which is how it should be. We want to set the bar really high, but show we've got that return — we have to make it commensurate with what we would expect in these asset classes," Maloney said.
One investment that Maloney speaks of with pride is a forestry allocation in Paraguay. That investment is made through Astarte Capital Partners, and the restoration of the forest has led to the return of a puma.
"The nice things about these investments is that … we have the science to show what was there at the beginning and the real difference we are making to biodiversity and nature," Maloney said.
There's also a social element to natural capital investment: oceans, beaches, peat bogs and forests are "all things that local people will be using. We always ask (whether people will) still be able to access that amenity. We always look for the jobs to go to local people," Maloney added.
The Cushon Master Trust, London, meanwhile, with £2 billion in assets, is working closely with Schroders and is in the final stages of due diligence to bring its first natural capital partners in North America into its portfolio, investing in sustainable timber production and management, said Julius Pursaill, strategic adviser.
"We hope, all going well, to move forward with this allocation in the first half of 2024. Separately, Cushon is in the midst of mandate discussions with two other natural capital managers as we pursue investments in this high-potential sector," he said.
Another U.K. institutional investor, the £10.3 billion Church Commissioners for England, has a 25% allocation to real assets.
Its 4% allocation to certified sustainably managed timberland consists of 92,000 acres of land, predominantly in the U.S. and the U.K. The portfolio has a further allocation of about 6.5% to farmland, which is principally U.K.-based; its tenant farmers produce staple commodities and key crops.
"On an asset level, no one farm is the same in respect of the opportunities and challenges available to tenants. They'll differ in respect of approach, history on the farm, operational capability and supply chain relationships," Guy Webb, senior rural asset manager, said in an email.
The overall real assets allocation returned 9.5% in 2022, with forestry gaining 11.9%. The return on farmland was not included in the commissioners' annual report.
"We invest in natural capital because there are social and environmental advantages to doing so alongside the core purpose to deliver the financial objectives of the charity," Paul Jaffe, head of ESG – real assets at Church Commissioners for England, added.
The commissioners completed a "natural capital and carbon baseline assessment" across its farmland, strategic land and timberland portfolios in 2021, which led to a revised responsible investment strategy, focusing on three key systemic risks: climate change, social inequality, and nature and biodiversity loss.
Norwegian sovereign wealth fund giant Government Pension Fund Global, Oslo, does not have a stand-alone allocation to natural capital, but integrates it and other ESG-related considerations across the responsible investment strategy for the 15.59 trillion Norwegian kroner ($1.44 trillion) portfolio.
At a market level, executives at Norges Bank Investment Management, the fund's in-house investment unit, work to improve markets by promoting standards and business practices that promote sustainable growth. It is an active member in the Task Force on Nature-Related Financial Disclosures, emailed comments from a spokesperson said.
At the portfolio level, NBIM uses complementary tools to identify, measure and manage financially material nature-related risks that the fund faces. At a company level, it highlights expectations on nature-related topics in dialogues and voting.
Between 2012 and 2022, NBIM divested from 67 companies "where the primary motivation for risk-based divestment was linked to either biodiversity and ecosystems, ocean sustainability or water management." A further 179 companies were cut for climate-related risk, of which 60 were related to "unacceptable or unmitigable deforestation risks," the spokesperson said.
NBIM also started a research project looking at how projected trends over natural resource loss may financially impact the fund's investments in the future. The aim is to better understand the relationship between climate change and natural resource availability, and the fund is collaborating with professors at the University of Minnesota.
The fund hopes "to estimate the future economic impact of changes to natural resources on countries and industry sectors and how this may financially impact the fund's investments, particularly in areas such as food production, infrastructure and renewable energy, and in countries whose economies depend significantly on natural capital," the spokesperson said. "The research will support our investment strategies and understanding of our risk exposure of long-term climate risk."