“Natural capital” strategies are now more in demand than “real estate” as asset managers scramble to access forestry, agriculture, timber, and carbon-credit-based assets.
That is, according to consultancy firm bfinance, an investment agency that specialises in mandate searches for asset managers and has advised on US $270 Billion in investment transactions globally.
“The last year saw ‘natural capital’ manager searches for bfinance clients outpacing real estate manager searches for the first time,” according to Nikkie Howard, a senior associate in the consultancy’s private markets team.
Last year, Wood Central reported that global banks want to invest in productive forestry, “combining a large-scale sustainable investment with compelling risk-adjusted returns.”
At the same time, the New York Stock Exchange is eyeing establishing a “natural asset” exchange that could see NYSE-listed companies trade on ecosystems by managing, maintaining, and restoring public and private land.
The Australian Clean Energy Finance Corporation, affectionately known as the country’s “Green Bank”, has seen it pile into nature-positive assets to drive one million tonnes of carbon abatement over the next decade.
Now, a report published by bfinance found that 50 asset managers provide natural capital strategies, which are defined “as those with a forestry, agriculture, timberland or carbon credit-related theme, as well as some renewable energy themes.”
According to Ms Howard, the demand has seen “the rise of science-based [climate] targets across fund managers and LPs”.
“In real estate, the move towards decarbonisation, and the thematic of needing more timber for new building development, is one I’m seeing in all of my work in real estate and manager selection.”
This is supported by the Green Building Council of Australia, which last year noted a 50% increase in timber buildings applying for ratings with “Embodied carbon on the radar of every developer and landlord.”
More broadly, Ms Howard said, “is a desire for exposure to assets that would help to offset residual carbon emissions in the future.”
The report observed “very different return objectives, asset allocation constructs and ESG/impact objectives” among investors interested in natural capital strategies, saying “some seek stable cashflows to match liabilities; some want high annualised returns; some prioritise capital preservation”.
As a result, Ms Howard has urged caution, encouraging investors to “develop a broad understanding of the sector before determining what a natural capital allocation should deliver”.
According to Sarita Gosrani, bfinance’s Head of ESG, most investors are driven by the financial dimension of natural capital – including its non-correlation with markets, diversification, and strong returns over recent years – some have asked for “on-the-ground impact” as part of mandates.
“There are big differences in how seriously managers are taking that,” she noted, saying that carbon sequestration and the secondary societal benefits of nature-based assets are sometimes considered carefully, but not always.”
She added that there was still confusion, and more clarity was needed among investors about the interplay between natural capital and biodiversity.
The latter has been a growing focus for investors, standard-setters and regulators over the past 18 months, following the “nature positive framework” launch in September last year.
Backed by 40 of the world’s most significant financial requirements, the new framework – which includes new reporting requirements and science-based targets, means that biodiversity could become as big a theme as climate change.
“But just because you’re investing in timber, for example, doesn’t mean you’ll gain exposure to ‘biodiversity impact’,” Ms Gosrani said.
