How Investible is Natural Capital?

Articles From: Schroders
Website: Schroders


Head of Sustainability Client Advisory


Five key things I took away from a recent discussion on the increasingly important investment theme of natural capital.

One of the most fascinating books I recently read is Andrea Wulf’s ‘The invention of nature’. It is a lively account of the life of the explorer, naturalist and geographer Alexander von Humboldt. On his many travels, Von Humboldt was always looking for patterns and connections between all kinds of life – reflective of a holistic worldview that recognises that systems do not function in isolation, but within bigger systems.

Of course, most people know that nature is crucial to human life. Or, as the economist Herman Daly put it: “The economy is a wholly owned subsidiary of the environment, not the reverse.” Yet, our economy continues to function in a way that exploits and exhausts nature to such a degree that we risk destroying the basis.

The conclusion is clear: restorative action is badly needed. As Schroders CEO Peter Harrison argues in his blog ‘why we must make nature investible’, we need to rethink our relationship with nature, and the financial sector must play its part.

But how? In his blog, Peter explains Schroders’ approach: “We have pledged to change the behaviour toward nature of every company we invest in; we will create new nature-based investment products, and use our solutions business to channel capital into new and existing funds. By doing so, we help our clients make a positive impact while also diversifying the sources of their returns.”

Clearly, this is not straightforward and won’t happen overnight. We are well into the realm of new investment models and analysis that remains challenging with current data sets, but tackling that challenge is urgent and cannot wait for perfect answers.

Schroders’ own plan for nature can be found here.

But what does it mean for clients? How investible is natural capital? Are clients thinking about this at all? We explored these questions in a panel that I moderated at a client conference in March.

There were five key takeaways. First, natural capital is much bigger than people think. In the first paragraph I mentioned biodiversity breakdown as a bigger problem than climate change, but let’s put it into numbers as well: the annual value of ecosystem services is estimated at over $120 trillion, about 50% higher than global GDP. However, as Schroders’ Global Head of Sustainable Investment Andy Howard pointed out, payments for ecosystem services are 40x smaller. So, there is a huge gap between value and financial value, which can be closed by monetising a larger proportion of ecosystem services.

This is happening, driven by regulation and, as a result, corporates trying to offset their negative externalities, for example by investing in reforestation. In fact, corporates are moving faster than the supply of new projects, as Schroders’ Head of Alternatives Andrew Dreaneen argued on the panel. There is a massive need to develop new projects.

Second, the social dimension is extremely important. Deputy CEO at BlueOrchard and Head of Sustainability and Impact at Schroders Capital, Maria Teresa Zappia, explained that no less than 1.2 billion people are highly nature dependent, relying on nature for three quarters of their basic needs.

Moreover, Maria Teresa pointed out, the social dimension is also crucial in successfully developing natural capital projects. Defining the rights to land of local communities is typically a critical component. Often, especially in emerging markets, these are not formalised and may require active involvement of NGOs to ensure land tenure is formalised prior to any conservation projects take place. And when the projects take place, local communities tend to know much better than outsiders how to protect local natural capital.

Third, natural capital is indeed on many clients’ minds. We started our panel by asking the audience if they currently allocate/advise to nature-based solutions. To my surprise, 54% of the audience indicated they did, where I was expecting a single digit percentage. Of course anecdotally I knew that clients were asking for it – especially with institutional clients setting targets, wealth managers looking for biodiversity products, and family offices taking it into account in their long-term investments for next generations. But this was much more widespread than expected.

Fourth, products are coming. In private assets, there are products on sustainable forestry; regenerative agriculture; and increasingly conservation (protect and restore), which used to be venture philanthropy, but now also comes in return-seeking forms. On the listed side, biodiversity engagement funds offer potential, with clients asking for leaders in industries with high exposures, and intense engagement to improve biodiversity performance and reporting. And these products tend to come with a good portfolio fit, as they tend to have low correlations; and a biodiversity engagement fund tends to have very different holdings than the typical sustainable equity product. Moreover, biodiversity offers an interesting holistic lens to a portfolio, which allows one to better identify and manage risks otherwise not seen. However, in some natural capital products it does involve giving up expected returns, which is acceptable only to a small subset of clients.

Fifth, there are still large bottlenecks. Getting a decent risk-return can be challenging in natural capital solutions. Public-private partnerships are often needed to make it work and reduce risk. Many standards still need to be set, and monetisation is far from straightforward.

Some people have more fundamental concerns: by treating nature as an asset class, we again get the typical reductionist and short-term behaviour that got us here in the first place. There is merit in that warning, and when mobilising capital we should put sufficient safeguards in place to ensure that nature really benefits. At the same time, a lot of experimentation is needed to develop a wide diversity of mechanisms to mobilise capital for nature. It is a massive challenge, but it’s worth it and I’m sure that Alexander von Humboldt would have taken it up as well.

Originally Posted May 10, 2023 – How investible is natural capital?

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Leave a Reply

Your email address will not be published. Required fields are marked *

Disclosure: Schroders

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realized. These views and opinions may change.  Schroder Investment Management North America Inc. is a SEC registered adviser and indirect wholly owned subsidiary of Schroders plc providing asset management products and services to clients in the US and Canada.  Interactive Brokers and Schroders are not affiliated entities.  Further information about Schroders can be found at Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY, 10018-3706, (212) 641-3800.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Schroders and is being posted with its permission. The views expressed in this material are solely those of the author and/or Schroders and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.