All the cool kids are investing in… natural capital?
Natural capital investments, such as forestry, can achieve strong risk-adjusted returns, according to Nest’s head of infrastructure Stephen O’Neill (Steven Kamenar/Unsplash).
Nowadays, it’s hard to report on asset owners without hearing the words “responsible investing” at least once a month. Perhaps more than that if someone – and I won’t be naming names – is having a bad public relations moment.
This, however, is being superseded by a new and emerging asset class, which is beginning to catch on amongst institutional investors: natural capital.
For the blissfully ignorant amongst you, this type of allocation invests in forests, wetlands or soils in a way that both generates a positive environmental impact and produces a financial return.
It’s tempting to assume that this asset class is essentially environmental, social and governance-tilted investing with a decent(-ish) facelift. However, things are rarely as they first appear, and a deeper dive was required before AOX could weigh in on this type of investment, one way or another.
Let’s take a look at the facts. According to data from AOX’s sister publication MandateWire, a total of 26 asset owners have reported either allocations to or planned investments in natural capital over the last 12 months. This includes the £35.9bn Brunel Pension Partnership, the $105.3bn United Nations Joint Staff Pension Fund and the £20.2bn West Yorkshire Pension Fund, the latter acquiring a significant minority stake in Rebalance Earth, a UK-based natural capital fund, back in 2024.
“Biodiversity and ecosystem resilience underpin economic stability”
Gresham House, a specialist alternative asset manager, reported £375mn in forestry commitments from investors, including the £31.6bn London CIV and members of the Wales Pension Partnership, this year.
But why has natural capital investing found favour with industry heavyweights? Darran Ward, head of alternatives for the West Yorkshire Pension Fund, told AOX that the scheme views the asset class as a “strategic imperative”.
“Biodiversity and ecosystem resilience underpin economic stability,” said Ward. “Nature loss creates systematic risks that cannot be diversified away, and we believe that restoring natural capital is essential to both climate mitigation and adaptation. This is not just a nice-to-have, hug-a-tree issue, it’s a macro and portfolio resilience issue.”
He added that simplistic narratives and short-termism can limit the impact of climate-tilted investing, with capital deployed needing to lead to “investment returns and real-world outcomes”.
The pension fund is actively developing further allocations and continues to work with partners to build scalable platforms that combine financial return with material outcomes.
Investors certainly seem more alert to the business case for investing in the environment than they were ten years ago. A report published by KPMG found that, in France, 42 per cent of the value of securities held by French financial institutions are highly or very highly dependent on one or more ecosystem services.
Furthermore, in 2022, Gresham House stated that if the contributions of natural capital to the global economy were to be valued in the same way as other types of capital, it would have an estimated value of $125tn — approximately 1.25 times larger than global GDP at that time.
Stephen O’Neill, head of infrastructure and natural capital at Nest, agrees that “investing in a sustainable manner can achieve strong risk-adjusted returns”.
To AOX, he said that Nest’s recent £1.1bn commitment to two timberland mandates — managed by Campbell Global and BTG Pactual Timberland Investment Group — was not necessarily about sustainability, but rather about the risk-return case: “It happens, almost as a happy coincidence, to be an asset class that sucks a huge amount of carbon out of the atmosphere.”
While O’Neill acknowledged that profitability depends entirely on the investment, he said that in the US, where you have “the lowest returns and the lowest risk of global timberland markets”, returns can range from 5.5 per cent to 6 per cent. In contrast, if you go into Chile, Uruguay and Paraguay, your returns may reach the low double digits.
In other words, this newfound drive to invest in nature is more than just good marketing from savvy investors. For West Yorkshire and Nest, at least, it is simply what needs to be done to protect your portfolio from the effects of climate change and ensure long-term profitability.
The natural capital approach begins with the premise that there is money to be made by investing in nature. The tangible steps that are then taken to reverse socio-environmental degradation? Merely an added benefit that does not require asset owners to compromise on their returns.
In other words, everyone – including Mother Nature – wins.
So, the AOX take on natural capital? It’s a step in the right direction. Assuming the allocations stick, of course.