Harnessing the investment opportunities in natural capital
As investor attention shifts from carbon emissions to biodiversity, asset owners are advised to consider the investment opportunities in natural capital. Companies that support resource efficiency, zero waste and the circular economy are hailed as attractive investments that both protect the earth’s natural resources and deliver strong returns.
Speaking at the Pensions and Lifetime Savings Association’s local authority conference in June, Alina Donets, portfolio manager of natural capital at Lombard Odier Asset Management, said the environmental challenge of preserving the earth’s natural capital provides “lots of investment opportunities”.
She said there are opportunities in “transitioning from a linear economic model to a circular and biologically based economy”. Companies that are shifting to a more sustainable and nature-positive business model are not only attractive from the environmental and sustainability perspective, but can also often be an equitable and economically viable option, she added.
Opportunities that harness natural capital range from bio-based alternatives to traditional products such as biomaterials and biofuels, water management and treatment technologies, and green infrastructure in urban areas.
“There are opportunities in transitioning from a linear economic model to a circular and biologically based economy”
She pointed out that by focusing on natural capital, investors have the opportunity to diversify into solutions and technologies “away from what has already [become] quite a crowded space in climate solutions. There are areas that are forgotten about, which carry the same weight and same amount of opportunities in terms of reducing risks and creating returns for the future”.
Seeking interesting opportunities
Donets said investors should be considering the areas they want to gain exposure to. For example, the mining sector is well known for having high natural capital risk. Instead, investors could look at alternatives or solutions to the sector such as recycling companies. “By investing in solutions, we are detaching our way of sourcing raw virgin materials,” she said.
Donets added that pension funds should look beyond just having a small investment in natural capital and instead consider shifting a larger part of their global equities allocation towards “companies that are diversifying across sectors and developing alternative solutions to the old economic system and creating a new nature preserving one that can be sustained for a longer period of time”.
Engagement with risky companies
Gustave Loriot, responsible investment manager of the London CIV, which oversees around £26bn on behalf of 32 London local government pension schemes worth a collective £45bn, said the pension pool’s primary responsibility is to help its client funds to pay pensions. It says that this will only be possible by managing sustainability-related risks and opportunities and supporting a financial system that is fit for the future.
“Managing the risks and opportunities of natural capital and biodiversity is a critical component of this vision,” he said. From a systemic risk perspective, natural capital is the single most important issue that investors should be worrying about.
In 2021, as part of stewardship policy, the pool set key natural capital priorities of water risk, biodiversity loss and plastics pollution. This year the list was extended to include deforestation and land-use change.
Loriot said the pool analyses its investment portfolio to see where it is exposed to natural capital risks and uses the results for targeted engagement with companies that are exposed. The pool is also creating systems to track the progress companies are making against these different environmental variables.
Using voting as a stewardship tool, he said London CIV will “vote for resolutions to adopt policies on supply chain deforestation and work to issue more transparency on deforestation from the companies in which it invests”. In practice, this also means the pool will vote against the re-election of directors that fail to oversee deforestation risks after engagement.
Reflecting on TNFD
Building on the work of the Task Force on Climate-related Financial Disclosures, the Taskforce on Nature-related Financial Disclosures framework, which is currently in prototype format, aims to enable corporates and financial institutions to assess and disclose on their nature-related risks and opportunities.
Loriot said that so far the framework only consists of draft recommendations, while the metrics and targets section is missing. This, he added, is more complex to address as it requires reliable, local data for investors, which is difficult to obtain, in order to monitor exposure to nature-based risks.
He said it will be “incredibly difficult” to standardise all the range of metrics and issues. As investors are dealing with a “plethora of scientific variables, which are [complicated] by local conditions and environments”, he said he is not hopeful of reaching a point where different funds can be compared against a specific set of variables and metrics.
Loriot said the pool will be monitoring closely the development of TNFD but stressed there are a “number of things we can already do as investors”.
Donets said that although the TNFD is an important initiative that may align the varied and large number of players in the industry and help standardise and bring transparency in terms of metrics, it is a “lagging tool”.
“I don’t think that we need to wait for it or that it will unlock a huge amount of new opportunities or innovation,” she added.
