"Natural Capital is easy to overlook because it is a pond in which we swim, and, like fish, we are not aware we’re in the water.” - Paul Hawken, Natural Capitalism
Nature is integral to the global economy. Through global ecosystem services such as carbon sequestration, natural assets produce an estimated $125 trillion annually. Moreover, almost half of the worlds economic output - $44 trillion of value - is moderately or highly dependent on nature.
Thus, nature related risk presents a significant threat to the global economy. Simultaneously, the opportunity to invest in Nature Based Solutions (NBS) presents an unprecedented opportunity for investors looking to positively impact nature and society. Currently, NBS represent only 2% of the $632 Billion annually allocated to solving climate change. If international targets are to be met, investment into NBS will need to triple by 2030 and increase fourfold by 2050.
In this blog post, we explore:
🌲 Historic roadblocks for private investment: Despite containing favorable characteristics such as non-correlation with other assets & inflation proofed returns, private investment into Nature Based Solutions (NBS) have been historically limited.
💵 Rising capital inflows for Nature: Significant capital inflows into NBS are occurring with 50 new nature-focused funds emerging in the last year. The wider ecosystem is also growing exponentially with voluntary carbon markets growing 190% in 2021.
🏦 Natural Asset Companies (NACs): NACs are a new asset class listing on the NYSE which allow asset owners to convert nature’s value into financial capital. When a NAC is floated on the NYSE, the proceeds from the IPO are used to protect and grow the natural assets and the ecosystem services they produce.
An estimated $845 billion of annual investment is required to safeguard the natural environment. Currently, annual spending on nature is estimated to be only $134 billion, with only 14% of funds historically coming from private capital. One of the primary roadblocks that has restricted entry into this market is the difference between average investment need of NBS projects and the target investment size for institutional investors. While the average NBS transaction size is $30 million, the average private equity transaction is $157 million.
As more NBS projects are finding appropriate levels of scale, private investors are beginning to take notice and allocate capital towards these projects. According to Climate Asset Management, “Large-scale nature-friendly investment products are emerging. They are designed to provide institutional investors with the opportunity to diversify their investment risk while maintaining commercial, long-term returns.”
A new generation of financiers are waking up to the asymmetry present in NBS solution investments. We are witnessing a rising tide - soon to be tsunami - of investment into NBS. Institutional investor involvement is a sign that nature as an asset class is maturing and quickly becoming mainstream. These financiers are unlocking the same inherent value that nature has delivered to our financial system since its inception.
According to Bain, “Private capital is pouring into NBS…Over the past five years more than 50 new funds, with NBS as a core focus, have been launched - an increase of over 20% more than in the previous five-year-period…these investments are increasingly, no longer dependent on public grants or a spirit of philanthropy.”
Exemplifying this new natural capital surge is the Natural Capital Investment Alliance. Formed in 2021, the NCIA aims to mobilise USD $10 Billion in investment capital towards natural capital solutions. Founding members include Climate Asset Management, Mirova and Lombard Odier.
Nature restoration and carbon markets are growing exponentially. The US restoration industry has now reached over US$25 billion in annual economic output, supporting over 220,000 jobs: more than the entire US logging, coal mining, iron and steel industries combined. Voluntary carbon markets have also seen significant growth post-pandemic, both in terms of price and volume. In 2021, the primary voluntary carbon market grew by 190% while credit retirements grew by 70%.
At the heart of this industry is the recognition of carbon as an asset. Through its recognition as a financial instrument, carbon allows investors to both diversify their portfolio and gain exposure to an attractive investment vehicle which has the potential to generate significant returns. Since 2012, CFAs Carbon Composite, which tracks a diversified portfolio of carbon, has generated an annual return of 22%. Further analysis indicates that there is no statistically significant correlation between carbon as an asset and traditional and alternative asset classes.
This leads us into why NBS are emerging as the perfect investment vehicle for private investors. NBS sequester carbon, improve land management and biodiversity, and in return generate bankable commodities such as carbon credits for their investors. According to Bain, NBS could account for 37% of total climate change mitigation strategies and sequester about 11 gigatons of CO2 out of the 30 gigatons /year needed to limit global warming to below 2 degrees Celsius. Given their potential to abate and remove carbon from our atmosphere, their low marginal cost and ability to deliver value on both the social and economic level, NBS provide investors an idyllic alternative asset to diversify into.
Finance Earth’s analysis of private investment into NBS found that the majority of projects are targeting market rate returns between 2-12%. These investments also displayed attractive investment characteristics such as providing non-correlated and inflation-proofed return through real asset-backed activities. NBS project life cycles are also especially appealing to private investors with long-term investment strategies, as the majority of projects have at least 5 year time horizons. Further to this, NBS have comparatively lower marginal costs than other climate abatement solutions and deliver value both on social and economic fronts.
Historically, NBS have received less than their fair share of attention from investors. But current trends in the wider ecosystem suggest that this narrative is changing. Heralding the increase of investment into NBS are the upcoming introduction of Natural Asset Companies (NACs) - the newest asset class soon to be listed on the New York Stock Exchange. These companies grant the rights to the productive use of a natural resource in a defined area, similar to water or mineral rights. In this way, they will enable asset owners to convert nature’s value into financial capital. When a NAC is floated on the NYSE, the proceeds from the IPO are used to protect and grow the natural assets and the ecosystem services they produce. For example, on agricultural land, the proceeds fund the conversion of industrial farming to holistic regenerative practices
NACs will broaden the range of private investors who are interested in investing in an asset that is intrinsically valuable, but, up to this point, has been excluded from the financial markets. Early signs suggest that there is a great deal of interest in NACs from investors looking for impact at scale. According to Douglas Eger, “large companies are also taking notice and it is likely that a very significant multinational will make public its support in the very near future.” One of the main aims in creating NACs is to transform the way investors value nature, aligning investor interests in conservation to give the solution scale and speed.
Private financing is waking up to the economic and environmental value that nature as an asset class provides. Whatever their risk profile and needs, pioneering investors can generate both positive returns while benefiting both people & planet. As private capital continues to flow into carbon markets, NBS and NACs, so too will demand for high quality natural capital projects.
Cecil’s NBS management system is helping teams developing high integrity NBS projects scale portfolios to meet this incoming investor demand.
If you’re a nature-based project developer or investor looking to drive high quality outcomes across your growing NBS portfolio, please get in touch. We’d love to demo our platform that makes scaling high integrity NBS portfolios easy by bringing projects, data and stakeholders into one place.
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