Kunming in China’s Yunnan province is not as famous as Paris.
Montreal in Canada is arguably better known, albeit not as romantic.
Yet one of the most significant international treaties is named after both cities.
Dubbed the Paris Agreement for nature, the 2023 Kunming-Montreal Global Biodiversity Framework is supported by 196 countries and pledges US$200 billion per annum by 2030 to fund nature repair.
But protecting the earth and conserving vital resources for future generations is too big a job for governments alone.
Individuals and the private sector, including institutional investors, have a major role to play.
To achieve the targets contained in the Kunming-Montreal Global Biodiversity Framework, including that at least 30 per cent of land, waters and seas are effectively conserved and managed by 2030 (“30 by 30”), the private sector must play a central role, according to David Brand, founder and executive chairman, New Forests.
“We need financial resources to conserve nature. The private sector has been a lot of the problem, now they need to be a lot of the solution,” he said during an Investment Magazine roundtable, hosted in partnership with New Forests.
“A central idea is that ‘30 by 30’ can be achieved by integrating measures beyond just government-managed parks and that means private sector participation in the conservation network. Part of this will be about driving value for nature and creating policies that can attract capital on the basis that it will generate a return.”
As fiduciaries, institutional investors have a responsibility to incorporate environmental, social and governance (ESG) criteria into their decision-making processes where they are financially material, according to Tim Unger, senior portfolio manager, sustainable investment at Australian Retirement Trust (ART).
“We believe that sustainable investing leads to superior outcomes,” he said.
When it comes to sustainable investment, ART has three key ESG areas of current focus: climate change, nature and biodiversity, and human rights (focusing on modern slavery and First Nations).
While the $300 billion-plus fund integrates ESG factors (which include modern slavery and climate change) into its investment portfolio, Unger indicated that ART is developing its approach to incorporating nature and biodiversity considerations to fully understand their impact on its portfolio.
Australian Ethical Investment also has clearly defined areas of focus when it comes to supporting the transition to net zero, which the group’s head of private markets, Adam Roberts, described as a “three-legged stool”.
They are industrial decarbonisation, climate technology and nature-based solutions.
As a manager searching for market-based returns, Australian Ethical Investment is focused on real assets that are “more traditional” in terms of cash flow and return profile, although it is closely monitoring some of the “newer and more novel” solutions coming to market, Roberts said.
According to Nick White, global director of strategic research at Mercer, it is crucial for investors to understand the key trends driving markets.
The megatrends identified by Mercer include the energy transition, circular economy and a theme the group refers to as “the natural reorder”, of which nature regulation is part of the trend but not the focus.
“There’s a lot of attention on the energy transition and critical minerals but the natural reorder is another important area, and our focus there is on the risks and opportunities in the natural capital space,” White said.
“This is an area that is underrepresented, underinvested and generally misunderstood. There seems to be preconceptions about the return outcomes from this asset class, if it is even an asset class.”
A new asset class?
Roundtable participants all agreed that the investment community needed to pay closer attention to natural capital assets, including forestry, agriculture and conservation, but not everyone agreed it should be a distinct asset class.
Shrabastee Mallik, senior consultant at Frontier Advisors, argued that natural capital real assets, including agriculture and timber, could be recognised as a standalone asset class, not just part of the real assets bucket.
Making that a reality will require supportive government policy, she said.
“If you look at infrastructure 20 years ago, it wasn’t as institutionalised as it is today but what supported that was government policy, not just domestically but globally,” Mallik said.
“We’ve looked at the returns from timber and they have some compelling case studies, and [timber] addresses a lot of those sustainable environmental concerns, however, the investment timeframe can be up to 30 years. You’re not always going to have a fund manager around for 30 years. So, what happens as policy changes and some of these concerns change? What will be the focus of the new generation coming in?”
Roberts said investors needed to think about potentially favourable regulatory change as “upside”.
“If you think about capital, particularly institutional capital, entering nature positive investments, whether they are real assets or not, you need a long-term road map or at least some form of regulatory certainty because of the high capex cost that goes into the ground today,” he said.
“If regulatory policy changes, you can’t quickly change direction so it doesn’t matter if regulatory policy becomes more favourable in the future, you need confidence in the investment and regulatory environment of what you’re underwriting today.”
Framing natural capital as a new asset class could be problematic and as it could delay urgently needed investment, said Phoebe Baker, associate director, Clean Energy Finance Corporation (CEFC).
“If it’s defined as a new asset class then investors could perceive the associated risks as unknown, which could delay capital deployment at scale,” she said.
“Rather, we can leverage investments in known sectors like agriculture and forestry for better carbon and biodiversity outcomes.”
Using the example of one of the aims of the Australian Sustainable Finance Taxonomy, Unger said that investment in natural capital could also potentially be embedded across a range of assets that are considered “traditional” asset classes.
“One of the aims of the Taxonomy is to help drive capital to those areas that help make the transition to a low carbon economy possible, and those activities can be accessed in both the listed and unlisted markets,” he said.
“It’s the same challenge with nature and biodiversity: to get capital to flow to areas that will make the world more nature positive. Some sectors, like forestry and agriculture, may not have attracted large amounts of investment in the past, but they are understood asset classes. There’ll also be opportunities in other asset classes including listed markets.”
“The same principles that the Taxonomy is being used for, to help direct the allocation of capital, can be useful when considering nature and biodiversity.”
Putting a value on nature
The Roundtable’s foremost expert on taxonomy, Nicole Yazbek-Martin, head of taxonomy and natural capital at the Australian Sustainable Finance Institute (ASFI) reiterated the Institute’s mission to drive change across the financial services system to increase the speed and scale of money flowing to activities designed to create a sustainable, resilient Australia.
ASFI is looking at how natural capital factors can be incorporated into financial decision-making, not only for products and services, but from an opportunity and risk perspective.
In response to discussions about whether the damage to nature were largely historical, Yazbek-Martin voiced concerns about the pace and volume of companies and industries emerging that are heavy consumers of natural resources, such as data centres, which use large amounts of water to cool their systems.
“The benefits of nature are privatised and the losses are socialised and, as an investment community, if we don’t get our heads around this, it’s going to be an existential crisis,” she said.
“The imperative is to put a value on nature and if structuring it as an asset class is the best way to value it, then let’s get on top of it because our demands on nature are not decreasing, they’re getting worse.”
ART’s Unger said that putting a price on nature could potentially help boost education and understanding of the benefits of enhancing nature and biodiversity.
“We have started to put a price on carbon and, as imperfect as it is, it brings the time horizon into sharper focus. Pricing the benefits of restoring nature and the possible associated positive impacts, may help identify financial benefits for investors and increase the likelihood of action,” he said.
White added that there needed to be a deeper understanding of past, present and future return drivers, and broad diversification, to help turn natural capital into an investable asset class.
“When people say they had a bad experience with agriculture or a bad experience with forestry, what they typically mean is that they have had a bad experience with a [particular] farm or forest,” he said.
“In an area that is not nearly as diverse as real estate or infrastructure, there must be greater diversity [of assets] to create a truly investable, robust asset class.”
“That means allocations around the globe, not only geographically but in terms of policy jurisdiction because this issue is polarised in so many regions. That’s risk mitigation.”
An existential crisis
Frontier’s Mallik agreed with Yazbek-Martin’s description of the depletion of natural resources as an “existential crisis” and called for companies and industries, such as fast fashion, to be held accountable for their harmful activities.
Mallik said the response needed to be holistic and include penalties and incentives, citing recent changes in France that give tax credits to fashion manufacturers that use natural fibres instead of synthetic materials, and also plans to add a fee of up to 10 Euros (about $16) to each fast fashion purchase by 2030.
Encouraging natural capital assets to be appropriately valued is crucial, said the CEFC’s Baker.
“You need carrots and sticks in order to change behaviour,” she said.
“Some sectors are having a negative impact on biodiversity and, at the least, a no harm approach could be embedded (in policy). Companies also need to be rewarded and incentivised to change where they can improve biodiversity.”
To achieve real change, Jo Saleeba, global head of sustainability and impact, New Forests, said there first needed to be an admission that things needed to improve.
“Everyone is trying to paint themselves as sustainable and if everyone’s sustainable, where do we go? We need to get better at developing frameworks and being brave enough to say, we need to improve because the only way we can fix a problem is by agreeing it exists,” she said.
Standardised data and metrics for measuring progress are critical, said Brand, pointing to the establishment of the global Taskforce on Nature-related Financial Disclosures (TNFD), alongside the Taskforce on Climate-related Financial Disclosures (TCFD).
The primary role of the TNFD is to help companies report and act on their nature-related dependencies, impacts, risks and opportunities.
Brand also raised the idea of “natural capital accounting”.
“Organisations have a financial balance sheet, but they could also have a balance sheet of, for example, carbon assets and biodiversity assets,” he said.
“Whether it’s natural capital accounting or another system, it just needs to be standardised because if everyone has different metrics and information, it’s just noise.”
Brand said standardisation would also help investors understand if they were “winning or losing”.
In the absence of standardised metrics, there is still plenty of useful information available, said Saleeba, citing research by the CEFC and proprietary research by New Forests that has measured nature and biodiversity benefits across the group’s $11.6 billion portfolio over the past two decades.
“The question of data and effective measurement is something that comes up all the time and can be used as an excuse not to do more,” she said.
“While we need to harmonise and get consensus, it shouldn’t hold back nature positive action.”
Australian Ethical’s Roberts agreed, pointing out that the nature and biodiversity movement required action from privately-owned farms or forests, the majority of which did not have the ability to produce robust reports and analysis.
This differed significantly to the energy transition, which depended on large corporations changing their activities and behaviours.
In the field of taxonomy, Yazbek-Martin said the focus was on economic activities not entities.
While the taxonomy is specifically focused on climate mitigation, the Institute’s work is also exploring how to classify economic activities that drive environmental sustainability outcomes in the agriculture sectors. “These include adaptation, resilience and water saving benefits, in addition to economic benefits”.
In relation to ASFI’s broader natural Capital work, Yazbek-Martin explained that “we have been working with institutions, and New Forests has been part of that team, to quantify the [biodiversity] benefits of making investments in natural capital on these landscapes.”
Mallik concluded by urging policymakers to give the climate science community the same consideration as the medical science community and technology startups in terms of grants, funding, and tax treatment.
“AI gets so much money and I’m constantly reading about another AI startup raising $60 million from private markets but when it comes to innovative solutions for biodiversity, there’s not the same reaction because it is not supported by robust government policy,” she said.
The roundtable discussion highlighted that nature conservation and biodiversity are moving up the list of priority systemic issues for investors. Issues around measurement and monitoring, government policy settings and the definition of investment opportunities will all be central to the emergence of this new natural capital asset class.
