With over half of global GDP dependent on it, nature and its outputs underpin our current socioeconomic constructs[1]. Yet, there is an estimated biodiversity funding gap of $598-824b annually[2]. Finance flows need to double by 2025 (and triple by 2030) if we want to stave off global issues like climate change, biodiversity loss, and land degradation[3]. There is a huge opportunity here for the private sector to catalyse positive real-world nature impact and generate strong financial returns in the process.
As gatekeepers of institutional capital, we recognise our role in scaling nature markets by facilitating allocations. As such, we have spent over 18 months tirelessly researching nature-based solutions. Albeit by no means a straightforward process, this undertaking has empowered us to not only better understand the current market and ‘nature as an asset class’, but also establish our convictions in best-in-class investible solutions for our clients.
In August – after over 100 hours with various nature-based solutions managers, countless discussions and debates internally, months of reading, data analysis, writing, and re-writing, and 120 pages of research, analysis, and views, and five hours of committee meetings – our Investment Strategy Committee signed off two managers for our Nature-based Solutions Preferred List, demonstrating our expertise, confidence in, and commitment to the space.
Why should I care as an investor?
Nature-based solutions protect, sustainably manage, or restore natural ecosystems (land-based and/or water-based) and address challenges related to climate change, human well-being, and biodiversity.
Themes or sectors in focus typically include forestry, agriculture, conservation & credits, and the blue economy, and managers may choose to invest in one or multiple of these themes as part of their strategy. Here are some examples:
When done right, nature investors can benefit from a strategy effectively balanced from a risk-return-impact perspective.
Nature-based solutions managers capitalise on strong market fundamentals, including population growth and urbanisation, the climate transition, and regulatory drivers which support the growth of the nature market in the long-term. Investments also often have defensive attributes, offering portfolio diversification relative to traditional investments and, in some cases, acting as a natural inflation hedge (particularly forestry and agriculture). Moreover, investment can support investors’ sustainable investment objectives as products generate positive, tangible impact (particularly climate change and biodiversity).
While the universe is indeed relatively nascent, we believe that – with thoughtful and detailed due diligence – there are appropriate and compelling strategies for institutional investment.
How did you research such an emergent and broad asset class?
There’s currently no comprehensive database covering nature-based solutions (by our definition) strategies across themes, asset classes, and regions, so the first hurdle was forming our manager universe.
We ultimately identified, collected data, and performed analysis on around 60 distinct nature products, covering a variety of themes, asset classes, geographies, and risk-return-impact profiles.
With this initial understanding of the universe, we evaluated product appropriateness in relation to our client-base and screened down to 21 managers with whom we met with. Here, we dug deeper into strategy philosophy, investment process, and approach to impact, and found that no two strategies were alike – a product of the emergent nature of the asset class and the multi-dimensional opportunity.
At this stage, we started to make decisions around key characteristics we needed to see to gain comfort around the products. This included nature themes and geographies in focus, team expertise requirements when investing in/managing nature, and approach to revenue diversification and risk mitigation.
For each manager within this preferred list, we:
Given the immense opportunity and ever-evolving nature (pun-intended!) of the nature space, we expect to include further additions in due course, including one more by Q4 2023.
So what?
In solidifying our convictions in nature-based solutions as an area for institutional investment, we now know four things.
- Timing is everything: While we are currently researching open-ended options for clients with more liquidity requirements, investors may need to consider the timing of their investments as many funds in market today have limited capacity relative to traditional asset classes and will likely hold their final close within the next year.
- In the absence of information, get creative: We do not believe that lack of track record should automatically preclude managers from selection, as this could screen out innovative and forward-thinking ideas. Performing additional due diligence – data requests on individual track record or other relevant fund performance, pipeline analysis, modelling calls, investment committee paper deep dives – can provide comfort around this.
- Everybody is learning: It’s important to bring everything back to basics and ensure everyone understands what nature investing is, how it makes money, and how it generates impact – before diving into strategy-specific minutiae. Equally important is giving feedback to managers to facilitate continuous improvement in line with our expectations and those of our clients.
- Stay agile and humble: As an emergent area of investment, change and volatility is to be expected (and was definitely felt throughout the process), but we have ultimately held a positive long-term view on the trajectory of nature markets and sustainable development. Nonetheless, it is crucial to stay well-informed on any relevant developments, frequently test any assumptions made, and be open to challenge and feedback that will strengthen the integrity of the nature space.
Through this work, we hope to start supporting our clients in making allocations to nature-based assets which return a profit and effectuate positive impacts in the long-term, for the benefit of people and planet.
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[1] https://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf
[2] https://www.paulsoninstitute.org/wp-content/uploads/2020/10/Updated-10.23.20-FINANCING-NATURE_Exec.-Summary_Final-with-endorsements_101420.pdf
[3] https://wedocs.unep.org/bitstream/handle/20.500.11822/41333/state_finance_nature.pdf
