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The next frontier: investing in natural capital and preserving biodiversity
The next frontier: investing in natural capital and preserving biodiversity
At Gresham House, we believe that natural capital will emerge as a major global investment trend in the coming years.
What is natural capital?
Natural capital is defined by the Natural Capital Coalition as the stock of renewable and non-renewable natural resources that combine to yield a flow of benefits to people and planet. These benefits are commonly known as ecosystem services.
- Renewable natural resources can regrow or renew, such as plants, animals, air and water
- Non-renewable natural resources are finite and non-living, such as fossil fuels, soils and minerals
Nature delivers benefits to society through the provision of four core ecosystem services:
Some of these benefits to society have been valued via well-established markets for decades, including energy, food, and timber.
Now, as a result of recent market innovations, investors have the potential to generate value from investments that target some of the other benefits that flow from nature to society.
An example of this is the sale and purchase of carbon credits, which has created a new market and places a monetary value on carbon sequestration, a regulating ecosystem service.
Why is natural capital so important?
The UN Environment Programme estimates that half the world’s GDP is dependent on nature.
However, we are using our natural resources at a pace beyond that which the earth can replenish.
Wildlife populations have declined by 69% since 19701, more than 85% of wetlands have been lost and 32% of the world’s forest area has been destroyed.2
Beginning to recognise nature as a form of capital means that we can better value the benefits it offers our societies and economies and therefore aim to protect and restore it.
The world’s natural capital is estimated to be worth $125tn (1.25x Global GDP in 2022)3
Biodiversity loss is an existential threat to human life on earth.
Biodiversity is defined as the variability among living organisms from all sources, including terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems (UN 1992).
It is an essential characteristic of nature and is critical to maintaining the quality, resilience, and quantity of ecosystems and the provision of ecosystem services on which business and society rely.4
Biodiversity and nature-positive solutions are an increasing focus for investors wanting to effect change whilst also generating the potential for robust financial returns.
What does natural capital mean to Gresham House?
At Gresham House, natural capital means providing investors with access to return-generating real assets that contribute to both the transition to a nature positive economy and a net zero economy.
We deliver this investment access through the following four areas:
Production of sustainable natural resources
Produce sustainably managed timber and food to contribute to the circular economy and reduce agricultural impacts on nature
Avoid and mitigate climate change
Contribute to the transition to net zero by avoiding, reducing and removing carbon emissions
Restore and protect biodiversity
Contribute to the transition to a nature positive economy by protecting and restoring biodiversity by creating habitats and applying specialist land management techniques utilising natures’ intricate infrastructure
Create social value and support long term stewardship of nature
Provide community value through access to nature, create employment opportunities and protecting or securing land rights
The investment opportunity
While many investors have exposure to natural capital through assets like renewable energy (a provisioning ecosystem service) and have grasped the importance of investing in carbon related investments, other forms of natural capital, including biodiversity, remain an enigma – both from a product and return perspective.
Despite increased visibility and interest in the market, very few investors have active portfolio allocations to natural capital which contribute positively to the restoration or protection of nature.
Our recent Impact Lens research paper in association with Pensions for Purpose, Natural capital and biodiversity - where are UK asset owners on their journey? found that just 38% of those interviewed were already invested in natural capital solutions5.
Investing for our futures: Every $1 invested in restoration creates up to $30 in economic benefits6
At Gresham House, we have been investing in natural capital for many years, seen through our multi-decade track record in Forestry.
These assets produce timber which is a provisioning ecosystem service, and contribute to carbon sequestration, a regulating ecosystem service.
We are currently expanding our capability to report on the biodiversity within our forests and included initial analysis in our most recent Sustainable Investment Report.
We are also focused on developing new, interlinked solutions across real assets such as forestry and sustainable infrastructure – including carbon forestry, vertical farming, biodiversity net gain credits and habitat banks – as innovative ways to promote the potential transition towards a more sustainable economy through the protection and restoration of nature.
It is important to note that not all natural capital investments will contribute to the protection and restoration of nature. Other natural capital investments may seek to harness the benefits that nature provides society in a sustainable manner, such as productive forestry which generates timber.
Measuring and comparing the value of different benefits to people from nature is complex.
Through innovative, natural capital investment solutions – from forestry to sustainable agriculture and from biodiversity net gain to carbon credits – we help investors select natural capital, nature positive investments based on the outcomes they want their portfolio to contribute towards within the context of their financial objectives.
Capital at risk. Forestry investment is not for everyone. Please read more about the investment class and read up on the risks involved before considering investing.
References
1. WWF, 2021
2. WEF New Nature Economy Report, 2020
3. Institute and Faculty of Actuaries, Natural Capital – an actuarial perspective, 26 April 2021
4. Taskforce for Nature Related Financial Disclosures
5. Within the context of the report, “natural capital solutions” were investments explicitly targeting nature-positive outcomes
6. UN environment programme, Beyond GDP, February 2022
| Afforestation | Afforestation is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources.
Source: The Little REDD Book |
| Biodiversity | The variability among living organisms from all sources, including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems. |
| Biodiversity credit | Biodiversity credits are a verifiable, quantifiable and tradeable financial instrument that rewards positive nature and biodiversity outcomes (e.g. species, ecosystems and natural habitats) through the creation and sale of either land or ocean-based biodiversity units over a fixed period.
Source: World Economic Forum |
| Biodiversity Metric | A biodiversity accounting tool created by Natural England that can be used for the purposes of calculating biodiversity net gain.
Source: Natural England |
| Biodiversity net gain | An approach to development, land and marine management that leaves biodiversity in a measurably better state than before a development took place.
Source: Natural England |
| Carbon credit | A financial instrument that represents a reduction or the avoidance of one tonne of carbon dioxide equivalent (tCO2e) from the atmosphere.
Source: Gold Standard |
| Carbon pricing | The cost of emitting CO2 into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive offered for emitting less. Putting an economic cost on emissions is widely considered the most efficient way to encourage polluters to reduce what they emit into the atmosphere.
Source: The London School Of Economics |
| Carbon sequestration | An entity’s carbon emissions, typically divided by its revenues, though the denominator can also be square meter, per employee, unit of production, etc.
Source: USGS |
| Deforestation | Loss of natural forest as a result of: i) conversion to agriculture or other non-forest land use; ii) conversion to a tree plantation; or iii) severe and sustained degradation. |
| Ecosystem services | The contributions of ecosystems to the benefits that are used in economic and other human activities. The benefits are widely categorised into four categories: 1) Provisioning services – material outputs from nature that meet human needs such as food, drinking water, timber, critical minerals, and fossil fuels. 2) Regulating services – indirect benefits from nature generated through the regulation of ecosystem processes. Examples include mitigation of climate change through carbon sequestration, water filtration by wetlands, and crop pollination by insects. 3) Cultural services – non-material benefits from nature such as aesthetic, recreation, education, sense of place, and physical and mental wellbeing. 4) Supporting services – ecological processes that support the delivery of other ecosystem services such as nutrient cycling and soil formation.Source: Accountability Framework Initiative |
| Emissions trading scheme (ETS) | A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere.
Source: The London School Of Economics |
| Habitat Bank | Sites where habitat is created in advance, to offset or compensate for the negative environmental impacts of development or other human activities. This habitat will need to be secured and managed long-term.
Source: Natural England |
| Kunming-Montreal Global Biodiversity Framework | The Kunming-Montreal Global Biodiversity Framework (GBF) was adopted during the fifteenth meeting of the Conference of the Parties (COP 15).This historic Framework, which supports the achievement of the Sustainable Development Goals and builds on the Convention’s previous Strategic Plans, sets out an ambitious pathway to reach the global vision of a world living in harmony with nature by 2050. Among the Framework’s key elements are 4 goals for 2050 and 23 targets for 2030 which include 30 per cent conservation of land, sea and inland waters, 30 per cent restoration of degraded ecosystems, halving the introduction of invasive species, and $500 billion/year reduction in harmful subsidies. |
| Land use change | The change from one land use category to another. Land use change refers to the modification or management of natural environments into human dominated environments, such as settlements, semi-natural, agricultural areas and other living things.
Source: TNFD, 2023 |
| Natural capital | Natural capital is the stock of renewable and non-renewable natural resources that combine to provide a flow of benefits to people and planet.
Source: Capitals Coalition |
| Natural capital approach | A natural capital approach to policy and decision making considers the value of the natural environment for people and the economy.
Source: GOV.UK, 2020 |
| Natural forest | A forest that is a natural ecosystem, possessing many or most of the characteristics of a forest native to the given site, including species composition, structure, and ecological function. |
| Nature-based solutions | Actions to protect, sustainably manage and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits.
Source: IUCN |
| Nature-positive | A high-level goal and concept describing a future state of nature (e.g., biodiversity, ecosystem services and natural capital) which is greater than the current state.
Source: TNFD, 2023 |
| Payments for ecosystem services | Payments for Ecosystem Services is the name given to a variety of arrangements through which the beneficiaries of environmental services, from watershed protection and forest conservation to carbon sequestration and landscape beauty, reward those whose lands provide these services with subsidies or market payments.
Source: WWF |
| Primary forest | A forest that has never been logged and has developed following natural disturbances and under natural processes, regardless of its age. |
| Sustainable Agriculture | Sustainable agriculture is farming in sustainable ways meeting society’s present food and textile needs, without compromising the ability for current or future generations to meet their needs.
Source: Sustainable Agriculture Research & Education Program |
| Conversion | Change of a natural ecosystem to another land use or profound change in a natural ecosystem’s species composition, structure, or function. Deforestation is one form of conversion. |
| Net Deforestation | The difference in forest area between two points in time, taking into account both losses from deforestation and gains from forest regeneration and restoration. |
|
Forest
|
Land spanning more than 0.5 hectares with trees higher than 5 meters and a canopy cover of more than 10 percent, or trees able to reach these thresholds in situ. It does not include land that is predominantly under agricultural or other land use. Forest includes natural forests and tree plantations. For the purpose of implementing no-deforestation supply chain commitments, the focus is often on preventing the conversion of natural forests. |
| Biodiversity financing Oap | The difference between how much is currently spent and how much is needed annually in the next ten years to protect the most important biodiversity and the services it provides
Source: Paulson Institute |
How is biodiversity related to natural capital?
Biodiversity is defined as the variability among living organisms from all sources, including terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems1.
It is an essential characteristic of nature and is critical to maintaining the quality, resilience, and quantity of ecosystems2. The provision of the ecosystem services on which business and society rely are underpinned by biodiversity and without it many ecosystem services will fail.
Biodiversity loss poses an existential threat to human survival and prosperity which must be addressed within all aspects of our economies and financial systems.
What is the role of natural capital in the global economy?
In economic systems we need to value all types of capital. Humans are in the most part paid a salary, placing a value on human capital. The products and services we consume are rarely free, placing a value on produced capital. The third capital component of our economies is natural capital.
All economic activity relies on natural capital. From creating the conditions to support life on earth to producing the raw materials used in the products we consume, the global economy would not exist without nature.
Despite this fundamental role, natural capital has not been recognised as an economic asset in the same way as human or produced capital for example. 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, equivalent to 1.25x Global GDP in 20223.
What is the state of nature today?
Today, we consume the equivalent of 1.6 Earths just to maintain our current way of life4. This has led to 75% of the Earth’s land surface being significantly altered by human activity5, with just 3% of terrestrial ecosystems still ecologically intact6. Wild populations of mammals, birds, amphibians, reptiles and fish have dropped on average 69% in the last 50 years7.
Since 1990, the planet has lost 420 million hectares of forest through deforestation; this is not only harmful for biodiversity, but also contributes between 12-20% of global GHG emissions8,9.
The UK in particular is one of the most nature depleted countries, with more than half of its biodiversity lost through human activity since the industrial revolution10.
What is causing the loss in nature?
The five main drivers of nature loss are: land use change, climate change, resource extraction, pollution, and invasive alien species11.
The global food system is the primary driver of biodiversity loss with agriculture alone threatening 86% of species at risk of extinction. However, sacrificing nature to meet increasing food demand has now put $577 billion in annual crop production at risk due to the loss of pollinator species.
Despite the worsening state of nature, around $7 trillion is invested globally each year in activities which have a direct negative impact on nature12. This includes private financing of industries such as construction, electric utilities, real estate, oil and gas, and food and tobacco. These industries in aggregate represent 16% of investment flows in the global economy but represent 43% of all nature-negative flows.
As well as this, government subsidies for agriculture, fossil fuels, fishery, and forestry that focus solely on economic output and drive unsustainable practices totalled $1.7 trillion in 2022.
How are nature and climate change linked?
Losses to nature are being accelerated as global temperatures increase. Even if global temperature increases are limited to 2˚C, 8% of the world’s mammals will lose their habitats13.
Climate change is one of the key causes of nature loss but we need nature and biodiversity to avoid the worst affects of climate change. The two topics are inherently linked and cannot be considered in isolation.
Nature is a crucial ally in our ambitions to limit global temperature increases and avoid the worst impacts of climate change. Over the past 10 years nature has absorbed 54% of man-made carbon emissions in our land and our oceans, with the remaining 46% of emissions accumulating in the atmosphere, contributing to climate change14.
The combination of emissions continuing to increase and nature being increasingly destroyed is deadly. Nature is our greatest ally in the fight against climate change, and it’s loss from our planet our greatest threat.
What is the biodiversity finance gap?
Just $200 billion was invested in nature-based solutions in 202215. Global investment in nature needs to increase at least four-fold, equivalent to $536 billion a year, to adequately address the climate, biodiversity and land degradation crises12, this is known as the biodiversity finance gap.
Closing the biodiversity finance gap is crucial for our societies and economies future prosperity. For every $1 invested in nature restoration, up to $30 of economic benefits are generated through the better provisioning of ecosystem services.16
Can you invest in biodiversity today?
In the last five years, a combination of regulation and voluntary frameworks have created tailwinds for delivering biodiversity as a new nature market commanding economic returns. The introduction of mandatory biodiversity net gain for planning permissions in England from February 2024, has created a catalyst for biodiversity as an investment class with biodiversity credits now sold in compliance and voluntary markets.
How can we transition from a nature-harming to a nature-positive economy?
It is estimated that the world’s natural capital could be worth as much as $125 trillion but nature markets today are only valued at just under $10 trillion17. This highlights that nature’s true value is not accurately reflected in our current economic and financial systems.
Our failing to value nature, has led to its degradation. Putting a value on nature is complicated, but by doing so, market participants can be incentivised to;
- Avoid causing further damage to nature
- Reduce unavoidable impacts on nature
- Take action to restore and regenerate nature.
Taking these three actions across our global economies should aid in the transition to a nature-positive economy.
Moving to nature-positive models could create annual business opportunities worth $10 trillion by 2030, as well as creating nearly $700 billion in savings annually through reduced operating costs18.
Investors will need to take precautions to ensure that their natural capital allocations and wider investment portfolios are driving positive outcomes and not adding to the $7 trillion of nature-negative flows, as many existing nature-market opportunities in agriculture, forestry, and fishing are driving nature loss.
How is the nature crisis being addressed in the global sustainability agenda?
A major milestone in the transition to a nature-positive economy occurred at the fifteenth meeting of the Conference of the Parties (COP 15), with the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF). This global agreement sets out 4 goals for 2050 and 23 targets for 2030, with the headline ambition “30×30” – to conserve, restore and protect 30% of land and oceans by 2030.
Within this ambition is a goal to mobilise $200 billion per year by 2030 for investment in biodiversity, and a goal to progressively reduce harmful subsidies by at least $500 billion per year to 2030.
Prior to this, the Sustainable Development Goals (SDGs) set goals 14 (Life Below Water) and 15 (Life on Land) to directly address the degradation of nature.
The Taskforce for Nature Related Financial Disclosures (TNFD) is an international initiative formed to develop nature-related disclosures so that organisations can provide clarity to investors, consumers and other stakeholders on where they have an interface with nature and what the nature related risks and opportunities faced by the business are.
The Capitals Coalition is another organisation that has formed to support businesses, financial institutions and governments by providing guidance on how to take a natural capital approach and include the true value of natural capital in decision-making.
What is the status of nature markets today?
Nature markets are where nature-specific revenues are generated as an integral part of the trade; these are estimated to be worth around $9.8 trillion today19. The majority of this is driven by commodity production, including agriculture.
Only a fraction of current nature markets are verified with sustainability certifications. Hence investors allocating to natural capital through existing nature markets need to be careful to ensure their capital is not causing nature destructive outcomes.
Credit based markets and conservation markets are a growing focus for natural capital investors, however these markets currently represent just 1% of the value of all goods and services traded in nature markets20.
Examples of a credit based market – Carbon forestry
Carbon forestry is a developing natural capital market which places a value on carbon sequestration in forest biomass to generate carbon credits. Well executed afforestation projects can contribute to the atmospheric carbon removals required to stabilise global temperatures and create important co-benefits for local biodiversity and ecosystem integrity.
What could future nature markets look like?
Research from McKinsey suggests that nature markets such as credit, insurance and sustainability linked bonds will grow in demand, driven by climate change and consumer preferences. Nature specific credits and payments for ecosystem services are also gaining traction but supply of these solutions are relatively low but are expected to grow as corporates and governments become more aware of how their activities negatively impact nature.
Going forward nature markets need to align themselves to nature positive outcomes to ensure our global prosperity. This can be achieved through valuing nature as part of our economic and financial systems. The challenge arises in ensuring that the valuation methodologies are consistent across different assets and regions.
Payments for ecosystem services are another innovative market-based mechanism where beneficiaries, or users, of ecosystem services provide payment to the stewards, or providers, of ecosystem services. The income is then spent on management and conservation of the ecosystem to guarantee a flow of ecosystem services over-and-above what would otherwise be provided in the absence of payment.
What makes Gresham House well positioned for investing in natural capital?
Gresham House is the ninth largest natural capital manager globally and is investing in an increasing range of scalable and profitable natural capital assets.
We provide our clients with a platform of return-generating natural capital assets with established track records, including sustainable forestry, sustainable agriculture, carbon forestry and biodiversity creation. Each asset has different risk and return profiles and outcomes for nature. We work with our clients to provide access to these options to create their natural capital portfolios which promote the transition towards a more sustainable economy.
We support the promotion of high standards throughout the whole Natural Capital market, for example:
- Gresham House is a co-founder of the International Sustainable Forestry Coalition which aims to achieve greater recognition of the importance of sustainable management and preservation of global forests in the fight against climate change
- We are investigating how we can collaborate with other investors to create a standardised approach to monitoring and reporting on the generation of carbon credits from certain forestry projects
- Rebecca Craddock-Taylor is a part of a biodiversity working group at the Institute & Faculty of Actuaries to ensure actuarial advisers can guide their stakeholders on why natural capital is critical to risk management and investment strategies.
1. UN 1992
2.Taskforce for Nature Related Financial Disclosures
3. WWF Living Planet Report 2018: Aiming Higher
4. Becoming Generation Restoration, UNEP
5. IPBES
6. Where Might We Find Ecologically Intact Communities?
7. WWF Living Planet Report
8. Deforestation has slowed down but still remains a concern, new UN report reveals
9. Climate Finance Thematic Briefing: REDD+ Finance
10. State of Nature report
11. TNFD
12. State of Finance for Nature 2023
13. UN
14. Our climate’s secret ally: Uncovering the story of nature in the IPCC Sixth Assessment Report
15. State of Finance for Nature 2023
16. Beyond GDP: making nature count in the shift to sustainability
17. Taskforce on Nature Markets, McKinseY
18. New Nature Economy Report II: The Future of Nature and Business
19. Global Nature Markets Landscaping Study
20. Mckinsey, State of Nature Markets Today & Tomorrow
Natural Capital leadership team
Get in touch for more information and to find out more.
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| Heather Fleming | Claire Glennon | Alastair Leather |
| Managing Director, Institutional Business | Head of UK Institutional Sales | Director, Institutional Distribution |
| h.fleming@greshamhouse.com | c.glennon@greshamhouse.com | a.leather@greshamhouse.com |
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