Key Takeaways
- Natural capital represents about 4-5% of global GDP but receives less than 0.2% of institutional investments.
- Climate Asset Management advocates for treating natural capital as a standalone asset class due to its unique benefits.
- Investment in nature-based solutions must increase significantly to bridge the $7.08 trillion gap by 2030.
The Importance of Natural Capital
Natural capital, encompassing essential natural assets such as soil, water, air, and biodiversity, is vital for economic activity and human survival. A report from Climate Asset Management highlights its underinvestment across institutional portfolios, noting it contributes approximately 4-5% to global GDP while attracting less than 0.2% of institutional capital. This stark disparity emphasizes the need for a reevaluation of how natural capital is allocated within portfolios.
One of the key challenges identified is the difficulty institutional investors face in categorizing natural capital within their investment structures. This ambiguity restricts investment capacity and raises the question of whether natural capital should be treated as a separate allocation or integrated with other asset classes like infrastructure and real estate.
Arguments for Standalone Allocation
Climate Asset Management underscores the importance of recognizing natural capital as a distinct asset class. Its foundational role in generating long-term environmental, social, and economic value becomes increasingly critical as the world grapples with climate and nature-related risks. The World Bank points out that nearly half of global GDP is linked to biodiversity, which is deteriorating due to issues like overfishing, pollution, and deforestation.
Agriculture, for instance, is responsible for about a third of global greenhouse gas emissions. The report emphasizes the need for investment in natural capital solutions and measures related to agriculture, forestry, and land use (AFOLU) to help meet global climate targets.
Traditionally, natural capital has been grouped with real estate or infrastructure investments due to shared characteristics, such as stability and inflation hedging. However, it offers unique advantages that yield stronger environmental outcomes compared to standard real-asset investments. For example, wetlands can effectively mitigate flood risks, and healthy soils are crucial for food security and biodiversity, which support economic activities.
Moreover, natural capital can provide revenue opportunities through carbon credits, biodiversity credits, and conservation easements. In 2023, only $220 billion was allocated towards nature-based solutions, contrasting sharply with $7.3 trillion invested in “nature-negative” activities. To address this imbalance, investment in nature-based ventures must rise to $571 billion annually by 2030.
Growing Interest Among Investors
The urgency for better investment in natural capital is gaining traction among institutional investors. According to a survey referenced in the report, 40% of institutional asset owners expect to debut their natural capital allocation within the next five years, with existing investors indicating plans to increase their allocations further.
For significant growth in this area, substance and clarity in investment strategies are crucial. Approximately 68% of survey respondents indicated that clearly defined project-level KPIs are essential for evaluating these investment strategies. A strong evidence base in natural capital initiatives could enhance the economic justification for larger allocations over time.
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