SUSTAINABLE INVESTMENT Q&A

Nature-based solutions and considering biodiversity in your scheme

Celine Grace Legaspi
Vice President

Find me on LinkedIn

With over half of global GDP dependent on it, nature and its outputs underpin our current socioeconomic constructs. Yet, there is an estimated biodiversity funding gap of $598-824bn annually.

For our latest Sustainable Investing Q&A, we spoke to Celine Legaspi, Vice President Manager Research, about Nature-based solutions and the opportunity for institutional investors.

SUSTAINABLE INVESTMENT Q&A
Nature-based solutions and considering biodiversity in your scheme

What are nature-based solutions and why are they such a hot topic right now?
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.

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.

This means there is a huge opportunity for the private sector to catalyse positive real-world nature impact and generate strong financial returns in the process.

Why should institutional investors be paying attention?
As gatekeepers of trillions worth of capital, institutional investors have a critical role to play in scaling nature markets through their allocations.

When done right, our research and experience show that nature investors can benefit from a strategy effectively balanced from a risk-return-impact perspective. They get to 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 on climate change and biodiversity).

SUSTAINABLE INVESTMENT Q&A
Nature-based solutions and considering biodiversity in your scheme

Where do the key investment opportunities lie?
Themes or sectors in focus typically include forestry, agriculture, conservation & credits, and the blue economy. Managers may choose to invest in one or multiple of these themes as part of their strategy.

Sustainable forestry is all about generating returns through the sustainable management of land for timber products. Key drivers of return for this asset class are biological growth (of forests), price growth (of timber), and income from harvest.

On the other hand, sustainable agriculture is focused on generating returns through the sustainable management of farmland. Return drivers are crop prices and rental income (from farmers).

Conservation & credits is about generating financial returns through the monetisation of conservation or restoration activities. Managers may finance the development of a woodland afforestation project that would then generate nature-based carbon credits, in addition to other value-added services (e.g. ecotourism). These credits can then be sold on carbon credit markets to earn a return.

Last but not least, the blue economy is predicated on the sustainable use of ocean resources for economic growth, improved livelihoods and jobs, and ocean ecosystem health. Sectors in focus include fishing, seafood processing, aquaculture, maritime/coastal tourism, shipping & ports, and circular economy.

SUSTAINABLE INVESTMENT Q&A
Nature-based solutions and considering biodiversity in your scheme

What are the key considerations for investors looking to explore opportunities in nature-based Solutions?

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: Lack of track record should not 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 investors’ expectations.
Stay agile and humble: As an emergent area of investment, change and volatility is to be expected, but we ultimately hold a positive long-term view on the trajectory of nature markets and sustainable development. Nevertheless, it’s 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.

To learn more about ‘nature as an asset class’ and our research into Nature Based Solutions as an area for institutional investment, click here.