Natural capital, meaning the elements of nature that directly or indirectly produce value to people, such as forests, water quality and biodiversity, underpin the majority of our economic activity – an estimated $44 trillion of economic value depends on natural resources – equivalent to more than 50 percent of global GDP. Further, it is believed that improvements to natural capital conservation could contribute to around 30 percent of the climate mitigation needed to deliver on the Paris Agreement 1.5C target.
However, for too long, the economic value of natural capital has not been recognised by investors.
Now, as we grapple with the portfolio implications of net-zero commitments, as well as pledges made during COP26, the financial community turns its attention to what private markets should prioritise in 2022 – natural capital. The financial and non-financial risks posed by issues such as deforestation, for example, are too great to be ignored.
To deliver on this, investors should evaluate three key strategies.
First, investors should make specific allocations to private sector projects that establish, preserve, protect and enhance the planet – not just avoid the bad actors. The public sector has been responsible for the overwhelming majority of global conservation finance, with only 14 percent to 20 percent coming from private sector finance. This gap underscores the opportunity to grow investment dollars in this space and refine measurements to evaluate progress made against natural capital goals, like those established by the Task Force for Climate-related Financial Disclosures (TCFD).
Carbon offsets projects, or carbon credits, can be carried out in a way that is sensitive to natural capital while creating jobs in local communities. For example, paper companies in Brazil have invested in projects that enhance biodiversity by teaching local farmers how to plant trees and manage tree cutting in a sustainable manner, so the natural environment is not heavily disrupted.
Secondly, incorporating an investment’s impact on natural capital assets should be accounted for throughout the due diligence process – it is expected that this will become easier over the next few years. Investment managers and data providers have developed some tools that do this, such as SustainEx by Schroders, which analyses an investment’s positive and negative externalities.
We have also entered into a strategic partnership with Natural Capital Research, along with Oxford Sciences Innovation. NCR is a data-led science-based organisation that specialises in measuring natural capital assets globally. Using leading modelling and data techniques, NCR enables landowners, utility companies and corporates to map the natural capital provided by their landholdings. These include assets important for carbon storage, carbon sequestration, soil erosion protection, flood risk management, biodiversity, water quality and recreation.
It also specialises in advising asset owners how to enhance their natural capital value and providing the tools to report and validate increases in value over time. Marrying its scientific knowledge with our investment capabilities allows us to bring innovative natural capital solutions to our clients.
Lastly, engaging with companies to increase awareness of how they affect natural capital, and rely on it, will help shift towards more sustainable business approaches. Private markets players seek to invest in companies that are or can become profitable and sustainable for the long term. It is paramount to engage with portfolio companies about the implications that natural capital has on the greater economic cycles and long-term value.
Investors can facilitate conversations, meeting companies where they are in terms of natural capital awareness, and bring them to the forefront of the industry. These discussions allow investors to gain practical insights into companies that are managing this risk adeptly and those whose practices are lagging, to determine the best course of action. Investors then can drive adoption of more sustainable practices and introduce new tactics, such as sustainable supply chain practices, ensuring long-term sustainability.
Incorporating three proposed methods: allocating with purpose, conscious due diligence and investor engagement in investment decisions is pertinent to the future of sustainable investing and our planet. Creative thinking and collaboration between all stakeholders will be needed if we are to find solutions to these pressing problems. For companies, investors, and nature, this would be a win-win-win.
Sarah Bratton Hughes is global head of sustainability solutions at Schroders