‘Natural capital as an asset class’ will require open minds

Humanity’s unprecedented incursion into nature is already producing some of the disastrous effects scientists have long since warned us about.

Increasingly erratic weather brought about by global warming has grown in its consistency and intensity across the world, while the global pandemic we’re now living through follows in a line of zoonotic (animal borne) diseases which are attributed to the degradation of the natural environment caused by human activity.

These are all heady issues that merit discussion, you might say, but what does this have to do with private markets?

Well, as sister title Agri Investor reported in late August, a joint venture from HSBC and Pollination will create a new asset manager specifically dedicated to investing in and protecting the natural environment.

Interestingly, the pair believe a new asset class under the heading ‘natural capital’ needs to be established to facilitate such investments on a wider scale, which, for HSBC and Pollination, will involve sustainable stewardship of carbon sequestering and biodiversity enhancing natural assets.

“When we’re talking about natural capital, we’re talking about ensuring the extent that we use natural capital for gain is done so in a very sustainable way, [which] also enhances the long-term existence of that nature,” Pollination co-founder Martijn Wilder told Agri Investor.

The JV will first launch a $1 billion fund in mid-2021 that will invest in areas private equity has grown accustomed to in recent years, including regenerative agriculture, sustainable forestry and nature-based biofuels.

“We’ll be looking at how we invest in biodiversity and wildlife for a return and integrating those things in there. This is a long term investment play, so some of those areas may mature in a few years’ time, like actual direct biodiversity investments, but we will get there and so the fund will start at one end of the spectrum, and then move into that other end of the spectrum over time,” added Wilder.

Plans are also in place for a $2 billion carbon credit fund that will invest in more obscure natural assets that store carbon, which includes rain forests, reef systems and mangroves, among others.

The need to invest in and protect the natural world has been identified by countless reports over the years, directly linking its prosperity with that of every living creature. Just last year, following publication of the UN’s report on the implications of nature’s decline and accelerating species extinction, chair of the body’s biodiversity division Sir Robert Watson said: “We are eroding the very foundations of our economies, livelihoods, food security, health and quality of life worldwide.”

Trouble is, decision makers “often consider nature’s benefits ‘free’ so market pricing is difficult, sometimes unfeasible, and they are often valued at zero”, as former US Treasury secretary Henry Paulson recently wrote in the Financial Times (paywall). Paulson also called for the creation of a new asset class comprised of things like productive soils, crop pollination and watersheds, citing data that estimates the loss of “services” from pollinators such as bees would equate to a $200 billion loss in agricultural output.

Taken in tandem with developments such as Mirova closing its Althelia Sustainable Ocean Fund on $132 million in August, and Credit Suisse combining with Rockefeller Asset Management to launch a public markets Ocean Engagement Fund in early September, momentum is clearly building in some of the more obscure areas the HSBC-Pollination JV plans to target.

If ‘natural capital’ is to grow to become a bona fide asset class in its own right, it will require a rethink that challenges and updates PE’s understanding of the benefits we derive from the natural world – and not simply a rethink of what actually constitutes an asset class.