StepStone to urge LPs to ‘lean in’ on nature capital

With natural assets still waiting to be correctly valued, ‘a huge arbitrage opportunity will exist for the investors that are willing to lean in’, StepStone says.

Limited partners should begin thinking about exposure to natural assets now to capture early-mover benefits, according to investment consultant StepStone.

Natural assets have not yet been “correctly valued” and until a value is calculated, “a huge arbitrage opportunity will exist for the investors that are willing to lean in”, StepStone writes in a report, seen by New Private Markets, set to be released soon.

“Owing to their long-term mindset and record of finding arbitrage opportunities in inefficient segments of the market, we believe private markets are uniquely positioned to gain an early-mover advantage in nature,” the firms states.

The investment consultant likens the evolving market for natural capital to the development of climate change as an investment theme, which is a slightly more mature trend.

“As climate change has become an investment theme, we have seen how re-ratings have hurt some assets and helped others. We expect nature to follow a similar path. To capitalise on this arbitrage opportunity, LPs should begin thinking about the effect target assets have on ecosystem services and biodiversity.”

StepStone predicts that limited partners will see nature introduced into their investment programmes either by GPs integrating it into their ESG frameworks and investment decisions, or by the LPs carving out a new nature allocation. “Either way, investors will be able to express their nature programmes via single- or multi-asset-class mandates,” the firm writes.

The arrival of supportive regulation, technology and new standards on nature-related risk metrics are all cited by StepStone as factors expected to further boost the value of ecosystem services. In September, the taskforce on Nature-related Financial Disclosures released its latest framework allowing companies to report and act on nature risks.

Natural capital and its potential has become a frequent talking point among industry players. A number of natural climate funds have launched in the last month; Bregal Investments is the latest to join the natural capital club with its investment in carbon insetting service provider PUR Projet.