Natural capital has started to take root among institutional investors. Household names such as Schroders, Stafford Capital Partners, Nuveen, Macquarie Asset Management and Manulife Investment Management are among the many asset managers fundraising or investing in natural capital.
Definitions and understandings of “natural capital” vary. Nature, much like “climate”, can be viewed by investors as a set of risks to mitigate or a value creation opportunity: something that overlays an entire portfolio or an asset class that deserves its own allocation. Or both.
Investors and managers are starting to think more broadly about natural capital-related risks such as biodiversity loss and natural resource shortages. For example, private equity firm Triton requires portfolio companies to “report explicitly on natural capital, ideally incorporating a biodiversity risk assessment”. This is likely to become a priority for many firms following the release earlier this year of the Taskforce on Nature-Related Financial Disclosures framework.
Crowding into the market
Impact funds for natural capital have crowded into the market in 2022. Manulife is targeting $500 million; HSBC/Pollination’s Climate Asset Management is targeting $1.6 billion across two funds; Australia’s QIC is targeting A$500 million ($343 million; €322 million); Stafford is targeting $1 billion; Schroders has created a subsidiary impact firm, Akaria Natural Capital. Stafford, Manulife and CAM are planning to generate carbon credits through such strategies – with CAM distributing these credits in place of financial returns to LPs.
These go beyond traditional, low-and-steady-yielding agricultural and forestry strategies: the capital creates a positive effect on the environment through strategies such as reforestation and land regeneration. The fund manager derives additional returns by transforming existing assets to become more environmentally friendly. We have yet to see how these strategies will fare in terms of fundraising and performance.
Appetite from strategic corporate investors has been strong: for example, Climate Asset Management’s carbon credits fund has raised half its target from corporates. AXA Investment Management Alternatives’ natural capital strategy has raised €500 million from AXA Group companies.
Interest from traditional asset owners has not yet reached a critical mass. Investment consultant StepStone is urging its clients to “lean in” on natural capital’s “huge arbitrage opportunity”. Macquarie’s head of agriculture and natural assets Elizabeth O’Leary said she is not seeing “material allocations made” by institutional investors, reports affiliate publication Agri Investor (subscription required). Notable exceptions include Temasek, PSP and CPP Investments. But both StepStone and Macquarie’s O’Leary expect to see dedicated “natural capital” allocations in asset owners’ portfolios soon.