Natural capital is “significantly underinvested” across institutional portfolios, according to a new report from Climate Asset Management. Its contribution to global GDP sits around 4–5%, but its share of institutional capital allocations is currently less than 0.2%.
One reason for this gap is that institutional investors “still struggle to determine where natural capital sits within their investment pools, which inevitably limits investment capacity,” claims the report. This in turn has prompted a debate: should natural capital have its own standalone allocation in a portfolio or sit within a sleeve of infrastructure or real estate?
The case for a standalone allocation
Climate Asset Management defines natural capital as the stock of natural assets — think soil, water, air, biodiversity systems — on which economic activity and human life are built. “As the world’s foundational infrastructure, these natural systems generate long-term environmental, social, and economic value while enhancing resilience to climate and nature-related risks.”
As the World Bank notes, almost half the world’s GDP is linked to biodiversity and natural assets that are in decline due to overfishing, pollution, deforestation, and other extractive practices. Agriculture alone accounts for about a third of all global greenhouse gas emissions, and agriculture, forestry and other land use changes (AFOLU) are estimated to be responsible for around 21%.
“Investing in Natural Capital solutions and AFOLU measures remains key to retaining the potential for alignment with the target of limiting warming to 1.5°C above pre-industrial levels,” notes Climate Asset Management.
Historically, natural capital was viewed as another aspect of real estate or infrastructure investment, as it shares many core characteristics of real asset classes including long duration, stable cashflows, and inflation linkage.
However, natural capital also offers unique additional benefits “delivering stronger potential environmental outcomes than many traditional real-asset strategies,” the report argues. For example, wetlands can mitigate flood damage, while healthy soils support support food security and the biodiversity that underpins many economic activities around the world.
It also includes additional opportunities from carbon or biodiversity credits, conservation easements, and other potential revenue streams.
As of 2023, just $220 billion was directed towards nature-based solutions versus $7.3 trillion for “nature-negative activities.” Investment into nature-based initiatives would need to rise to $571 billion per year by 2030 to close that gap, according to the report.
Investors are starting to see the urgency and are assessing natural capital as a standalone asset class. Two in five institutional asset owners expect to make their first natural capital allocation within five years, and those already investing expect to scale allocations further, according to a survey cited by the report.
Substance is key when it comes to growing these numbers. Some 68% of respondents said “well-defined, project-level KPIs matter most” when assessing strategies, and investors that find a strong evidence base in initiatives are “more likely to support the long-term economic case and to consider larger allocations over time.”
