According to bfinance, the number of asset managers offering natural capital funds has surpassed 50, driven by the increasing investor interest in this asset class.
“More than 50 asset management firms are active in the space, often running multiple strategies. There is also a growing list of multi-manager solutions offering further diversification,” the study reported.
However, it noted that despite the language of “capital”, natural capital is yet to gain full acceptance as an “economic asset”.
bfinance highlighted that investors in natural capital should consider diverse factors such as stable yields, built-in inflation hedges, diversification, carbon credits, and current valuation tailwinds when assessing investment strategies, emphasising the importance of a comprehensive understanding of the sector before defining allocation objectives.
According to bfinance, the most substantial fund cohorts within natural capital investing are in timberland or forestry, featuring a well-established roster of both open and closed-ended vehicles.
Others include agriculture funds and nature-based solutions (NBS), the latter of which focuses on protection of ecosystems while addressing other challenges such as food and water security.
“Protecting, restoring, and sustainably managing natural ecosystems and biodiversity is so crucial and inextricably linked to achieving our climate goals. Investing in natural capital allows investors to capitalise on strong market fundamentals and have tangible environmental and social impact on the ground,” said Sarita Gosrani, director of ESG and responsible investment at bfinance.
She added that this remains a “rapidly evolving” and complex space, given investment managers are adopting very different approaches.
Sebastian Mays, director of Australia and New Zealand at bfinance, elaborated that outside of the obvious positive ESG aspects, natural capital also provides embedded carbon reduction within their strategies and oftentimes a positive carbon capture.
“Interest in exploring strategies that have a positive impact on the net carbon of a portfolio is becoming increasingly important, particularly as the majority of institutional investors within Australia have a net zero target,” Mr Mays said.
bfinance noted that several of these funds offer very low or no recurring yields, with 16 per cent of funds’ returns almost entirely driven by carbon credit production and the rest seeing commercial returns supplemented with carbon credit revenue.
Delving deeper into carbon credits and the questions that often surround the subject, bfinance explained that investment in natural climate solutions does not itself guarantee that the carbon credits generated will be of high quality.
“Recent asset manager due diligence indicates broad dispersion in the approaches being undertaken by investment managers: investors must handle the subject with care,” the study reported.
“Asset managers generating carbon credits through the assets in which they invest typically assert that they are seeking to generate ‘high quality’ credits that are likely to command a higher price and mitigate potential reputational risks for their investors.
“Investors should think carefully about what ‘quality’ means and how to validate the manager’s strategy during due diligence.”
