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Investor appetite for natural capital hits all-time high

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A new bfinance study on natural capital has observed its burgeoning popularity, with over 50 asset managers now providing one or more strategies in this sector.

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.

In its latest Natural Capital Investing: An Introduction to Forestry, Agriculture and Carbon Credits study, bfinance highlighted a noteworthy trend – manager searches related to natural capital, on behalf of bfinance clients, have now surpassed even real estate manager searches for the first time.
“Natural capital” broadly refers to the planet’s stock of renewable and non-renewable natural resources such as land, air, water, soil, minerals, and living organisms.
“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”.

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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.

It noted that while investors will typically invest in commingled funds, a significant proportion of managers will structure separately managed accounts tailored to specific risk and return profiles where there is sufficient scale to permit diversification.
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.

Among the expanding array of available funds, there are over 30 strategies dedicated to generating carbon credits for investors. This emergent group is currently aiming to secure a combined equity commitment of US$19 billion.

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.”

Investor appetite for natural capital hits all-time high

A new bfinance study on natural capital has observed its burgeoning popularity, with over 50 asset managers now providing one or more strategies in this sector.

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Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

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