Why Investors Should Care About Natural Capital

The climate issue is on everyone’s lips. Following a flurry of natural disasters over the last several months from wildfires to floods to earthquakes and extreme temperatures, climate change has never been so clear to see; with stories channeled through TV, articles and radio into courthouses, schools and homes around the world.

But whilst the climate issue has often been reduced to the energy sector, the COVID-19 pandemic, recent natural events and a broadening awareness and understanding of the issue has demonstrated that climate preservation is also intrinsically linked to the preservation of nature.

This is where the topic of natural capital comes in.

Natural capital is Earth’s collective stock of natural resources that benefit living beings on our planet. The term was first used in the 1970s and the idea of viewing natural capital as a valuable economic asset is gaining popularity.

The UN is playing an instrumental part in creating this sea change, urging governments to look past GDP and creating a framework to help them to do so. The System of Environmental-Economic Accounting aims to aims to help people and businesses value natural resources in a more meaningful and accurate manner.

Whilst ultimately all wealth depends on the preservation of natural capital, Earth’s per capita stock has fallen in value by 40% over the past 25 years, And according to the Green Recovery Observatory which has assessed the “greenness” of Covid-19 recovery spending in 89 countries, found that less than 3% of recovery spending will be devoted to natural capital. In fact, almost 13% of recovery spending was assessed as negatively impacting natural capital. This includes expanding road transport and defines services.

So what can be done to turn the tide on natural capital and ensure that private finance steps up to the plate to channel funds to this underrepresented investment theme and ultimately support a green recovery and sustainable future?

Investing in Natural Capital for a Green Recovery

The finance and investment community has the power to affect overall global emissions and the economic decisions made in the era of COVID-19 recovery must be aligned with climate goals in order to secure a sustainable energy future.

The European Green Deal calls for a shift in investment flows which it describes as essential to achieving the goals of the Paris Agreement and a green recovery. There remains a huge investment gap and finance requires a fundamental overhaul to begin closing this. As one example, financial portfolios need to align with a well below 2 degrees’ emissions pathway to incentivise green growth, sustainable development, and systems transformation.

To help shape a narrative that acknowledges and also affirms the importance of natural capital in enabling a green recovery and sustainable future, leading financial actors need to better understand the risks and opportunities from considering natural capital and incorporate this into their portfolios, and frankly into every financial decision they make from lending, investment and insurance decision-making.

Investing in natural capital actually implies substantial economic, social, and environmental benefits. In addition to supporting national pandemic recovery plans and the prevention of future pandemics, it will support those vulnerable countries most affected by coronavirus which will likely exploit natural capital to overcome debts induced by pandemic.

From an economic perspective, investing in natural capital leads to the creation of jobs. A $1M annual outlay in forest management can generate 500-1,000 jobs in many developing countries and according to UNEP, nature-based solutions create jobs more than 10 times faster than fossil fuel investment. In addition, it will preserve jobs indirectly as investing in natural capital will lead to the presentation of nature-dependant industries including tourism, water, agri.

The environmental benefits are clear. Investments in natural capital will reduce climate risks and help stem biodiversity loss. Pertinently, it can also increase community resilience to natural disasters including fire, floods, storms.

The health of the world’s population is also positively impacted through investments into natural capital. By enhancing local cooling effects, improving air quality, ensuring access to clean water, bolstering food security, reducing exposure to toxic pollution, and increasing access to green spaces, natural capital projects can improve physical and mental health and reduce mortality related to environmental toxicity.

With rising ESG headwinds, investing in natural capital is also a way for investors to fulfil increasingly stringent sustainable mandates and pressure from LPs and other actors. So in addition to the environmental, health, economic and social benefits, investing in natural capital not only supports a green recovery post pandemic but has the potential to boost the resilience of investment portfolios, reducing risk it and enhancing reputation.

What’s happening right now?

It would seem as though investing in natural capital is a no brainer and several financial institutions have already taken action.

A report from The Nature Conservancy and Environmental Finance which surveyed a global group of asset owners, asset managers and financial intermediaries (including banks, investment advisors, consultancies and NGOs) found that the close link between climate change and the decline in natural resources are becoming increasingly well understood by the investment community and that an increasing number are factoring environmental concerns (including natural capital) into their investment decisions.

Yet much work is still to be done on education and encouraging the finance and investment community to spend more time on natural capital. The Capitals Coalition is made up of 380 global initiatives and businesses and works with global businesses, financial institutions and governments to push them to account for natural capital in their decision-making by 2030.

Similarly, the Natural Capital Investment Alliance, which has been established by the Prince of Wales with founding partners HSBC Pollination Climate Asset Management, Lombard Odier and Mirova, aims to mobilise €8bn towards natural capital themes across asset classes by 2022 and scale up this investment theme by engaging and working with the investment management industry.

The World Bank and global investors have also established a collaborative engagement, Nature Action 100+. It is similar to the Climate Action 100+, but seeks to drive change at the top 100 companies having the biggest negative impact on nature

These efforts are a great building block but to further enhance and strengthen the natural capital investment theme, education, clear frameworks and collaborative action will be key.

Conclusion

Investing in natural capital can and should be a key pillar of the green recovery and further, a sustainable future. As the Dasgupta Review, a recently published report commissioned by the UK Treasury argued, “Although our economies are bound by the important asset of nature, we continue to underinvest it in”.

We are at a critical moment in the climate crisis and choices made be the finance and investment community today will have long-lasting economic and ecological ramifications. Investing in natural capital as part of the response to the COVID-19 pandemic would help to tackle many current health, economic, social and environmental issues while also helping countries achieve long term climate goals.

The World Economic Forum found that $44 trillion of economic value generation (over half of the world’s GDP) is moderately or highly dependent on our natural capital and yet is remains an underrepresented topic and investment theme.

The continued lack of attention given to natural capital which is resulting in increased biodiversity loss and depletion of renewable stocks, if continues, could lead to increased insurance risks, higher costs of capital and a loss of investment opportunities.

Unless the finance and investment community acts now, the very real risk for businesses, investors and profits will only worsen.