Natural Capital Investments – Protecting Natures Assets Through Assets of Our Own

With the rise of the Natural Capital economy, we talked to a panel of market experts to get the scoop on the latest wave of investment vehicles.

Contributors:

• Ed Martin, Head of Insurance Strategy, Allspring Global Investments
• Christopher McKnett, Head of Sustainable Strategy, Stewardship and Implementation, Allspring Global Investments
• Andrew Skeat, Group Vice President and Director, T. Rowe Price
• Chris Watts, Senior Solutions Consultant, Clearwater Analytics

1. What is Natural Capital?  

Skeat: Natural Capital is a term used to describe the world’s environmental assets. This includes renewable resources, such as water or wind, and non-renewable resources, such as oil and gas, which are used in the production of goods and services. While the term has been recognised since the 70s, it’s only in recent years that investors have considered Natural Capital as an asset class in its own right.

McKnett: We understand natural capital to mean the entire range of life on earth as well as the stock of inanimate material, such as minerals. One of the most familiar terms for a subset of natural capital includes biodiversity which encompasses the variety of living things—from the very largest plants and animals down to tiny microorganisms that can’t be seen with the naked eye.

2. What do you find most compelling about these investment types? 

Skeat: Investments made toward natural capital have the potential to deliver a dual return for the investor. The first is financial, a return on investment. The second is a moral return, in support of the longevity and health of the world’s stock of natural assets.

For example, we (T. Rowe Price) are working with the International Finance Corporation (part of the World Bank) to help fund and grow the corporate blue bond market. Blue financing is an emerging area of sustainable finance, helping to support ocean-friendly or clean water projects that form a part of the blue economy. It aims to create a pool of capital that can be used to support emerging market companies that directly support SDG goals 6 and 14. In addition to the financial return potential, such investments have the potential to directly benefit the basic human essentials of clean water and sanitation in emerging markets, as well as healthier oceans for all.

McKnett: In our view (Allspring Global Investors) biodiversity is the most important asset, providing essential benefits to human life and our global economy. Energy is key to a functioning economy, as are nutritious food, clean water, and the regulation of disease and climate. Over half of the global GDP is dependent on natural capital and with global biodiversity in sharp decline, investment risks are emerging. The most sensitive industry sectors include forestry, agriculture, pharmaceuticals, food and beverage, electricity, and construction.

3. What role is technology playing in making these types of investments accessible and possible to report on? 

Watts: Technology plays a pivotal role in making natural capital investments accessible to a broad range of asset owners and eases the reporting burden. As an example, Clearwater is utilising advanced technologies, to expand access to vital information and data on sustainability factors. Accurate measurement, monitoring, and reporting of environmental impacts through data analytics and remote sensing is a vital part of the landscape.

Skeat: Technology can be important in that it can make data more accessible. But regulation is vital. Although data to measure impact today remains challenging and incomplete in some instances, we are seeing coalescence around what market would consider to be best practices. One useful tool for measurement is an International Capital Markets Association (ICMA) harmonised framework for impact reporting that details core impact indicators for specific projects.

Martin: Technology can also reduce the threats to biodiversity, whether that be sensors to detect leaks, remote monitoring of species health and abundance, and artificial intelligence’s potential to hyperscale knowledge of loss, remedy and prevention.

4. Is there a risk of asset managers greenwashing Natural Capital funds? And what will it take to maintain trust with investors? 

Skeat: Without doubt, we have seen instances of greenwashing or bluewashing where parties fall short living up to their external messaging or promises that they may have conveyed to the market. This is partly a consequence of ESG labels having been applied quite broadly, and in some cases quite liberally. Beyond regulation, industry groups such as the ICMA, have provided guidance to the markets and on certain aspects of ESG bonds which is helping to elevate standards. Over time these regulatory frameworks will evolve and should help to strengthen standards even further.

Watts: There is a growing list of frameworks and regulatory reporting requirements that are helping with the standardisation of reporting. This is providing transparency, encourages consistency and provides a strong foundation for building trust with investors.

5. What opportunity is there for insurers to take advantage of these investment types? 

Martin: These investments can be a good fit for insurers. Many insurance companies have a long-term outlook suitable for these types of investments (so long as returns and risk levels are acceptable). Life insurance companies have especially long-term liabilities and are thus exposed to the negative impacts of natural capital scarcity on the rest of their investment portfolio. Life companies have also been investing more in private partnerships in recent years, which can provide exposure to strategies that support natural capital.

Property insurers, meanwhile, are more immediately affected by climate change and might seek to mitigate climate and nature risk coming from both the asset and liability side of their balance sheet. Changes in land use are the leading cause of biodiversity loss and account for 12% to 20% of greenhouse gas emissions.

Watts: These investments align perfectly with insurers’ risk management and sustainability objectives, going beyond the realm of financial returns. By investing in natural capital assets, insurers can begin to hedge against certain climate-related risks, diversify portfolios, and mitigate vulnerabilities to losses. This proactive approach enables insures to showcase their commitment to environmental and social sustainability, enhancing their image as market leaders in this key area.

Skeat: In addition, there is an inherent ‘underwriting’ aspect to preserving the world’s natural capital such as water, for future generations and for the longevity of companies that rely on natural capital to operate. If companies can no longer access these assets in the form they once did, it bears a risk of increased costs, default, and ultimately possible bankruptcy.

If you’d like to learn more about the individuals or companies represented in this discussion, please find links to their profiles below.

• Ed Martin, Head of Insurance Strategy, Allspring Global Investments
• Christopher McKnett, Head of Sustainable Strategy, Stewardship and Implementation, Allspring Global Investments
• Andrew Skeat, Group Vice President and Director, T. Rowe Price
• Chris Watts, Senior Solutions Consultant, Clearwater Analytics