Commentary

A Holistic Approach to Natural Capital Investments

Martin Davies, Global Head of Nuveen Natural Capital, explains how natural capital assets can be measured and monitored to ensure consistency in returns and effective long-term land stewardship.

Over the past 25 years, institutional investors have become increasingly interested in farmland and timberland, attracted by their strong, stable returns and inflation hedge characteristics relative to other asset classes. Natural capital assets are powerful diversifiers because of their low or negative correlation with traditional asset classes, while being low-cost, natural solutions to climate change at scale.

Investment in natural capital assets is also crucial as demand for food and raw materials continue to dramatically increase to keep pace with population growth and rising consumption levels. Those managing farmland and timberland must find new solutions to meet this demand.

The world cannot simply double its productive land footprint, instead we must produce more on existing land. This means that food, fibre and timber production gains must come from efficiency innovations – refining methods that already exist and creating entirely new ones. Production systems must be calibrated to deliver yield and efficiency gains with a lower carbon footprint to get us closer to a  carbon-neutral reality.

The institutional investment community has a vital role to play in supporting natural capital assets to meet some of the most critical issues facing the environment and humanity.

Managing the interplay

Managing this complex interplay requires the  sustainable intensification of production alongside the optimisation of a carbon profile, and stewarding the natural resources of water, soil health and biodiversity to enable long-term resilience. Robust frameworks and methodologies that enable the impact of operations to be understood and foster a holistic land management approach can lead to responsible land stewardship.

Ecosystem services are the direct and indirect benefits to human wellbeing and quality of life derived from natural capital assets. Estimating the value of ecosystem services, the benefits to humans provided by the natural environment, is a good place to start and should be supported by an ESG framework that aims to improve internal data on energy use, greenhouse gas (GHG) emissions, water use, soil health and labour practices.

By integrating these methodologies, investors can work towards a rich and balanced approach to measuring and monitoring natural capital assets, which can deliver both long-term productivity and environmental benefits.

Enhancing data quality to establish a baseline and measure changes in natural capital can also contribute greatly to the resilience of an asset over time, which provides for more consistent returns, reduces risk and meets the rising expectations of stakeholders – such as the end-investor and regulator – in the delivery of responsible, long-term land stewardship.

The evolution of a sustainability strategy

Investors should aim to inform stakeholders, transparently, on the values of ecosystem services, and provide clear comparisons of such values to the cost of investment to maintain natural capital.

A natural capital balance sheet is an effective accounting process that should be implemented to understand the risks that put pressure on nature’s capacity to provide the benefits investments receive.

Yes, it’s ambitious, but the underlying process can begin with the following questions being answered:

  • What natural capital assets are owned/managed or depended upon?
  • What benefits flow from the assets?
  • What is the value of these benefits and to whom do they accrue?
  • What does it cost to maintain and manage these assets?
  • What is the net impact on natural capital?

GHGs from agricultural production and land-use change  – which are estimated to rise to 15 gigatons per annum by 2050 – must be addressed, as previously stated, and built into a separate accounting process to transform data into tangible action. Or, in other words, carbon mitigation strategies.

About 37% of the pathway to reach climate goals codified by the Paris Agreement could be met by natural capital solutions, with institutional investment playing a role in closing the GHG mitigation gap and keeping global warming below 2 degrees Celsius. This can be achieved through a combination of natural capital solutions, including conservation, restoration and improved land management practices, but only once agricultural carbon footprint has been effectively quantified.

However, these accounting processes come with a caveat. Investors must have a strong understanding of operational land management and must have a significant geographic global footprint and technical knowledge of forestry and agronomy to deliver resilient and diversified solutions.

The future of natural capital investing

As the need for investment in farmland and timberland increases, the effective mapping and monitoring of natural capital assets will require continuous improvement, to better understand their impacts on the wider world and to ensure transparency for investors. Sustainability frameworks need to be constantly refined and data capture processes broadened in scope. But we must remember that improved metrics are just part of the solution. These activities have to be complemented by ongoing innovations and implementation of projects on the ground, often in partnership with NGOs or supply chain partners to improve the stewardship of investments in support of nature, climate and people.

 

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