Interview

Earth’s Balance Sheet

Natural capital accounting is critical to the conservation and sustainable management of natural resources, says ex-Invesco strategy head Dr Henning Stein.

Natural capital refers to the stock of renewable and non-renewable natural resources and ecosystems that provide various benefits to humans and the planet. It encompasses all the Earth’s natural assets, which not only have intrinsic value, but also play a vital role in supporting human well-being and economic activity.  

Recognising the value of natural capital is essential for sustainable development and responsible environmental management. Assessing and quantifying natural capital can help investors and businesses make informed decisions about resource use, conservation, and ecosystem management, considering both short-term and long-term benefits to society and the environment. This approach is often referred to as ‘natural capital accounting’ and is increasingly important in the context of environmental conservation and sustainable economic development. 

The opportunities for asset owners to recognise, quantify and invest in natural capital are still in their relatively nascent stages, but are steadily emerging due to growing awareness and interest from global investors, according to Dr Henning Stein, until recently Global Head of Thought Leadership and Market Strategy at global asset manager Invesco.  

“We’ve noticed nature-related opportunities from asset managers in North America, and we’ve seen a growing interest among European and Asian investors too,” Stein tells ESG Investor, adding that this heightened awareness is being driven by a myriad of factors. 

According to Stein, the Task Force on Climate-related Financial Disclosures (TCFD) laid a vital foundation for nature, facilitating scenario building and providing organisations, including asset owners and managers, with a means to managed and forecast various climate-related risks.  

This emphasis on climate-related disclosure has been amplified with the emergence of the Taskforce for Nature-Related Financial Disclosure (TNFD), says Stein, adding that the TNFD can be viewed as the “next logical step” after the TCFD.  

The TNFD is set to publish its final recommendations later this month, following the release of its fourth and final beta framework for nature-related risk management and disclosure in March.    

The TNFD’s voluntary, integrated framework has been leveraged in recent biodiversity-related corporate disclosure standards, including the International Sustainability Standards Board (ISSB), European Sustainability Reporting Standards (ESRS) – which underpin the EU Corporate Sustainability Reporting Directive (CSRD) – and Global Reporting Initiative (GRI). 

But, unlike TCFD, which operates on the premise of accounting for greenhouse gas (GHG) emissions globally, TNFD acknowledges that risks are localised, says Stein, who now splits his time between a number of senior executive, business development and consulting positions. 

“In essence, TNFD provides valuable frameworks for understanding both risks and opportunities related to nature,” he says. “This perspective is vital in tailoring scenarios that extend beyond climate, especially given the localised nature of many environmental issues and the nature-related projects aimed at addressing them.” 

Stein notes that the TNFD represents an essential progression, as evidenced by its significance at COP15, where biodiversity and nature-related topics took centre stage.  

In December 2022, at the Kunming-Montreal COP15, 193 countries pledged to adopt the Global Biodiversity Framework (GBF). The framework included Target 15 which requires governments to encourage companies and financial institutions to disclose their risks, dependencies and impacts on biodiversity along their operations, supply and value chains, and portfolios by 2030 at the latest.   

“Investors are increasingly focused on bridging knowledge gaps to ensure they are not only climate-conscious but also aware of opportunities in the nature space,” says Stein. This focus is being informed by the concept of natural capital, which encompasses air, water, and soil – three areas intricately connected to all living organisms.  

Natural assets and liabilities 

Stein explains how natural capital can be seen as the planet’s balance sheet, playing a crucial role in various aspects, including conservation and sustainable management of natural resources. 

“Consider soil pollution, a growing liability,” he says, adding that a significant portion of habitable land is dedicated to agriculture, yet soil health is declining.  

This imbalance between nature-related assets and liabilities poses a substantial challenge, he says, given the need to balance the books over the course of the next 20 to 30 years. 

“Issues like freshwater, biodiversity, chemical and nutrient pollution are all intertwined and have far-reaching consequences for the planet,” he says, noting that the efficient value of plants has declined due to the high levels of CO2 they need to absorb, resulting in extreme changes to ecosystems and landscapes. 

Asset managers are coming to recognise the importance of addressing nature-related risks, including the potential disappearance of cities and unproductive agricultural land, says Stein, a Finance Fellow at Cambridge Judge Business School, a member of the Board of Advisors at ESI ThoughtLab and a member of the Policy Working Group at FAIRR. 

“The good news is that these issues are reversible, and this recognition has shifted the perception of investing in environmental sustainability from a feel-good endeavour to a savvy financial strategy.” 

Private markets, especially assets related to nature, such as sustainable timber, offer stable income and serve as potential inflation hedges, he says, adding that regulatory changes, particularly in Europe are driving the adoption of sustainable practices. 

For instance, the EU’s Nature Restoration Law is a key element of the EU Biodiversity Strategy which calls for binding targets to restore degraded ecosystems, in particular those with the most potential to capture and store carbon and to prevent and reduce the impact of natural disasters.   

The proposal aims to establish a larger EU-wide network of protected areas on land and sea, the launch of an EU nature restoration plan, as well as introducing measures to enable the necessary transformative change and tackle the global biodiversity crisis and work towards the goals outlined in the GBF. 

In May, the EU adopted new rules for deforestation-free products. Under the EU Deforestation Regulation, European companies must carry out extensive due diligence on their value and supply chain to ensure that their products do not contribute to deforestation.  

Such regulatory shifts are expected to gain momentum and further incentivise investments in natural capital, says Stein.  

“Currently, we don’t account for the real costs associated with harmful products, nor do we adequately reward products that have a positive impact on the environment,” he says.  

“This needs to change, and it requires both legislative change on a cost and national level.” 

Jurisdictions with “forward-looking” regulations will have a significant advantage in fostering tech-based solutions to the solve the nature crisis, such as precision fermentation and smart agriculture, which will help reduce pesticide use, manage nitrogen levels in the soil, and increase yields, argues Stein.  

Diversifying for nature 

Asset owners looking to diversify their portfolios to invest in nature-related opportunities increasingly have the tools to do so effectively, says Stein.  

“This diversification can lead to attractive and uncorrelated investments, particularly in the realm of natural capital,” he says, adding that impact investors are increasingly allocating capital to natural capital investments, especially in emerging markets. 

According to Stein, emerging markets are gaining attention, including Sub-Saharan Africa, Latin America, the Caribbean, and Southeast Asia.  

These regions offer significant opportunities for impact investing, he says, but success requires experienced managers who can navigate local projects, build track records, and collaborate with local talent. 

“Investing in natural capital provides a unique opportunity for investors to participate in this space with potentially higher returns,” he says.  

“This approach, sometimes referred to as ‘natural capital plus’, involves marrying traditional infrastructure investments with innovative solutions in fields like agroforestry.” 

However, only a few asset managers can operate in this space at scale, explains Stein, citing JP Morgan and Manulife Investment Management among them.  

“These firms are not limited to managing timberland but are also delving into the forest carbon offset market,” he says, adding both asset managers are raising funds to purchase forests specifically for carbon sequestration. 

In May, in an effort to help speed and scale the growth and development of carbon dioxide removal (CDR) technologies, JPMorgan Chase signed long-term agreements to purchase over US$200 million in high quality, durable CDR.  

“Institutional investors can now obtain carbon offsets, aligning their growth focus with ESG goals,” says Stein, adding that Manulife has partnered with the World Economic Forum (WEF) to foster sustainable forestry and promote health and well-being. 

“Scaling innovative solutions that protect and restore forests is where the real impact is seen,” he says. “This aligns with the broader context of the current state of ESG, where sustainable investing is gaining momentum and making a significant impact on the market.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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