INVESTMENT PROFILE: London-based Climate Asset Management has taken natural capital markets by the horns and is buoyed by rising demand from financial institutions globally for natural capital investments. But markets will only come of age if governments step in to regulate them effectively.
Now that the corporate world largely “gets” emissions reduction and climate adaptation, investors’ attention has shifted to emerging natural capital and biodiversity opportunities.
But despite all the buzz preceding the introduction of the first Taskforce for Nature-Related Disclosures in September, actual tradeable markets for natural capital and biodiversity solutions that don’t involve carbon sequestration remain in their infancy.
Unsurprisingly, Europe is ahead of the curve when it comes to creating biodiversity investments, in part because France is introducing Article 29 which will force large companies with revenue of more than EUR 500 to report on biodiversity from 2022.
Financial institutions will have to measure their impact on biodiversity and adopt new investment strategies to reduce this impact, as well as report on their Scope 3 emissions and publish an alignment strategy showing they are operating consistently with the Paris Agreement on Climate Change.
While progress is taking place far from Australian shores, one of the leaders in the natural capital investment game has an Australian connection.
London-based Climate Asset Management is a joint venture between Pollination, the energy transition advisory firm set up by renowned Australian climate lawyer Martijn Wilder and HSBC Asset Management.
Climate Asset Management started out at the height of the COVID-19 pandemic in 2020 with aspirations to raise a $US1 billion natural capital fund and a $2 billion carbon fund involving investors and projects based all over the world.
Last December, the fund manager announced first close commitments of $650 million which was roughly split across the two funds. Within that, Apple committed $200 million from its Restore Fund. Fundraising activities are continuing, with a final close targeted for around the end of the year.
The fund seeks to acquire assets that can deliver our investors the dual objective of attractive risk weighted returns, coupled with improved environmental and climate outcomes. Investments range from sustainable forestry to regenerative agriculture, biofuels, water supply and “blue carbon”, which is carbon captured by oceans and coastal ecosystems.
So far, the fund manager has inked three natural capital deals covering more than 3000 hectares of farmland assets. Underutilised or degraded farmland will be converted to produce higher value crops, incorporating regenerative practices and a biodiversity action plan to improve the landscape. Carbon sequestration projects that generate cash are part of the land management strategy.
Projects
One project is a land development project in Extremadura, Spain, which will convert more than 400 hectares of farmland that is normally flood-irrigated to regenerative high-value almond production.
Another is the restoration of two million hectares of land across six African countries – Kenya, Ethiopia, Malawi, Tanzania, Uganda and Zambia in a collaboration with the Global EverGreening Alliance.
Over the longer term, the fund manager aims to become the largest dedicated investor in the natural capital space with $6 billion under management, by achieving better biodiversity outcomes while generating commercial returns.
“This gives us the flexibility to meet our fiduciary obligations while actively contributing towards the moral obligation to consider the environment,” chief investment officer for the fund’s natural capital strategy, Ben O’Donnell, said.
Financial institutions which recognise the investment potential of natural capital are leaders in the space, including many insurance companies, he said, adding that France’s introduction of Article 29 is having a positive impact is helping to raise awareness of the potential for natural capital markets.
What gets measured gets managed
A nagging issue in the emerging natural capital scene is the availability and reliability of credible data to create measurable baselines against which progress can be measured. Encouragingly, O’Donnell said that progress is being made on that front.
“Technology to measure environmental activity is probably moving faster than the investment sector. There’s going to be more technology available, whether that’s acoustics or DNA testing, or video equipment that can measure biodiversity.
“And testing is becoming cheaper, whether it’s in relation to soil, water or other factors. It’s fundamental to have a baseline so that you can measure outcomes and make sure that you’re improving your measurement and reporting on the back of that data.”
Climate Asset Management targets investments in land-use schemes such as forestry and agriculture, rather than the property sector, but O’Donnell said he encounters built environment firms in natural capital markets looking to create biodiversity credits to offset a loss of some description. He advises these companies to focus on the gains they can make by integrating biodiversity into the built environment as much as they can.
“It’s not just about offsets, it’s about how you can make your buildings more environmentally friendly from a biodiversity perspective. This includes trees, waterflow, pollinators, insects and habitat and goes from there,” he said.
Ready, set, regulate!
But despite all the interest in biodiversity as a tradeable instrument, markets are still nascent and largely driven by the need for corporations to offset actions that cause biodiversity loss.
“Unfortunately, right now these markets are oriented around offsets. There’s typically destruction that is being offset by the credit. It’s very difficult without government regulation to encourage a voluntary market which is unregulated because you can build supply but if there’s no institutional demand for the credit, it’s not going to compete with other investible opportunities,” O’Donnell said.
We need more government action
Only so much is possible through voluntary action, he continued. “It’s on everybody’s radar, but no government has stepped up to ensure that it legislates and regulates demand. At a minimum, governments need to change the way in which they regulate the fiduciary obligations of managers of institutional capital so they include the environment as a consideration when they’re investing.
“But there is no market where regulation is driving demand for credits from a broad section of the economy that ultimately is probably indirectly having a negative impact on biodiversity outcomes. And that all needs to happen to generate more demand, which will create more supply, which will ultimately help markets repair.
“Regulation will drive change more than simply a desire because from a company or institutional investor level, the board’s primary fiduciary obligation is to maintain and build shareholder value over time and that doesn’t currently weave in environmental outcomes in a way that means it’s prioritised.”
The problem with index hugging
In some ways, index-hugging herd mentality within the investment community is to blame, he believes. “In Australia, institutional capital is all about making sure you don’t stray too far from the benchmark index and don’t do anything other people don’t do. You’re forced onto a particular pathway from an investment perspective and it’s all about risk and return.”