Is nature ready to move into the mainstream?

Nature may be a sideline investment strategy for many asset managers but initiatives that protect the natural world are already taking root among the industry’s most advanced players, setting an example for others to follow.

By Lois Bennett

5 minute read time

Nature’s relevance to finance can no longer be ignored. This is especially true of those operating in sectors that manage extensive supply chains that must adapt to climate impacts and environmental degradation.

“Nature is an incredibly important component of how we think about our supply chains and their impact on financial outcomes if disrupted,” says Caroline Haas, Head of Climate and ESG Capital Markets at NatWest.

Yet, integrating nature into investment strategies can be more complex than addressing climate alone given the breadth of metrics and impact.

Asset managers leading the way

The most forward-thinking asset managers have already started to carve out specific nature-related strategies and products.

BNP Paribas, for example, has been working on nature-related funds since 2018, and other firms are exploring dedicated funds for areas including water, ocean health and deforestation. Fidelity and T. Rowe Price have made strides with nature funds for water and ocean preservation, helping drive investment into Sustainable Development Goal (SDG) 14, which focuses on life below water and is the least invested SDG.

“There is a UN advisory council that has been set up to solely focus on water or, more precisely, on oceans, and there has been notable interest from asset managers to participate in this initiative,” says Caroline.

Astute asset managers use nature-related exclusions in their portfolios to address sensitive areas: “There are already a number of exclusions in place, with regard to deforestation and palm oil,” notes Caroline. “You will see more of those nature-related exclusions that are trying to mitigate negative risk, especially in protected areas.”

3D-printed coral reefs

While existing nature financing is largely focused on mitigating financial risk, some new products aim to strike a balance.

In 2023, Danish energy company Ørsted became the first in the energy sector to issue a blue bond dedicated to ocean-based conservation projects.

NatWest Markets helped the company bring the blue bond to market, explains Caroline. “We helped structure it and then sold it to asset managers who are interested in getting involved with biodiversity.”

The bond supports pilot projects such as salt marsh and sea grass restoration, 3D-printed reefs to rebuild critical ecosystems in the North Sea and testing innovative methods for coral reef restoration.

These products are few and far between, however, and investors are demanding more scalable projects to engage meaningfully with nature financing. But Caroline is encouraged by the demand, even if it is not yet being met: “We actually have more demand than we have product to service.”

Nature and climate: distinct but interconnected

A major obstacle to nature financing is the breadth and intricacy of nature and how it interlinks with climate-related issues, while being distinct. Caroline says: “We thought climate was hard, but nature is even broader.”

Many firms assume they’re covering nature by managing climate-related risks in their supply chains, but nature increasingly requires its own frameworks due to the complexity of assessments. Where climate strategies focus on reducing emissions, nature involves a wide range of factors and metrics, from ecosystem health to soil composition.

When investors have taken notice of nature, it is more often driven by risk mitigation than revenue generating opportunities, Caroline adds. “Many [investors] are initially taking an exclusionary approach, similar to the early days of climate assessments. They aren’t going beyond what they are required to do to incorporate impact into their investment decisions.”

Aga Siemiginowska is the Head of Sustainability at Oakley Capital, a private equity firm focused on mid-market businesses in sectors including technology and education. “The Taskforce on Nature-related Financial Disclosures (TNFD) has come really quick off the back of [disclosure framework] the Taskforce on Climate-Related Financial Disclosures (TCFD), and given the size and sectors of our companies, our focus continues to be on what is material. We’re starting to see nature-related topics, especially related to supply chain, come to light, but it’s still nascent.”

Aga continues: “I think it will change in time,” she says. “There probably isn't full recognition of how quickly this is coming down the track.”

A carrot and stick approach

Quality data and regulatory support are essential for nature investment opportunities to become accessible to a wider range of investors, particularly granular data such as geospatial information and supply chain dependencies.

“Nature and biodiversity really rely on understanding the geographic footprint of the activity,” says Caroline. “There’s very limited reporting of the revenue and the geographic breakdown of that revenue, and what is the impact of nature on that revenue stream.”

Regulation is also expected to play a significant role in driving nature investments forward. Further impetus was created by the Kunming-Montreal Global Biodiversity Framework signed by 190 countries in 2022 committing to protect and restore 30% of the world’s terrestrial, inland water and coastal and marine area by 2030.

For example, the UK’s Biodiversity Net Gain (BNG) rule – which requires property developers and investors to ensure their site have a positive impact on nature – is already in effect and the EU is ahead of the curve with nature-related regulations adopting mandatory reporting on nature and biodiversity risks, opportunities and impacts.

“We need both the carrot and the stick,” says Caroline. “You need positive incentives, such as fiscal incentives, to help companies to undertake the necessary work. But then you also need some regulation to mobilise organisations.”

Regulation that mandates the disclosure of nature-related risks will likely encourage more investors to integrate nature into their strategies. “Unfortunately, as much as I’d rather like companies and investors to be proactive, once you force companies to disclose what they’re doing, suddenly things get unlocked, even if it is challenging,” Caroline notes.

For firms that haven’t yet developed nature-focused strategies, Caroline suggests starting small – just as climate-focused investing did – with exclusions and understanding portfolio company value chains. This approach can minimise exposure to harmful sectors while building a foundation for more comprehensive nature-related considerations.

Caroline is optimistic about the engagement from investors to date: “For some very large global asset managers, nature is not just on the fringes. They are already trying to incorporate it into specific mandates and frameworks.”

For investors ready to follow their lead, there’s an opportunity to both protect the planet and drive meaningful returns.

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Is nature ready to move into the mainstream?

By Lois Bennett

5 minute read time

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