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Investors’ alert: 2020 could be the year of ‘natural capital’

By Alexandra Tracy, Green Finance Advisor

The year 2020 may be the one in which “natural capital” moves onto the agenda of the mainstream investor community.

Natural capital is a way of thinking about natural resources – such as water, land, forests and clean air – as assets that provide a flow of benefits, or “ecosystem services” to people and the economy.  These services include food and the natural regulation of the environment and climate.

In total, it is estimated that nature provides more than US$70 trillion a year of goods and services essential to a successfully functioning global economy.

Climate change march school

Photo: Jennifer Creery/HKFP.

However, increasing pressures on nature are degrading the resources on which we depend at an unprecedented rate. Here in Asia, rapid economic growth has taken a high toll from the environment, leading to a deterioration of land, freshwater and marine ecosystems, as well as severe impacts on biodiversity.

Happily, better preservation and management of natural resources is starting to be recognised as a crucial element of the transition to a sustainable and low carbon future.  At UN Climate Week in New York in September, nature-based solutions – such as preventing deforestation, increasing reforestation, improving soil health and safeguarding wetlands and coastal areas – featured prominently. Protecting and leveraging natural ecosystems could provide nearly 40% of the emissions reductions needed to meet the Paris climate agreement’s goal for 2030.

Responding to environmental challenges

In recent years, investors have increasingly been seeking to respond to the challenges of environmental degradation and looming climate change.  This means understanding how the companies in which they invest are themselves taking action to manage these issues, and, in some cases, putting capital directly into investments that both generate a financial return and a measurable environmental result.

palm forest farm

File photo: pxfuel.com.

Companies that depend on commodities such as timber, palm oil, soy or cattle are under growing pressure from investors to commit to reducing or eliminating deforestation from their supply chains and to prioritise sustainable sourcing.  Some companies are already investing directly in ecosystem protection.

For example, IKEA Group has put millions of dollars into acquiring sustainably managed forest lands to ensure a supply of Forest Stewardship Council certified timber products and paper. Unilever has also made a number of strategic investments in processing facilities and local suppliers in order to bolster its long term sourcing of sustainable palm oil.

Investing directly

Investment in natural capital sectors such as sustainable forestry, agriculture, fisheries, water and natural habitat is accelerating globally.  In some cases, public capital is being leveraged to mobilise private investors, such as through the World Bank’s Forest Investment Programme and a number of initiatives by the Global Environment Facility to protect marine areas, encourage sustainable small scale fisheries and reduce ocean pollution.  The UN Green Climate Fund is also funding several nature-based solutions, including the restoration of wetland and stream ecosystems in four cities in Laos.

Meanwhile, there is growing appetite from institutional investors for funds focusing on natural capital opportunities.  The more established managers, such as Althelia Ecosphere and Ecosystem Investment Partners, have completed a number of capital raises from institutions including pension funds and insurance companies.  More recently the Meloy Fund for Sustainable Small Scale Fisheries, focused on Indonesia and the Philippines, attracted investment from foundations and family offices in the region.

Investors' alert: 2020 could be the year of 'natural capital'