As delegates left the COP15 conference in Montreal at the tail-end of 2022, they may well have been congratulating themselves on getting a deal across the line that includes targets to protect 30 percent of the planet for nature by 2030, plus commitments to overhaul around $500 billion of subsidies that damage the environment and pledges to restore 30 percent of the world’s degraded ecosystems. Even so, it didn’t quite get the same coverage as its more famous cousin, the pledge to keep global warming to well below 2C under the 2015 Paris Agreement.
It’s clear that climate change has moved way up business and society’s agenda, but the protection of biodiversity and nature currently lags behind on the priority list.
Yet this is changing – thanks largely to how the interrelatedness of the climate and nature has become better understood. “Nature considerations are critical,” says Suzanne Tavill, a partner and global head of responsible investment at StepStone Group. “We are now aware that the whole scope of nature investment opportunities needs to be addressed if we are to get to the 1.5C target.
“There has been a tipping point around nature as awareness has grown because phenomena such as wildfires, flooding, heatwaves and coral bleaching are increasingly demonstrating that climate change is here. All these are clearly impacting nature – there is an acceptance that we have to address the impact we are having on it.”
An economic issue
Indeed, there is a growing realisation that our health and economies depend on the health of our ecosystems. As the EU pointed out in a December 2022 press release, “more than 50 percent of our economy depends on nature… Businesses have a major role to play by aligning their activities and financial operations with biodiversity objectives and directing them away from activities that harm nature”.
The stark fact is that businesses and their investors may have little choice but to play the role the EU has cast for it. There is increasing momentum to act – and not just because it is the right thing to do.
“World Economic Forum research suggests that an estimated $44 trillion of global value – more than half of global GDP – is at risk of nature degradation,” says Holly Turner, a climate specialist at Schroders Capital. “This places biodiversity loss as the third-highest risk in order of severity, ranking only behind climate action failure and extreme weather events. The risks associated with ecosystem disruption and with dependency on ecosystem services could bring huge financial losses if they continue to go undetected, or at least misunderstood.”
Until recently, moves to measure and understand biodiversity impact in the business and investment community have come largely from major corporates. “Nature is today where climate was five years ago,” says Alvar de Wolff, a managing director and head of ESG at Bregal Investments. “It’s still quite nascent, but it is catching up quickly. There is momentum behind this from regulation, a need to act to build supply chain resilience, and from leading corporates who are well on their way to net zero – recognising that they also need to invest in nature.”
One example of this is Climate Asset Management, a joint venture between HSBC and Pollination, which recently launched its Nature Based Carbon Strategy with a $600 million target. In an interview with affiliate title New Private Markets, Martin Berg – the fund’s chief investment officer – explained that the LP base was global corporates with decarbonisation targets that would receive yield in the form of carbon credits in lieu of financial returns.
Yet the past 12-18 months has seen private markets start to look at this more seriously. Climate Asset Management has another, more conventional fund, Natural Capital Strategy, with a $1 billion target. Schroders established a natural capital impact firm in collaboration with Conservation International last summer – Akaria Natural Capital – and AXA IM Alts recently raised $500 million for natural capital investments.
Bregal Investments announced in October 2022 that it would partner with PUR Projet to invest in natural climate solutions. That same month, SWEN Capital Partners announced it had raised €150 million for its Blue Ocean Fund, and StepStone published a paper, We Don’t Value Nature, in which it argues that the list of stranded assets related to nature could lengthen considerably.
There is clearly a lot of activity around biodiversity and investments in areas such as forestry and agriculture, which are a natural home for targeted capital. Firms are seeing increased appetite for these opportunities.
“We’ve been a land-based investor for 35 years – it has always been part of the equation for us,” says Charlotte Daelemans, a managing director and senior real assets specialist at Nuveen. “But it’s only in the past two years that we’ve had more interest from institutional investors and wealth managers that are allocating to land-based, nature-based solutions. They are recognising they can solve for things like biodiversity and soil quality through land-based investments.”
The creation of credits, either as the carbon credit system improves or as nature-based credits develop, is also driving increased investor interest. “The recognition that investing in nature and biodiversity can align with a range of environmental and investment objectives has prompted a surge of private market interest, largely because of the role that investing in natural capital can play in addressing the twin threats of climate change and biodiversity loss,” says Maria Teresa Zappia, deputy CEO at BlueOrchard and head of sustainability and impact at Schroders Capital.
“In addition to areas such as sustainable forestry, a nascent theme that offers great potential to restore nature and biodiversity is investing in conservation through nature-based solutions,” says Zappia. “This sees investors seek to protect and restore vulnerable ecosystems in a way that both maximises impact while potentially generating a return through nature-based credits.”
A broader scope
Nevertheless, the opportunities are broadening out as more emphasis is placed on preserving, protecting and improving biodiversity as a business issue. “We’re seeing a shift among private equity firms,” says Tavill. “Previously, many considered natural capital as encompassing just farming or forestry, and these don’t offer private equity-style returns. Now, however, we are seeing forward-thinking GPs tap into natural capital, particularly through food systems in areas such as the molecular development of food, complex sensors to enhance soil’s sequestration capabilities, or the adoption of AI systems to drive productivity. GPs are now starting to leverage their experience in other sectors to apply it to enhancing biodiversity – all delivered with private equity-style returns.”
SWEN’s Blue Ocean Fund is an example of this type of strategy. Its focus is on start-ups in ocean data, sustainable food production, alternatives to single-use plastics, marine renewable energy and the decarbonisation of maritime transport. The firm plans to publish its biodiversity policy this year, something that may tilt SWEN’s overall investment philosophy still further towards protecting and enhancing nature.
“What I heard while at the COP15 conference evolved the way I think about this topic,” says Isabelle Combarel, deputy CEO, head of business development and ESG at SWEN. “Now I believe that nature has to come ahead of, but be linked to, climate. If you focus just on climate, you may be having negative impacts on nature; if you focus on nature, you will have a positive impact on climate because biodiversity is dependent on climate.”
Triton Partners is also advancing its practice around biodiversity. Having published a paper on biodiversity in May 2022, this year, the firm is asking portfolio companies to report on an increased number of biodiversity and ecosystem-related metrics than previously. “Many won’t have considered these before,” says the firm’s head of sustainable investing, Ashim Paun, “so some education is needed to ensure that we receive meaningful responses and can then help them to mitigate any identified risks.”
Paun has also seen new approaches to biodiversity develop in private equity. “We’ve seen private markets investors focus on areas such as ecology remediation businesses and geospatial mapping and sensors,” he says. “We see opportunities in water – tackling and mitigating the risk of water scarcity and/or flooding, for example, by making water take more efficient and not polluting what goes back into the water system. We also see opportunities in sustainable agricultural practices – not just technology, but also services that support agricultural industries.”
What’s the risk?
Though opportunities are emerging, many believe that mitigation of risk is a more likely path for the time being, especially since measuring biodiversity is such a complex issue. “Data is crucial,” says Paun. “There is a growing consensus that for financial capitalism to continue to operate, it needs to have a licence to do so. This means the negative social and environmental impacts need to be better governed. The impact of industrial activity on global ecosystems has largely gone unchecked and that’s partly because it is so complex. Until markets are presented with data, they can’t put a price or value on it.”
Many also fear greenwashing, because so little is currently understood and best practice has yet to emerge. As Fabio Ranghino, a partner and head of sustainability and strategy at Ambienta, warns: “We are seeing asset managers put forward biodiversity buckets of stocks on the public markets, yet when you look closely, they are just normal businesses that are somehow connected to biodiversity – its preservation is not driving returns. It’s a hot topic, but, for me, it remains primarily a responsible investment consideration.”
Whether firms opt to create strategies built around biodiversity or whether they focus on identifying and mitigating nature-related risks, it seems likely that GPs will need to consider nature in due diligence and value-creation plans in the not-too-distant future. Some LPs already include biodiversity in their investment allocations, while the risk of stranded assets due to nature-related considerations will increase over time.
As Tavill says: “Investors are now becoming aware of the risks. They can see just how interrelated many companies are with nature – and that will develop into mechanisms where that relationship can be priced. And that, ultimately, will feed into company valuations, much as climate impact is doing today.”
New frameworks and regulations are expected to help firms focus on nature impacts and support the development of measurement and reporting tools.
The Taskforce on Nature-related Financial Disclosures is developing a framework in a similar vein to its sister regime, the Taskforce on Climate-related Financial Disclosures, which has now gone mainstream. Scheduled to go live in September 2023, the TNFD framework will provide metrics and a standardised lexicon for nature-related disclosures. It claims that “nature loss poses a major risk to business, while moving to nature-positive investments offers opportunity”.
The earlier work on the TCFD has created a solid base for TNFD adoption. “TNFD is critical in raising awareness and prompting action by investors and companies,” says StepStone’s Suzanne Tavill. “It has credibility because of the groundwork laid by the TCFD, which has been broadly adopted by investors, companies and regulators.”
We are also seeing moves by the Science-Based Targets collaboration to create guidance on nature – the Science Based Targets Network – and by the Partnership for Biodiversity Accounting Financials to build standards for assessing and reporting on biodiversity impact and dependency. Meanwhile, regulators are also stepping in. The EU, for example, has proposed a Nature Restoration Law and reached a provisional political agreement on regulations aiming to create deforestation-free supply chains. The EU is also busy creating a taxonomy for the criteria around protection and restoration of biodiversity.
All these are providing an impetus for change, as well as offering some of the tools necessary to measure and report on nature impact. “We are seeing many early-stage developers in terms of assessment and measurement harnessing satellite data, among other [sources], to provide granular assessment,” says Schroders’ Holly Turner. “Initiatives like TNFD, SBTN and PBAF are complementing these measurements by creating reporting structures and shaping the types of commitments a financial institution can make towards biodiversity and nature.”
Once established, these initiatives and tools will help develop best practice approaches, says Triton Partners’ Ashim Paun. “We expect public and private markets participants to become better informed and progress towards more consistent and comparable reporting frameworks,” he says. “This will ultimately improve understanding, drive better biodiversity practice and allow for comparisons across geographies and over time. We also expect to see more attention paid to funding positive biodiversity outcomes in areas such as water, heavy industry, transportation and agriculture.”