Opportunities in Natural Capital
The current emphasis on natural capital by investors should help us better understand how companies manage the natural capital that runs through their businesses. However, as has historically been the case with sustainable investment more broadly, a lack of understanding and data supporting natural capital analysis has stood in the way. This is set to change.
Data and Natural Capital Analysis is Coming
A driver of natural capital analysis is the seminal report, ‘The Economics of Biodiversity: The Dasgupta Review’ released in February 2021. It states that some natural capital has ‘non-negotiably high value’, meaning that in some cases it should be left as it is or restored, but not developed or exploited. The report also detailed the financial benefits of conserving and restoring nature.
Another catalysis has been the regulatory action around natural capital and biodiversity by the European Union. In Europe, the Corporate Sustainability Reporting Directive (CSRD) was passed by the European Parliament to detail what companies will need to disclose concerning sustainability issues. This is supported by the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG), which provide more granular detail, including quantitative data, on what companies subject to the CSRD should disclose.
The greater transparency and insight into natural capital-related risks and opportunities have already encouraged many investors to better measure and manage natural capital in their portfolios. Companies have also begun to identify and manage the nature and biodiversity risks and opportunities affecting their business lines.
Capital for Nature-based Solutions
To get an idea of the potential market for nature-related financing, in the recent report by the United Nations Environment Programme Finance Initiative (UNEP FI), State of Finance for Nature 2022, stated that the world spends $154 billion per year on ‘nature-based solutions’. A breakdown of this number by PWC finds that about 83 percent of this funding comes from public sources, with only $26 billion per year coming from private market sources. Starting from this low base, there is plenty of opportunity for investors to step into this breach. To cite one example, the UN Climate Change High-Level Champions report observed that ‘developing and tapping solutions for a net-zero, nature-positive, resilient food system could generate up to US$4.5 trillion of new business opportunities by 2030.
We can also look at the green bond market, which has not previously focused on nature-related solutions beyond climate-related bonds. The global green bond market reached over $500 billion in 2021. That was up from about $270 billion in 2020. The pace of issuance was off in 2022, according to data from the Climate Bonds Initiative, but the long-term trajectory is for steady increases.
Investments will Grow
We are aware that it will be difficult to increase the $26 billion of private market funding and to redirect some of the $500 billion of climate-related bonds to nature-related bonds so we can invest in natural capital, including generating US$4.5 trillion of new food business opportunities by 2030.
We also acknowledge that natural capital is more complex to understand and measure than climate change. Climate change is just one of many natural capital issues. The amount of data and analysis needed to properly invest in cleaner air, water, and land will take time.
However, we believe investment in natural capital and biodiversity is poised to follow the trajectory of investment in climate change-related vehicles. Those who understand these stories better and faster than their competitors may enjoy outsized success.