UK pension funds remain reticent about investing in natural capital solutions despite growing awareness of biodiversity risks, according to a survey by Pensions for Purpose.
The report, titled Natural Capital & Biodiversity, reveals that while awareness of biodiversity risks among UK pension funds is growing, at least 62% are not invested in any natural capital assets.
The limited study, which was commissioned by Gresham House, surveyed 22 participants comprising 13 asset owners, five investment consultants, and other stakeholders. It revealed that most asset owners agreed that addressing biodiversity risk is at least as crucial as tackling climate change.
It showed that some UK asset owners are incorporating biodiversity and nature-related risks into their investment decision-making, but “only 38% of those interviewed have invested in natural capital solutions, and opinions on doing so are varied due to the concept’s nascency”.
The study also revealed that asset owners agree that addressing biodiversity risk is at least as crucial as tackling climate change, with some considering it an even more significant threat. However, challenges with data and the availability of investment products make it difficult to understand and address biodiversity loss through direct investment.
The report also found that 54% of asset owners interviewed now see biodiversity and nature loss as an ESG risk and a theme with which to engage underlying investments.
The asset owners interviewed for the research seek returns of 5-8% and are willing to be flexible on returns if the assets can offset their own carbon emissions.
The report also found that pension funds approach natural capital investment in three ways: as part of their infrastructure bucket; within their real assets or property allocations; or as a fixed income-type instrument. However, there generally remains a lack of supply for investible solutions that meet investors’ risk, return and impact profile. Investible solutions do exist, according to the research, particularly in natural capital assets such as sustainable forestry and biodiversity habitat banks.
Karen Shackleton, chair and founder of Pensions for Purpose, said: “The investments of the past based on natural capital exploitation are no longer viable; the cost of depleting our resources has become too high, both environmentally and financially. Investors must therefore seek sustainable alternatives that preserve and enhance our planet’s natural capital.
”Addressing biodiversity loss is essential for preserving ecosystems and is a smart investment decision, enabling more resilient portfolios amid growing public awareness and future regulation.”
Heather Fleming, managing director of institutional business at Gresham House, said: “Investments that avoid or reduce biodiversity loss and the depletion of global natural capital will be central to investment portfolios of the future, as investors realise the opportunity and the financial imperative to reverse nature loss.
“Nature has been treated as a free economic good for too long,” Fleming said. “With the WEF suggesting a nature positive transition could generate $10trn annually and 395m new jobs, building nature back better can drive attractive financial returns and planetary impact.”
Cameron Turner, research analyst for Pensions for Purpose said: “To encourage systemic change, we believe monetary value must be attributed to nature. Natural capital is finite, and our economy depends upon it with almost no price attribution save for cost of exploitation.
“Unless we place real monetary worth on nature, we will not incentivise behaviour that supports its protection and restoration.”
Pensions for Purpose said more research is needed to draw firm conclusions.
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