Holistic natural capital strategies take shape in investors’ minds

The top 50 largest institutional investors in natural capital own some €70.6bn in assets in aggregate (see page 54 for the full ranking), up from €63.7bn at the start of 2024. Natural capital makes up just over 1% of their total assets, suggesting ample room for growth.

Growing attendance by institutional investors at natural capital-focused conferences, including the IPE Real Assets Infrastructure & Natural Capital annual gathering in September, is another indicator of the growth potential of asset the class.

Tom Sarno, global head of timberland investments at Manulife Investment Management, says this interest was clear at a recent UK conference it held in collaboration with Cambridge University. “That was a demonstration of what we forecast a couple of years ago – that genuine interest in natural capital from investors was coming,” he says.

Sarno identifies three distinct sets of investors prepared to allocate to natural capital. “One group is investors wanting to invest in core timberland. The second, wants the same core timberland thesis but with some of the additional attributes. And the third looks for impact – not for philanthropy but for the value created, such as carbon, mitigation banking and other ecosystem services,” he says.

At the heart of natural capital is timberland and agriculture, both of which have been an investment asset class for the past four decades, but more recently have morphed into a broader definition of natural capital. It is an all-embracing term for land-based investments covering timberland, agriculture, and ecosystem services such as biodiversity restoration and carbon sequestration.

Gresham House managing director Olly Hughes says: “For us, the philosophy of natural capital is, first, to produce sustainable natural resources – which is what we are doing through forestry or agriculture – and second, to produce carbon to offset and mitigate climate change and to utilise the transition to net zero using sustainable materials. Third, to restore and protect biodiversity, and fourth, social value and the stewardship of nature that sits on our land.” 

Hughes says investors are looking for exposure, but the challenge is to create opportunities to invest across the firm’s portfolio of natural capital assets. To help in this endeavour, Gresham House recently appointed Eoin McDonald as director of global natural capital to develop and advance the company’s natural capital strategy. 

Gresham House has been on “journeys” with its clients, looking at natural capital “from a very high level and thinking about finding the real opportunities to deploy capital”, says Hughes. “Each client might have different priorities in terms of how they want to allocate to the strategy. They may want to be real asset-oriented, or they may want to be more technology-oriented.”

He says forestry and agriculture deliver core returns. Gresham House has an ambition to build on its sustainable timberland, agriculture and real estate investment to spin out into what Hughes says is “a pure land-based agriculture play” and to align agriculture with more traditional core timberland.

Martin Davies, Nuveen’s global head of natural capital, says: “We need to approach ecosystem services from natural capital assets in an integrated, holistic way. That is, to run a commercial production system based on regenerative agriculture and sustainably managed forestry – and alongside it, protect and improve existing habitat or restore damaged habitat. That is the model in our view.”

Davies says natural capital is “less mysterious than it is often perceived to be”. Investment managers and owners need to start thinking about the environmental services that can be generated from their land, he suggests.

Investors have a fiduciary duty to deliver returns for their clients, and this will ultimately dictate their asset allocation decisions. But Davies says sustainability and this fiduciary duty can be aligned. Sustainable agriculture and forestry can deliver core returns, while the reduction of synthetic farming methods (such as pesticides), greenhouse gas emissions, and energy and water use can provide economic benefits and have a positive impact on the environment. In time, there will be accretive returns from monetising all ecosystem services, he adds.

According to statistics provided by data firm Preqin, 18 natural capital funds raised a total of US$6.37bn in the first three quarters of 2024 (see table).

AXA IM Alts launched its natural capital strategy two years ago, “initially reserved for AXA Group investors as part of their global commitment of €1.5bn to fight against deforestation and preserve biodiversity”, says Alexandre Martin-Min, head of natural capital and impact investments. “It is part of AXA IM Alts’ broader strategic plan to further extend its efforts to address climate change and biodiversity loss, and it allocated an additional US$500m (€485m) towards nature restoration and habitat protection globally.”

Martin-Min says the updated strategic plans are incorporated into the firm’s longstanding presence in sustainable management of brownfield forestry assets, which currently represent around €1bn in assets under management. 

“AXA IM Alts’ forestry strategy aims to deliver stable long-term returns from sustainably managed timber revenue streams on behalf of our clients. These additional commitments to AXA IM Alts’ natural capital strategy mainly target returns driven from payments for environmental services, including carbon or other nature-based credits, with traditional revenue streams like timber being complimentary,” he says.

“Sustainable forestry has a huge role to play in delivering supplies of sustainable fuel, fuel and fibre and has attractive characteristics as an asset class. However, if we are to hit net zero as a global economy, we need bolder changes in land use and private capital allocation to actively restore and protect natural ecosystems.”

Davies says: “Managers have a fiduciary duty to maximise the value of a natural capital asset, like a farm. We should maximise the value from all the ecosystem services, but that is easier said than done. How do you monetise water management for flood control or water quality? There is no question that these things have a significant value to society, but who is going to pay for them? That is the challenge.”

Annual fundraising volumes

Year	Number of funds	Total raised in US$bn
2024	18	6.37
2023	21	5.59
2022	26	2.84
2021	39	5.45
2020	30	9.92
2019	45	12.7
2018	34	5.6
Source: Preqin

Davies, who has overseen Nuveen’s agriculture business which began operations as Westchester in 1986, gives an example. “Water companies in the UK spend a lot of money removing nitrates and phosphates from water,” he says. “But if landowners can change management of the watershed and reduce minerals from the source before they get to the water company, there is value there.

“Yet, it is a ‘utopian vision’ to think that all ecosystem services can be monetised. In time, however, a market for each of these services could evolve, like the global carbon market which is now well-established and growing rapidly. Carbon offset has become a sought-after commodity in the transition to a net-zero economy.” 

Companies with significant emissions have begun investing in timberland to access carbon credits, Davies says. They know the origin of the carbon credit and they are assured of the quality and the price, and from a reputational perspective, they probably take a great deal of comfort knowing the source of the carbon credit, he says.

Monetising ecosystem services

At a much lower level, biodiversity credits are starting to have a market value. But it is still a nascent area. 

In the foreseeable future, landowners may receive payments for managing or conserving certain plant species or habitats for a certain creature on their land. In some instances, conservation organisations are already willing to pay landowners to manage a forest or farmland in a certain way, through conservation easements which can protect and enhance habitat, says Davies. 

“There are a lot of services that have a value but as yet today we cannot monetise these,” he says. “Over the course of time, as demand for some of these ecosystem services evolves, landowners have a responsibility in some ways to make the market, by connecting with business and industry where there is a demand. Then, some of these components will be able to generate additional income streams.”

Within Manulife IM’s 5.5m acres of timberland, there are 17,000 miles of riparian buffers – vegetated areas that protect streams. Sarno says: “It is a big number and numbers are important but equally important is why those numbers matter so much. It is because these special riparian managed zones have very rich species of diversity and the web of life that is created. Further, about 23% of forests have special conservation designations. We protect the unique attributes in these areas, and they are third-party audited.”

Manulife IM, which manages more than US$16bn in natural capital assets, is generating revenue from some of these ecosystem services.

Sarno cites the example of a gopher tortoise project in Florida. This species originated in North America 60m years ago. Gopher tortoises are essential to a web of life, supporting some 350 species relying on their presence to survive. “We have created a mitigation bank to keep this keystone species intact. We have a conservation bank where we sell credits in exchange for accepting tortoises from other land users to provide additional cash benefits to our investors,” Sarno says.

Manulife IM also sold a corridor of an aquatic ecosystem to the state of South Carolina which recently bought the land to preserve the wetland environment, provide resilience to flooding and to protect a historic site.

“You can see that value can be created through ecosystem services by maintaining the forest in its existing ownership or by transferring ownership to someone who has particular needs of the ecosystem,” Sarno says.

“We are moving from optionality to value crystallisation. We are seeing this in carbon, recreation, mitigation banking, and there are other services too. If you look back 10 years, these did not exist. Now, they are real. And this is the promise of natural capital. You have these little pockets. I think it is certainly something that will start to become more mainstream, but we have to give it more time to grow and develop.”

Historically, it has not been possible to extract value from ecosystem services like flood prevention, water recycling or pollination, although Manulife IM and Nuveen are exploring ways to place values on them.

Nuveen has conducted pilots to establish natural capital balance sheets on a cross-section of assets managed globally and has developed accounting methodologies for ecosystem services (see Natural capital balance sheets).

Nuveen manages US$13.7bn of assets covering 3m acres in 11 countries. Davies says that if all ecosystem services could be measured, the theoretical value would be significantly more than the financial value of an asset. “And that is how a land manager, or owner, needs to think about their assets today,” he says.

Eric Cooperstrom, managing director of impact investing and natural capital solutions at Manulife IM, says: “We are seeing the beginning of a biodiversity credit market. There have been numerous protocols and pilot programmes that have emerged in the past few years. Ultimately, what underpins the evolution and success of these emerging biodiversity markets is how we can reliably and consistently track the data.”

Manulife recently formed a partnership with Restor, an open-data geospatial platform that provides tools for natural capital asset managers to analyse timberland through remote sensing technology to measure and monitor key biodiversity metrics in addition to water, carbon and forest cover changes.

“Getting that data is the first step towards monetising biodiversity benefits,” says Cooperstrom. “The next step is to pilot natural-capital accounting to put a monetary value on the biodiversity benefits from soil, water, air and community benefits.”

Ultimately, Cooperstrom hopes to be able to apply a dollar figure to previously unmonetised ecosystem services to help build the underpinnings of a functioning biodiversity market.

He says new technologies like ‘environmental DNA’ should make it possible to take water samples and carry out biodiversity screening to detect the prevalence of certain species. Bioacoustics can identify local fauna in the forests.

Davies says monetising supporting and regulating ecosystem services can add up to 250bps to the returns over and above those generated from provisioning ecosystem services. These accretive returns will enhance revenue generated from the commercial use of the land whether through timber production or agriculture.