UK institutional investors embrace a new nature-based asset class

Natural capital is increasingly on the radar of institutional investors globally, but the concept of investing in nature has built up momentum in the UK particularly, most notably among local government pension schemes (LGPS). 

In 2024, the West Yorkshire Pension Fund (WYPF) announced that it would invest in a new asset class – nature as business-critical infrastructure. It took a minority stake in Rebalance Earth, a newly launched business, and committed £25m (€28.9m) to a fund to build a portfolio that “delivers resilience, supports long-term value creation, and generates measurable environmental outcomes”.

Rob Gardner, CEO and co-founder of Rebalance Earth, is an early mover in the space. Rebalance Earth focuses on the restoration of landscapes and watersheds to protect companies, communities and cities from climate-related risks such as flooding, drought and water pollution.

Gardner says: “Nature-as-infrastructure is already a recognised real-asset class when framed through infrastructure economics rather than conservation rhetoric.” As Gardner points out, healthy ecosystems perform critical functions: slowing and storing water, reducing flood depth, improving water quality, supporting soils, sequestering carbon and stabilising coastlines. 

Last September, Rebalance Earth launched a partnership with marine restoration company Oyster Heaven, providing capital to develop the infrastructure and capacity needed to restore oyster reefs “at scale”. The initiative is intended to support further investment in restoration from companies that recognise the importance of the services these ecosystems provide – from cleaner water to stronger coastal protection.

“These functions have direct economic and financial implications. In the UK alone, nature degradation could reduce GDP by up to 12% by 2050, and one in four properties may face significant flood risk,” Gardner says. “The investment case emerges when these ecological functions are measured, verified and contracted. At that point, biodiversity becomes a generator of long-duration, uncorrelated cashflows – similar to renewable energy but focused on resilience rather than generation.”

Rebalance Earth aims to mobilise between £150m and £300m of long-term capital into river, wetland, woodland, peatland and coastal-reef restoration. Gardner adds: “Over the next decade, our goal is to unlock £10bn of pension-fund capital across the British Isles. By 2030, we want the UK to demonstrate that nature can be financed, scaled and governed with the same discipline as engineered infrastructure – and to provide a blueprint that other countries can adopt.”

Gardner says Rebalance Earth uses three institutional revenue pathways. These include long-term ecosystem-service contracts where companies, utilities and insurers pay for outcomes such as reduced flood exposure or cleaner water through 10-30-year agreements.

Another approach that can meet institutional investment standards involves the sale of “high-integrity environmental credits”. These include biodiversity credits, carbon units and blended “carbon-plus” credits verified through ecological monitoring, Gardner says. Then there are opportunities to take strategic equity positions in delivery platforms such as reef or landscape-recovery developers which, he says, provide growth upside and preferential access to project pipelines.

Gardner adds: “Combined, these mechanisms target mid-single to low-double-digit real returns, with distributions possible as projects mature and contracted revenues come online.”

But it is not only Rebalance Earth leading the charge. In January 2025, WYPF and the LGPS for East Riding doubled their investment in Foresight Group’s natural-capital strategy. They committed an additional £27m (€25.7m) to Foresight Natural Capital (FNC), whose existing portfolio largely comprises afforestation projects and established forestry assets.

The latest capital will enable FNC to pursue additional natural-capital opportunities such as biodiversity net gain (BNG), peatland restoration and regenerative agriculture. One of FNC’s investments is the Fordie Estate in Scotland, an afforestation project that also focuses on delivering nature and biodiversity benefits.

Robert Guest, co-lead of FNC, says FNC seeks to deliver a gross internal rate of return of more than 8% over long-hold time periods. Guest is confident that institutional demand for nature and biodiversity assets will continue to grow, especially where there is regulatory demand for biodiversity.

Elsewhere, Gresham House launched a biodiversity co-invest strategy in February 2024, securing backing from clients of investment consultancy WTW. It will invest in habitat banks created by Environment Bank Limited (EBL), a portfolio business of Gresham House’s British Sustainable Infrastructure Fund.

Habitat banks transform large areas of unused farmland into a mix of forests, ponds and grasslands. By creating diverse ecosystems, they can create biodiversity-net-gain (BNG) units that can be purchased by developers to offset biodiversity obligations. Gresham House said EBL, which aims to create around 8,000 hectares of habitat banks by 2026, is the only national-scale operator and already has a network of habitat banks across England ready to meet the needs of developers.

Ruth Murray, investment director of sustainable infrastructure at Gresham House, believes the backing of WTW demonstrates the demand for nature investments within the insurance and advisory sectors. Murray says nature, including biodiversity, is a nascent market for institutional investors. “People understand natural capital as a collective term, but I think they’re becoming increasingly aware [of nature/biodiversity as an asset class]. In England, investors are seeing biodiversity being traded and a real value being put on nature. So they’re starting to see it as more of a commodity, rather than something that was free, which is a key part of any market development.”

The UK’s big BNG

The UK’s biodiversity net-gain (BNG) regulations have been an important factor in the momentum of nature investments in the country. They require developers in England to invest in measures in their development’s local area that will increase biodiversity by 10%. In cases where this is not possible, developers can purchase ‘BNG units’ that will generate nature recovery in other parts of the country to meet their legal requirements for nature improvement.

However, towards the end of 2025, the UK government confirmed that it planned to weaken requirements for housebuilders to improve biodiversity on their project sites by introducing total exemptions for small sites and a less stringent mandate for medium sites.

Guest says: “Stable policies creating regulated demand for biodiversity credits/outcomes will encourage projects quickly. However, those remain exposed to regulatory change which is exposed to political shifts. Blending biodiversity credits with other anchor nature-based solutions services and with provisioning goods services, such as food and timber, will de-risk investments from swings in policy – which will affect demand for compliance-driven credits – and/or swings in the voluntary market.”

Guest says regulatory risks such as these can be navigated by teaming up with experienced partners that can pursue “holistic natural-capital projects – or portfolios of projects – which are based to deliver a range of natural-capital services”.

Strategies that combine “more tangible/traditional aspects to underpin the investment case with upside exposure from credits are likely to deliver better risk-adjusted returns”, he says. But, he adds, nature is difficult to standardise, which means foreseeing very large, international, liquid markets for single inter-changeable units of biodiversity are “challenging”.

“Policy and regulation play a huge role,” says Sarah Nelson, global lead director for nature and biodiversity at KPMG. “A compliance mechanism, such as BNG in the UK, can be a game changer because it creates a biodiversity credits market.”

In its 2025 paper, Biodiversity Investing: Why It’s the Future of Sustainable Finance, KPMG stated that institutional investors need to embed biodiversity into ESG investment criteria to avoid exposure to companies with high biodiversity risks. Investors must engage with portfolio companies to enhance transparency on biodiversity-related risks and allocate capital to biodiversity funds and nature-based solutions, the paper said.

Nelson, the paper’s author, says there is a rapidly growing case for nature, including biodiversity, as a standalone asset class. However, she cautions that several things need to change for it to stand up as an investment category. She says: “We need standardised measurements and data. So one of the biggest potential asset classes now is investments in tech companies that can produce biodiversity data.” l