Nature as an asset class: Three questions to ask before allocating

We have learned to value factories, warehouses and data centres, but still treat the floodplains, catchments and wetlands that protect them as if they have no value. That is starting to change, and last week’s London Climate Action Week was a good moment to ask why the shift is happening, and what investors should do about it.

The week brought plenty of focus and action to the table. For selectors, the bigger question was how to integrate nature into overall portfolio construction, not just an impact or values consideration.

Mallowstreet’s Natural Capital Report, which surveyed 68 UK asset owners with more than £3trn in assets, found that a third of existing investors plan to scale their natural capital allocations beyond 3% by 2030, as evidence of risk-adjusted returns and ecosystem resilience builds.

If you are an investor, you have three main tasks when it comes to nature risks and opportunities: engage with capital that works against your interests; understand the risks already present in your portfolio; and invest where the transition is creating new asset classes.

1. Engage with the capital working against your portfolio: UNEP’s State of Finance for Nature reports that “close to $7trn is invested each year globally in activities that have a direct negative impact on nature, from both public and private sector sources.” That is about 7% of global GDP, and more than 30 times the amount going into nature-based solutions. 

Some of it comes from harmful subsidies, which require policy engagement; some is private capital. You cannot value nature properly while supporting its destruction elsewhere in the book. Work with your fund managers to address this at the sovereign and company level.

2. Understand the risks already present in your portfolio: Nature loss is a systemic risk, and a growing one. The World Economic Forum estimates that $44trn of economic value, over half of global GDP, is moderately or highly dependent on nature; arguably, the whole economy and our livelihoods depend on it. That dependency affects every asset a selector holds, whether public or private, equity, debt, or property, and is transmitted through supply chains, insurance costs, and the resilience of physical assets.

The discipline is to treat nature as a systemic risk measured across the whole portfolio. The data to support this is improving: BlackRock, for example, has begun integrating the Natural History Museum’s Biodiversity Intactness Index into its sustainable investing analytics. There are many other great platforms, such as NatureAlpha and Nature Metrics, that help identify and map these risks across your portfolio and individual securities. 

3. Invest where the transition is repricing. Think about where batteries, electric vehicles and solar were 10 years ago. Last year, clean energy attracted over $2trn of investment, roughly double the $1trn going into oil, gas and coal; 10 years ago, fossil fuel supply outspent electricity. A similar shift is now starting in natural capital, including sustainable forestry, regenerative agriculture and nature as infrastructure.

That last category is easiest to grasp by analogy. Renewable energy became a mainstream investment when solar and wind could offer a 20-year power purchase agreement with a reliable buyer.

Nature reaches a similar stage when an environmental service, such as flood control or water quality, has a clear buyer, a set price and a multi-year contract. At that point, it starts to behave like infrastructure: long-duration, uncorrelated with other assets, and paid for out of necessity rather than goodwill.

Before making an allocation, ask three questions. Who is paying, and do they have to? How is the outcome measured, and against what baseline? How creditworthy is the buyer, and how enforceable is the contract?

A water company or grid operator that relies on a healthy catchment is buying resilience it cannot do without, while a buyer funding nature only to improve its reporting may stop when costs are cut. That obligation is what makes the first an infrastructure asset, a service the economy must keep buying; the second is not.

See also: Food investor Anterra Capital closes third fund at $100m

Get this right, and the payoff works on more than one axis. The return is a contracted, long-duration cashflow uncorrelated with listed markets. The risk reduction is real: the catchment that pays the coupon also protects the physical assets, supply chains and insurance costs already in the portfolio. And the resilience that justifies the payers’ spending becomes a source of stability for the investor, too.

London Climate Action Week and last week’s weather remind us we need to act. What investors bring is the capital to drive change and the discipline to underwrite it, at speed and scale.

Nature is becoming investable, offering returns, risk management, resilience and impact in a single allocation.