New markets are emerging to enable institutions to invest in nature and potentially achieve sustainability-related objectives alongside key financial outcomes.
Read this article to understand:
- The value of natural capital
- The role of nature-based solutions in tackling climate change
- Investment opportunities in carbon removal
The insects that pollinate our crops. The teeming rainforests whose species yield ingredients for new drugs. The plants and algae that generate the oxygen we breathe.
These are all examples of natural capital, a concept that refers to the essential things that nature provides to humanity for free. Over half of global GDP – around $44 trillion – is moderately or highly dependent on nature and its services, making natural capital a foundational pillar of the global economy. But in many areas, nature, and the value we derive from it, is under threat.
Thanks to new market developments, investors are waking up to the opportunity to harness the power of natural capital to realise financial returns, make progress towards net-zero targets and deliver beneficial outcomes for nature, people and planet. This article series will explore how.
The problem
Natural capital is best thought of not in terms of “flows”, as with some other forms of capital, but instead in terms of assets from which we derive utility. We use natural capital either in its own right or by combining it with other forms of man-made capital to deliver ecosystem services, such as energy, medicines and food. (And of course, few would disagree that nature has a value in and of itself, beyond the uses humans find for it.)
Some natural capital we can only use once: its supply is finite, and we therefore refer to it as non-renewable. It’s no secret that we have used up many of these non-renewable resources already.
The ultimate resource, when it comes to natural capital, is that which we classify as renewable. This type of resource can be continuously renewed – but only if we use it sustainably. Treat these assets well and they are our most valuable. Unfortunately, they are more often overexploited.
Common ownership of natural assets – from fossil fuels to redwood trees to shoals of bluefin tuna – has meant human beings have lacked incentives to consume them sustainably. This issue is sometimes known as the “Tragedy of the Commons”. Among the damaging repercussions of unsustainable consumption of natural resources are climate change and biodiversity loss, which represent huge risks to human civilization, including economies and markets.
Nature-based solutions
Recognising this, an increasing number of companies and countries are pledging to do their bit to address the problem, such as by reducing their own consumption of natural resources, and by cutting greenhouse-gas emissions as much as possible. But decarbonisation of economies is a challenging process, and with “hard-to-abate” sectors especially, there will still be some residual emissions to deal with.
This fact, along with growing awareness of the wide-ranging risks associated with nature loss, has fostered increasing interest in nature-based solutions: efforts to protect and restore natural capital through activities such as afforestation or wetland restoration. Such projects can improve nature’s ability to perform carbon sequestration, the process whereby ecosystems trap carbon from the atmosphere (see Figure 1).
Figure 1: Carbon sources and sinks
Source: Intergovernmental Panel on Climate Change (2014) and Project Drawdown (2019)
Human interventions to facilitate sequestration could make a significant difference to the carbon balance worldwide. While plants and the soil lock up about one quarter of human-caused carbon emissions now, they could do more if forests and wetlands were restored and a more thoughtful approach was taken to carbon management. For example, about 30 per cent (15 billion tonnes carbon dioxide equivalent) of the carbon mitigation needed by 2050 to deliver on the target of the Paris Agreement, which aims to limit global temperature increases to 1.5°C above pre-industrial levels, could be achieved through tree planting and ecosystem restoration, according to recent research.1
The investment case
New opportunities are emerging for companies to contribute to the renewal of nature and thereby offset their emissions. For example, the growth of voluntary carbon markets enables investors to purchase carbon removal credits, which certify the removal and sequestration of CO₂, via nature-based schemes such as forestry projects, or engineered removals. Such credits can contribute to net-zero targets.
Well-managed nature-based solutions can rehabilitate habitats for wildlife, enhance soil and water quality, and even mitigate flood risk
But it is also possible to invest directly in in nature-based solutions, such as forests, peatland or mangroves, in order to access the carbon credits they generate and gain more control over the outcomes of the project. Well-managed nature-based solutions can rehabilitate habitats for wildlife, enhance soil and water quality, and even mitigate flood risk. The credits can be sold on to other investors or retired to offset emissions from elsewhere in an institution’s portfolio.
In this way, investments to help safeguard and replenish natural capital can yield important sustainability benefits as well as the prospect of financial returns. Credits can act as a useful hedge against rising carbon prices in the future. Investors in nature-based solutions can also potentially benefit from other income streams, such as those from sustainably managed timberland projects, and from an appreciation in the value of the land itself over the longer term.
In future articles in this series, we will dive deeper into carbon credits and nature-based solutions, as well as potential technological methods of carbon capture, and explore how investors can access them.
