In the second of four articles, we explain how environmental importance does not automatically translate into investment readiness. Investor confidence in future revenues depends on market evidence, contractual certainty and a track record of delivery.
Read this article to understand:
- The different stages of market development of natural capital assets
- Why higher investor readiness indicates greater revenue certainty rather than stronger return potential
- How the “investment readiness levels” framework can be used as a tool for both due diligence and portfolio construction
The investment case for natural capital has never been stronger. Governments, corporates and financial institutions increasingly recognise that restoring ecosystems, managing carbon, improving water resources and protecting biodiversity are essential to a resilient economy (See “Natural capital comes of age, part one: From environmental value to investment opportunity”).
A growing range of environmental markets are emerging to monetise these outcomes, and markets that barely existed ten years ago are now attracting significant private capital and corporate interest.
However, there is often an implicit assumption that because a market delivers an important environmental outcome, it is also ready for large-scale institutional investment. In practice, these are two very different questions.
The challenge for investors is not determining whether biodiversity, carbon removals or water quality improvements have societal value, but whether future revenues can be underwritten with sufficient confidence to justify allocating long-term capital.
This distinction matters because natural capital is not a single ecosystem outcome. As an asset class, it is a collection of revenue streams at different stages of maturity, with different levels of market evidence, contractual certainty and delivery track record. We believe investors need a more structured way to assess the maturity of natural capital revenues, for example through an investment readiness level (IRL) framework.
What determines investment readiness?
Investment readiness is a question of revenue certainty
At its core, investment readiness is a question of revenue certainty. Whether we invest in infrastructure, real estate, farmland or forestry, our ability to commit capital depends on our confidence that future cashflows will materialise broadly in line with expectations. In natural capital markets, that confidence typically comes from three sources: market evidence, contracted cashflows and evidence of previous execution success (see Figure 1 below).
A. Market evidence
The first source is a deep and observable market. Investors gain confidence when they can identify a large number of transactions, transparent pricing, multiple buyers and sellers, and a long history of market activity. Timber and agriculture provide obvious examples. Prices are imperfect and fluctuate over time, but investors can point to decades or even centuries of market data. They understand how markets behave through different economic cycles and can observe comparable transactions.
The same principle applies to environmental markets. Transactions and data are building up in carbon markets, water rights markets and other regulated systems, enabling investors to analyse and model these outcomes.
B. Contract evidence
Where deep markets do not yet exist, long-term agreements with creditworthy counterparties allow investors to underwrite revenues even when markets remain relatively immature and there is little or no secondary market of potential buyers.
This model is well understood in infrastructure. Renewable energy projects were financed years before power markets became fully mature, thanks to revenues secured through long-term power purchase agreements.
Investors are in effect replacing market risk with counterparty risk
Though far from being adopted or executed at scale, the same principle is now emerging in natural flood management. By offering multi-year offtake agreements, corporates or large infrastructure asset owners can provide a stable income to the initial investors in a natural flood management project. Once a contract is in place, investors are in effect replacing market risk with counterparty risk. This can substantially decrease a project’s cost of debt if the off-taker’s creditworthiness is solid.
C. Delivery evidence
The final component is execution certainty. A market may have buyers and pricing mechanisms, but investors still need evidence that projects can consistently deliver the claimed environmental and revenue outcomes at scale. Pilot projects demonstrate feasibility. Institutional investment requires evidence of repeatability.
This distinction is particularly important for revenue streams that are newly established or developing. While methodologies may be robust and scientific consensus growing for emerging ecosystem revenue streams, large-scale projects which have been operating successfully through multiple delivery cycles may be few and far between.
Figure 1: The three determinants of market readiness
| Category | Market depth | Contractability | Commercial delivery track record |
|---|---|---|---|
| Meaning | Can investors observe sufficient evidence that a market exists? | Can future revenues be underwritten through contracts? | Has the revenue stream been delivered repeatedly at commercial scale? |
| Indicators | Historical transaction volumes Multiple buyers and sellers Observable pricing Secondary liquidity Forward-looking price signals | Long-term offtake agreements Creditworthy counterparties Government-backed payment schemes Regulated purchasing requirements Revenue floors or minimum commitments | Multiple projects operating successfully Large-scale deployment Multiple delivery vintages Demonstrated issuance and monetisation Track record through economic and policy cycles |
Source: Aviva Investors, 2026.
The missing risk premium
A number of emerging environmental markets are characterised by limited transaction history, price discovery, contracted demand and delivery track record. In these cases, investors are effectively being asked to underwrite multiple risks simultaneously, including biological risk, execution risk, market creation risk, regulatory risk and liquidity risk.1 Yet these markets’ projected returns are often benchmarked against established real-asset strategies.
This raises an important question: if investors are being asked to finance the creation of an entirely new market, should they not expect returns more consistent with growth equity or venture capital than mature infrastructure?
This common mismatch deserves greater scrutiny.
Not all environmental markets are equally mature
Applying an investment readiness lens across environmental revenue streams reveals substantial differences (see Figure 2).
At one end of the spectrum sit timber and agricultural production. These benefit from deep markets, proven operating models, established financing structures and long-term transaction histories.
Many are early-stage markets undergoing commercial validation
Compliance and voluntary carbon markets increasingly occupy a middle ground. While policy and regulatory risks remain important considerations, pricing mechanisms exist and transaction volumes are growing. Many carbon removal pathways achieve institutional readiness through long-term offtake agreements, even where the depth of secondary market liquidity remains to be tested at scale.
At the other end of the spectrum sit many emerging ecosystem service markets, including voluntary biodiversity credits and certain water or nature-based outcome payments. These may be environmentally compelling and strategically important but often lack the transaction history, pricing transparency or contractual revenue structures institutional investors typically require. It does not mean they lack potential, but investors should recognise them for what they are: early-stage markets undergoing commercial validation.
Figure 2: Investment readiness levels (IRL)
| IRL | Description | Natural capital example |
|---|---|---|
| 1 | Conceptual revenue model exists | Academic concepts for ecosystem service payments |
| 2 | Pilot transactions completed | First voluntary biodiversity credit sales and natural flood management outcomes |
| 3 | Repeat transactions occurring | Early biodiversity markets, pilot water quality schemes |
| 4 | Market validation underway | Nutrient neutrality, compliance biodiversity markets |
| 5 | Commercial project financing possible | Engineered removal projects with some contracted sales |
| 6 | Institutional capital entering | Voluntary carbon projects with established buyers |
| 7 | Revenue stream routinely financeable | Compliance carbon, mature water rights markets |
| 8 | Established institutional asset class | Forestry carbon, mature environmental compliance schemes |
| 9 | Fully mature market with long operating history, liquidity, valuation methodologies and financing structures | Timber, agriculture |
Source: Aviva Investors, 2026.
A practical test
One simple way to think about investment readiness is what might be called the substitution test. If a project loses its intended buyer, can another buyer be found at a reasonably observable market price?
- For timber, the answer is generally yes.
- For agricultural commodities, the answer is generally yes.
- For global carbon markets, the answer is increasingly yes.
- For many early-stage biodiversity markets and natural flood management, the answer may currently be no, or at least not yet.
The more dependent a revenue stream is on a specific buyer, future policy intervention or a theoretical future market, the greater the uncertainty investors must absorb. Where that’s the case, long-term contracted revenues become increasingly important.
Towards an investment readiness level framework
Although the natural capital sector has made remarkable progress over the last decade, the next stage of market development requires greater discipline around risk and return.
Investors need frameworks that distinguish between environmental importance and investment maturity. They need to understand where revenues are supported by observable markets, where they are supported by contracted offtakes, and where they depend on future market creation.
As discussed, there are three paths to investment readiness: deep market evidence, long-term contracted revenues or extensive commercial delivery history. The highest IRL opportunities possess all three and the lowest are still only developing the basic foundations of investment readiness. This has allowed us to define investment readiness scores for a variety of revenue streams (see Figure 3).
They are indicative rather than fixed, and the readiness of any revenue stream will vary by geography, policy framework, project structure, counterparty quality and available downside protections. The purpose of the framework is therefore not to create a precise rating, but to help investors identify the type of risk they are underwriting.
Figure 3: Suggested IRL for natural capital revenue streams
| Revenue stream | Market depth | Contractability | Commercial delivery track record | Suggested IRL |
|---|---|---|---|---|
| Timber | Very high | Medium-high | Very high | 8-9 |
| Agriculture | Very high | Medium-high | Very high | 8-9 |
| Water rights (certain markets) | High | Medium | Very high | 7-8 |
| Compliance carbon | High | Medium | High | 7-8 |
| NBS voluntary carbon (high quality, established methodologies) | Medium | Medium | Medium-high | 6-7 |
| Compliance biodiversity markets | Low | Medium | Low | 4-5 |
| Water quality credits and natural flood management (NFM) outcomes | Very low | Low | Very low | 2-3 |
| Voluntary biodiversity credits | Very low | Very low | Very low | 1-2 |
| Emerging ecosystem service payments | Very low | Very low | Very low | 1-2 |
Source: Aviva Investors, 2026.
Investment readiness and portfolio construction
While investment readiness provides a useful lens for assessing individual revenue streams, it should not be interpreted as a recommendation that investors allocate only to the highest-IRL opportunities. Investors do not necessarily need every revenue stream within a natural capital asset to be highly mature. Mature cashflows can provide the foundation that allows investors to gain exposure to emerging environmental markets while maintaining an acceptable overall risk profile.
Most successful private-market portfolios contain a blend of mature and emerging exposures. Infrastructure investors routinely balance fully contracted assets with merchant exposure. Private equity funds combine established businesses with higher-growth opportunities.
Similarly, natural capital investors may choose to combine mature revenue streams such as timber and agriculture with growth-stage environmental markets that offer greater potential for enhanced returns. The role of the IRL framework is therefore not to determine whether a revenue stream is “good” or “bad”, but to help investors understand the nature of the risks they are being compensated for, and whether those risks are consistent with the return expectations of the investment.
A well-constructed natural capital portfolio may contain a range of revenue streams across the readiness spectrum (see Figure 4).
Figure 4: Example natural capital assets and strategies for different portfolio objectives
| Portfolio role | Example revenue streams | Typical IRL |
|---|---|---|
| Core income and capital preservation | Established forestry, farmland, water rights | IRL 8-9 |
| Core-plus and diversification | Afforestation, regenerative agriculture, compliance carbon | IRL 7-8 |
| Growth and market expansion | Nature-based voluntary carbon, compliance biodiversity markets | IRL 5-7 |
| Market creation and innovation | Voluntary biodiversity credits, NFM outcomes, other ecosystem service payments | IRL 1-4 |
Source: Aviva Investors, 2026.
A risk-and-return trade-off
In this context, higher investment readiness should not be confused with stronger return potential. Mature markets generally provide greater revenue certainty but may offer lower upside. Earlier-stage markets may offer the prospect of stronger growth but expose investors to greater uncertainty, resulting in a higher required return to compensate for the additional risk.
Investment readiness is a portfolio construction tool as much as a due diligence framework
The challenge for investors is not simply to identify the environmental outcome they wish to support. It is also to determine how much of the portfolio should be allocated to mature, cashflow-generating assets and how much to emerging markets whose future success depends on the evolution of demand, policy support and market infrastructure.
Viewed through this lens, investment readiness becomes a portfolio construction tool as much as a due diligence framework. It allows investors to choose where they are seeking stability, where they are pursuing growth, and where they are taking exposure to market-creation risk.
But if investment readiness is not fixed, what causes revenue streams to mature over time? As we discuss in our next article, regulation, policy support, corporate procurement and market infrastructure have often been catalysts, transforming environmental concepts into investable asset classes.
Look out for Natural capital comes of age: Part three
How nature markets will mature.
Any anticipated financial benefits are not guaranteed and may not materialise, as outcomes depend on a range of uncertain future market, policy and project-specific factors.
