Nature’s rebirth: an opportunity in real assets

Nature is our most important capital and the basis for human health and wellbeing. Our economy, directly or indirectly, depends 100% on it. However, our economic model has failed to value our most precious asset – key to solving the environmental crises we face and securing continued economic prosperity – and instead has grown at its expense.

A robust scientific understanding of the actions required to restore and partner with nature has permeated the world’s most powerful institutions, driving a decisive policy response. Awareness of the scale of the world’s environmental challenges is influencing corporate and consumer behaviour, and inspiring technological innovation.

Seeing this shift, forward-looking Investors understand that nature’s true worth is not reflected in financial markets. But this could change rapidly: demand for climate-resilient soft commodities that support the net-zero, nature-positive transition will drive potentially the largest asset revaluation this century, in our view. Much of this change will take place in private markets.

why nature?

The increasing impacts of climate change and natural disturbances require rethinking supply chains across a number of economic sectors. In addition, businesses face increasing policy, consumer and competitor pressure to reduce adverse impacts on nature. They must also prepare for greater regulatory demands to report on their nature-related activities and risks, with the Taskforce for Nature-related Financial Disclosures aiming to emulate the success of its climate-focused predecessor. This will require regenerative business models to ensure resilient value chains, in contrast to the extractive ones that dominate corporate activity today.

Increasingly, the future success of a business will be directly linked to its ability to restore and harness the regenerative power of nature, in our view.

deeply undervalued.

Nature’s immense ability to absorb carbon dioxide (CO₂) illustrates how the economy has undervalued its resources and services. Nature absorbs over 54% of anthropogenic (human-caused) CO₂emissions – yet nature-based solutions receive less than 2% of global climate finance¹.

Our food systems account for one third of all anthropogenic emissions and face two key challenges:

Creating resilient supply chains. By 2050, for example, climate change will make about half of current coffee-growing areas unsuitable for production²
Within value-chain climate change mitigation. Meeting legislative, policy and consumer demands to decarbonise and mitigate their impact on nature. For instance, by 2050 companies ascribing to the SBTi’s FLAG Guidance are committed to cutting emissions by 72% by 2050

What is the investment opportunity? With climate mitigation and adaptation being an imperative, we see regenerative value chains as being critical to the future growth and viability of businesses. As these are developed, they require capital and specialist skills which can be deployed through private markets

1 Source: Why Nature, Why Now, FOLU, 2021; 2. Roe et al., 2019, Climate Policy Initiative, 2022
2 Source: RCP 2.6, RCP 4.5 and RCP 8.5 in accordance with IPCC models

nature-based real assets.

One way to invest in nature through private markets is to convert underperforming land into a nature-based asset that produces commodities at premium prices.

We see opportunities in at least four real-asset markets: coffee, cocoa, cotton and cosmetic ingredients. In each, land can be acquired, restored and cultivated to produce sustainable crops with an embedded carbon value. Such commodities are in demand from businesses aiming to align with the net-zero transition.

This involves buying monoculture plantations in stable emerging markets and converting them for use in agroforestry through tree planting, soil improvement and other proven methods. The aim is to produce climate-resilient, nature-positive coffee, cocoa, cotton and cosmetic ingredients and sell these to corporate customers.

There is also the potential to generate value from standing forests by investing in infrastructure to produce wild-forest commodities, like coffee and essential oils.

investor returns, stakeholder benefits.

Such activities would generate several potential return streams:

Income: revenue from the commodities grown
Capital growth: the long-term appreciation in the land value
Price premium: the value of climate- and nature-certified commodities

In addition, nature-based real assets can also provide potential portfolio benefits common to private-markets investing:

Diversification: sources of return that are uncorrelated to listed markets, and are not marked-to-market as frequently
Inflation hedge: commodity prices and land values typically rise in line with inflation

Who else benefits? The corporate customers buying regenerative commodities are better able to adapt to climate change, meet sustainability targets, and respond to regulatory and consumer demand. Specialist local farmland operators also gain the opportunity to scale their operations and become more profitable.

Seen this way, investing in regenerative value chains is a win-win-win: for investors, stakeholders and – crucially – nature.

next steps.

To succeed, this approach to nature-based real assets requires world-class investment expertise in private-market transactions, experience in operating in emerging-market agricultural sectors and adept risk-mitigation strategies. Accessing an established network of committed companies seeking sustainable commodities, as well as specialist operators, is also essential.

Knowledge of key climate- and nature-reporting regimes, and an ability to anticipate policy changes and corporate momentum as we move to a net-zero and nature-positive economy, are instrumental, too.

We are at a critical juncture: enabling policy and market frameworks support the investment case for nature, providing the potential to unlock its inherent value. Is your portfolio positioned for nature’s rebirth?

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