Nature: an asset class, not an offsetting strategy

Nature is the driving force behind the global economy. Aligning finance with nature and biodiversity goals to regenerate value rather than simply extracting it is therefore imperative not only for the environment but for ensuring sustainable growth. This was the key theme of a keynote discussion, entitled ‘Securing a nature-positive future’, at Global City’s recent Net Zero Delivery Summit in London.

A keystone asset

“I am new to the finance industry, but how is it that nature is still not an asset class?” commented Marc Palahi, PhD, Chief Nature Officer at LOIM. A world-renowned expert in forestry, the circular bioeconomy and climate change, he spent eight years as CEO of the European Forest Institute before joining Lombard Odier last year.

“Nature is our keystone asset, the true engine of the global economy,” said Palahi. As the product of billions of years of evolution, it not only constitutes the essential infrastructure regulating our planetary system, but it is also an invaluable resource. As Grant F Reid, Chair of the SMI’s Agribusiness Taskforce and former CEO of Mars shared with the panel, half the world’s habitable land is agriculture, and every single one of us depends on the food sector.

Nature ultimately regulates and conditions our economic system. So, if we want to reach net zero and create a viable, sustainable economy fit for the rest of the 21st Century and beyond, we need to stop regarding nature as an offsetting strategy and start treating it as a true asset.

“Nature is the most transformative technology on Earth and should be revalued rather than depleted,” said Palahi. To do this effectively, the global economy needs to be based on ecologies of scale – it needs to be built around nature rather than simply feeding off the natural world. As Palahi admitted, that involves a significant change in mindset. Rather than being seen as a potential impediment to economic growth, ecology needs to become the keystone around which the sustainable economy of the future is built.

Reversing the cycle

An important topic within the discussion was the interconnectedness of climate and biodiversity. As Palahi stated: “there is no net zero without nature”. Unfortunately, the acceleration of climate change and the ongoing degradation of natural habitats combine to create a vicious cycle. The more we damage nature, such as through deforestation or excessive farming, the less carbon is absorbed from the atmosphere and the more damage is done to the soil. As severe weather events increase, nature is degraded further through forest fires, floods, tidal waves and landslides, compounding the issues.

Higher temperatures in particular have a serious impact on the economy. According to a study conducted by the Potsdam Institute for Climate Impact Research in collaboration with the European Central Bank, by 2035, higher average temperatures will be pushing up global food prices by up to 3.2% per year, contributing 1.2% to overall inflation¹. Fortunately, however, just as climate change and nature degradation can negatively reinforce each other, implementing emissions reduction and nature-positive solutions can create a positive feedback loop that mitigates this damage.  

Bringing climate and biodiversity together

COP29 in November 2023 saw a growing push for climate and nature to be considered in tandem. The Joint Statement on Climate, Nature and People issued in Dubai by the United Nations Framework Convention on Climate Change recognised not only that climate change critically threatens biodiversity, but that conversely, “continued loss and degradation of nature increases climate vulnerability”. Late 2024 will see both COP29 and the 16th United Nations Biodiversity Conference (COP16) take place just weeks apart, presenting a key opportunity to bring these two agendas even closer together.

The creation of business models that support biodiversity and the need for legislation around biodiversity compensation are likely to be key themes at COP16. The conference will be the first biodiversity COP since the adoption of the Global Biodiversity Framework (GBF), which was an outcome of COP15 in Montreal in 2022. Intended as a ‘Paris Agreement for Nature’, the GBF aims to facilitate action to address the interlinked issues of climate change and biodiversity loss. At COP16, governments will be required to report on progress made to implement National Biodiversity Plans, providing an opportunity for leaders to rethink, build on and accelerate the transition to more nature-positive economic models focused on sustainable growth.      

Building the foundations

In a sign that biodiversity is being taken more seriously not just as an ecological but as an economic issue, global policy is shifting. A range of regulatory frameworks are being put in place to help businesses and investors integrate consideration of nature-related dependencies, impacts, risks and opportunities into their activities. These include the International Sustainability Standards Board (ISSB), whose standards will be part of the International Financial Reporting Standards, the Taskforce on Nature-related Financial Disclosures (TNFD) and the European Union’s Corporate Sustainability Reporting Directive (CSRD). Fellow panellist Shaun Carazzo, EMEIA Financial Services Climate Change and Sustainability Leader at EY, noted that these are game changers for how his firm’s clients view nature.

Closing the gap

The role of the finance sector in this movement is to catalyse the transition to a new nature-positive economy. How and what we choose to invest in is therefore vital for a healthy global economic ecosystem.

“I see the financial sector as a pollinator, circulating pollen in the form of capital, so that businesses can fructify and create value rather than extract value,” said Palahi.

Carazzo celebrated the increase in nature-related financing, but warned that it is still not nearly enough: “Between 2021-22 we saw an 11% increase in nature financing, but that number needs to triple by 2030 and quadruple by 2050, if we want to effectively mitigate our effect on nature.” 

To help close the £700 billion nature finance gap, financers and investors need to proactively seek innovative solutions, broaden investment opportunities and align finance strategies with climate and biodiversity goals. At LOIM, we are committed to this relationship between nature and finance. We want to transform value chains, investing for the success of the future, rather than planning to merely offset failure. To this end, we are developing a real-assets strategy focused on regenerating value chains in specific commodity markets.

Transforming the landscape

As Palahi commented during the discussion: “The only permanent thing in nature is change, and we need a change of mindset to succeed in building a new economy anchored in nature.”

The intention behind our nature-focused strategy is to acquire real assets, such as monoculture farms or degraded land, then partner with local communities, organisations and specialists on the ground to invest in nature-based solutions, from agroforestry and cover cropping on farms to the restoration of ecological corridors in the wider landscape. The aim is to transform these landscapes into more productive and resilient ‘nature-based assets’, improving their economic, climatic and natural value.

A wide range of products across multiple value chains can benefit from this approach, most notably coffee, cocoa and palm oil. We have selected coffee to pilot the strategy. In our view, it is one of the most important soft commodity globally and already commands a specialty segment within its market, but is highly exposed to risks resulting from climate change and biodiversity loss. Additionally, as a crop that originated in tropical forests, it is well suited to being grown in traditional settings using science-backed, nature-based solutions.

The underlying imperative for this strategy – and embedding nature within the economy, rather than exploiting it – is the need to build a more symbiotic relationship between the human and natural world, quickly.

“The next 10 years are crucial if we want to rebuild our world in time,” said Palahi. “We need to start investing and learn by doing.”

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