How to invest in natural capital

The latest guidance by the Taskforce on Nature-related Financial Disclosures (TNFD) is helping pension schemes integrate nature into their decision-making.

The 14 recommendations, which were published last month, aim to provide a global, standardised framework for organisations to report on nature-related risks and opportunities and ultimately support positive action.   

By using this framework, organisations such as pension schemes can understand and assess their impact on nature, including the use of natural resources, greenhouse gas emissions, and biodiversity, and disclose their nature-related risks. 

The TNFD said nature needs to be brought into the strategy, risk management and capital allocation decisions of business and finance, with fully integrated climate and nature considerations.  

But what does this mean for pension schemes and how can they prepare for this? 

TNFD in practice

Interestingly, some schemes are already working this way. For example, Cushon Master Trust said that it already allocates to natural capital via the Schroders ClimatePlus LTAF.

Julius Pursaill, strategic adviser at Cushon Master Trust, said that while it’s a nascent asset class, it builds on traditional allocations to forestry as an asset class. 

Pursaill explained: “While forestry allocations typically have not been managed for biodiversity gain, natural capital allocations clearly have a stronger focus on this, whether they be forestry, peatland restoration, regenerative agriculture or ‘blue’ assets like mangrove restoration.”

Natural capital offers important carbon sequestration potential, added Pursaill. He said: “Cushon Master Trust is currently seeking tenders for a carbon sequestration mandate, with an emphasis on natural capital. There is no Paris-aligned net zero trajectory that doesn’t rely on carbon sequestration, so improving the supply of high-quality, sequestration-based carbon credits is essential.”

Investing in nature

André Ranchin, investment consultant and biodiversity lead at consultancy Hymans Robertson, said all asset classes depend on nature and ecosystem services to some degree, as over half of global GDP is reliant on nature. 

However, he added that in practice, investment in nature opportunities tends to fall within two broad categories. The first category includes thematic funds, particularly equity funds focussed on nature and biodiversity.

The second route is through investing in real assets, such as timberland and sustainable agriculture. 

Ranchin added that other assets which help the climate transition, such as renewable infrastructure, can also indirectly support nature, given climate change is one of the key drivers of biodiversity loss.  

He said: “We’re seeing the number of investible assets aiming to support nature increase quickly and expect this trend to continue going forward. In particular, we’re starting to see a proliferation of nature-themed equity funds. The Global Biodiversity Framework agreed at COP15 and the TNFD framework published in September are likely to contribute to this trend and increase the range of investible assets in this space.”

Access routes

Pension schemes can only invest in nature in practice if there are enough investible assets right now. 

Ranchin said that in theory, there are many investment opportunities related to the sustainable management and restoration of natural ecosystems and biodiversity. This might include solutions related to sustainable agriculture, reforestation and ocean restoration. 

In practice, these can be accessed through equity, debt or real assets. 

Ranchin said: “As a first step, schemes may want to understand their dependencies and impacts on nature. Engagement with investment managers and portfolio companies is then a relatively straightforward way to make a real world difference, and can even result in nature-related opportunities through existing investments adjusting their approach to managing nature-related issues.”

However, Maggie Rodger, co-chair of the Association of Member Nominated Trustees (AMNT), believes there are only a small number of suitable investment prospects available to schemes right now. 

She said: “There are some investment managers putting together offerings which are nature positive opportunities - many of which sound very exciting in what they aim to achieve. However, set against the size of pension funds, they are relatively small, and so can only be a  part of the biodiversity answer.” 

The TNFD initiative has been led by 40 taskforce members who represent over $20trn in assets under management. It will now encourage voluntary market adoption of the recommendations and will track its progress every year.

Ranchin believes the reporting frameworks from other bodies should actually make it easier to adapt to the requirements of TNFD. 

He said: “This is a helpful framework providing a clear set of recommendations which give necessary guidance to organisations, including pension funds, on how to understand and act on nature loss. The consistency with other reporting frameworks such as TNFD and The International Sustainability Standards Board (ISSB) should make it relatively straightforward for asset owners to understand and implement TNFD. Given the scale and severity of the biodiversity crisis, any positive drivers of change are a good thing – and the TNFD recommendations fall within this category.”

However, Rodger believes many may see the extra reporting requirement and ‘moan’ as the pensions industry is already overloaded with reporting thanks to the Task Force on Climate-related Financial Disclosures (TCFD) and multiple consultations by The Department for Work and Pensions (DWP).

She said: “As trustees, it’s hard not to see the possibility for a huge new set of reporting requirements and groan. However I hope that, two years into TCFD, we can begin to move away from the process of gathering metrics and form-filling. Instead we should be using TNFD as a means to concentrate on having key board discussions about managing climate and nature risks, as well as potential positive outcome investing opportunities, and, of course, the welfare of our pensioners when they come to retire.

“In other words, to stand back a little and have strategic investment discussions, rather than concentrating on measuring existing portfolios.”