Strong institutional demand for natural capital investments, new research reveals

A new report highlights the growing appetite for natural capital investments in institutional portfolios, with half of UK asset owners saying they already invest in natural capital or will do so within the next 18 months.

The research, commissioned by alternative asset manager Gresham House and carried out by the research division of mallowstreet, a community for the institutional investment industry, shows strong backing for the asset class, as investors become increasingly aware of natural capital’s potential to deliver resilient, impactful returns.

Alongside financial performance, the report found that supporting climate adaptation and mitigation was the biggest driver of investment in natural capital, followed by the good stewardship of members’ assets and reducing nature-related investment risk. Allocations to natural capital are likely to comprise 3% to 5% of total assets, with 59% of asset owners saying they would invest up to 3% and an additional third potentially investing up to 5%.

The survey revealed a range of approaches to investing in natural capital among institutional investors. Local Government pension schemes would typically invest in natural capital via illiquid assets, with 33% putting an allocation in real assets and a further 25% would put an allocation in the private markets bucket.

23% of UK investors would allocate to the asset class via growth assets, while 18% would align it to an impact allocation, highlighting the need for a wide range of liquid and illiquid strategies to cater to different investors’ requirements.

The study also explored institutional investors’ attitudes to carbon and biodiversity credits, finding overwhelmingly that investors prefer to generate their own credits from their investments, rather than buying them. 52% of investors said they would primarily generate credits to offset nature loss or emissions in their portfolio, while 48% would sell the credits they generate to deliver a return. However, investors remain keen to see a more formal international market and consistent global standards to increase confidence in trading these assets.

Gresham House is the world’s ninth largest natural capital manager by value, offering clients a platform of varied return-generating natural capital assets with established track records, including sustainable forestry, sustainable agriculture, carbon forestry and biodiversity creation.

Rebecca Craddock-Taylor, director, sustainable investment at Gresham House, said: “While there is more work to do to build understanding of natural capital among end investors, the theme is clearly gathering momentum and it is exciting to see that UK asset owners are increasingly aware of the potential to deliver both financial and environmental benefits by backing natural capital solutions.

Equally, it is crucial for asset managers to respond to this growing demand by offering a tailored range of natural capital products that reflects the complex and varied requirements of different types of investors and addresses the wide-ranging challenges facing biodiversity and nature around the world. This will be essential to ensuring that natural capital forms a key part of the portfolios of the future.”

Ally Georgieva, head of insight at mallowstreet, said: “Natural capital is a nascent investment theme and we expect to see significant evolution over the coming years as best practice emerges and becomes more established, but it is clear that there is growing interest in the area from UK asset owners. As the asset class continues to mature, asset managers, owners and regulators need to purposefully work together to establish the frameworks and approaches needed to drive further long-term investment and deliver positive impacts for nature.”