How wealth managers can invest for a nature-positive future
15 December 2023
Proactively introducing nature positivity into portfolios is one way for investors to get ahead of shifting regulations, swings in public sentiment, and the impacts of a changing natural world.
Puglia, a beautiful region in the heel of Italy, is responsible for roughly half of the country’s olive oil production1. However, an accidentally introduced bacterium, Xylella fastidiosa2, has killed millions of olive trees and turned the local landscape into a stark illustration of biodiversity3 loss and its negative economic impact. While farmers naturally grow different cultivars of olive oil, this genetic diversity, fit to handle local pests, could not cope with an invasive species from Central American coffee plants. Climate change also plays a role in this biodiversity loss, with infections less likely to be “cold cured” during mild winters and drought exacerbating damage to infected olive groves.
We believe that nature will become a prominent ESG theme for wealth managers and broader financial markets in the next few years. Since more than half of global GDP depends on stability within nature4, biodiversity loss poses significant systemic threats and merits the attention of investors.
We believe that investment policies designed to navigate the climate transition (the move toward a low carbon economy) should include – as a minimum – the objective of nature positivity. This is vital to reverse biodiversity loss, which is fundamental to achieving a successful climate transition.
Nature-positiveActivity aligned with the restoration and regeneration of ecosystems, species and natural capital and specifically not detrimental to nature
Natural capitalThe collection of renewable and non-renewable assets that nature provides and that serve as resources or services to people and economic systems
BiodiversityThe variety of living things on Earth, including the variability within and between species, and within and between ecosystems
We advise wealth managers to be proactive in integrating nature and biodiversity into their portfolios, for several fundamental reasons.
The Taskforce for Nature Related Disclosures (TNFD)5, for instance, released its final framework in September 2023 with the objective of integrating nature into strategic planning, risk management and asset allocation principles, and to divert capital flows to a nature-positive economy. The European Union Regulation on Deforestation-free Products entered into force in 2023. It requires, from the end of 2024, that companies selling products in or exporting them from the EU must conduct due diligence to confirm they were not sourced from land which was deforested or degraded after 31 Dec 2020. While the legislation in both cases is European, it is reasonable to expect other regions to follow with regulation related to nature assets.
Investors need to respond and be ready for upcoming regulation. Many have already made progress on developing processes to address climate transition risks in their portfolios. They should now look at developing a holistic approach that incorporates nature-related risks and identifies potential investment opportunities.
Regenerative processes, agritech, agroforestry (the planting of trees along boundaries or in with crops) and mixed land use can all play a significant role in enhancing and evolving agricultural practices, with potentially attractive investment characteristics. We believe strategies such as these could become key parts of a broader natural capital allocation.
The universe of solutions for investors is expanding. Indeed, the World Economic Forum estimates that investments with nature-positive outcomes could attract $10 trillion of funds annually, generating 395m jobs by 20306.
The frameworks for incorporating nature and biodiversity considerations into investment portfolios are still emerging. Nevertheless, there are four immediate actions that wealth managers can take today to get started.
1. Revisit your ESG beliefs and policies
We recommend that wealth managers seek to understand nature and climate linkages and consider nature in addition to their climate objectives. This can be undertaken through a belief workshop that helps define policies around nature and how nature positivity could be incorporated into investment objectives.
Nature and biodiversity are intrinsically linked to climate change. There can be no solution to climate change unless natural ecosystems are restored around the world. Incorporating nature and biodiversity considerations into climate policies is an imperative for investors, and by doing so some of the consequences of climate transition could be avoided. Decisions are complex, though, and can be damaging for strategies, returns, reputations and the environment if they yield unintended consequences.
For example, it is possible for well-intentioned renewable energy generation, such as hydroelectric schemes, to have deeply negative effects on the natural environment. Without the right information prior to the investment decision, investors could find that a solution to one perceived problem creates or exacerbates another one.
Policies that are nature-positive are likely to help move the climate transition forward. Wealth managers should therefore consider setting targets to allocate to this theme as part of their overall allocation to climate solutions. Wealth managers with net-zero targets should incorporate nature-positive goals into their strategies, given the essential role the biodiversity restoration and ecosystem conversation plays in achieving net-zero emissions.
2. Engage in nature-related investment stewardship
Investment approaches should ensure that the stewardship activities of underlying asset managers are monitored and ESG themes such as nature or climate are identified.
Investment stewardship is a vital tool that wealth managers can use to promote nature positivity in their investment portfolios. Several industry initiatives can support this, notably the Taskforce on Nature-related Financial Disclosures (TNFD).
When wealth managers invest client assets through third-party investment managers, it is important to understand how these underlying managers are engaging with nature-related topics to ensure they are responsible stewards of investor capital. We recommend that wealth managers collect information on how their investment managers are voting and engaging on their behalf. During this process, they should separate environmental, social and governance themes as clearly as possible. This will help to identify engagements that are relevant to nature.
3. Assess your portfolio's exposure to nature-related risks
We recommend that wealth managers conduct a nature-focused audit of their asset managers and start to evaluate their exposure to nature-related risks by identifying portfolio exposures to the TFND priority sectors.
Wealth managers should consider conducting an audit of their investment managers to see what policies they have in place to manage nature-related risks. The audit should also determine whether underlying asset managers have dedicated sufficient resources to manage these risks. We suggest using the following checklist:
- Does the manager have a nature/biodiversity policy in place, or does their climate policy make reference to nature/biodiversity?
- Can the manager provide evidence that they engage with portfolio companies on nature/biodiversity to deliver nature-positive outcomes?
- Does the manager consider nature/biodiversity risks when making investment allocation decisions?
- Does the manager produce any nature/biodiversity risk metrics for its portfolios?
- Does the manager participate in key ESG initiatives focused on climate (e.g., the Net-Zero Asset Managers Initiative) or nature (e.g., the TNFD Forum)?
4. Consider an allocation to natural capital opportunities
There is a growing opportunity in natural capital and some wealth managers are allocating to ideas that aim to produce a positive impact by protecting or restoring natural ecosystems.
The opportunity set for investment strategies focused on natural capital and biodiversity (i.e., products and solutions that specifically address natural capital challenges) is relatively new, but growing rapidly. Due to the complexities of some of the investment structures, as well as the relatively short track record of many of the funds, we advise wealth managers to conduct thorough due diligence on any prospective investments.
Asset managers are differentiating themselves into those investing in solutions to mitigate biodiversity loss, and those investing in companies that are working through their supply chains to ensure a net-positive impact on biodiversity.
The most common themes across biodiversity strategies tend to include the following issues: waste management, the circular economy, sustainable forestry and agriculture, natural capital, renewable energy, energy infrastructure and efficiency, sustainable packaging solutions, and ocean and water.
Most investment ideas we see in the market are within the public equities and private markets/real asset spaces.
Working with natural capital
A proactive stance on nature positivity is not simply about preparing for future risks, but positioning to seize potential opportunities from trends as they develop.
As nature swiftly becomes an important investment theme, we understand the increasing financial relevance of biodiversity in your asset valuations and exposures. We are working with clients as they consider integrating these elements into their portfolios. Doing so, and embracing nature-positivity in investment strategies going forward, could be an important way to ensure that we can all feel more positive about the future of nature.