The guide highlights the significant opportunity nature presents as an investable asset class and provides practical examples and case studies of nature-based investments.

Purpose

Institutional investors are increasingly interested in natural capital or nature investment opportunities. This guide aims to clarify these opportunities and encourage increased private capital flows into nature. The guide acknowledges the challenge of bridging the nature-positive funding gap and the need for diverse financing mechanisms to achieve global biodiversity goals.

Introduction and background

Biodiversity loss and nature degradation threaten global ecosystems and human systems. Since 1970, wildlife populations have declined by 69% globally. Nature degradation, worsened by climate change, is a significant economic risk, with 55% of global GDP dependent on nature. The financial value at risk in the blue economy alone is estimated at $8.4 trillion over the next 15 years.

The investment gap

The Kunming-Montreal Global Biodiversity Framework (GBF), adopted at COP15, sets ambitious nature restoration and conservation goals by 2050. Signatories committed to mobilising at least $200 billion annually in biodiversity-related funding by 2030. However, the actual investment needed is estimated to be much higher, with a financing gap of $711 billion annually through 2030. Investments in nature restoration are dwarfed by financing that harms nature, particularly in sectors like fisheries, forestry, and agriculture. Despite this, two-thirds of global institutional investors intend to increase their investments in nature.

Overcoming barriers to institutional investment

Private capital flow into natural capital has been slow, especially among institutional investors. Barriers include a lack of investible deals, deal structure, small deal size, long-term investment terms, and high risks. Concerns about the robustness of environmental and social key performance indicators (KPIs) and uncertainty around policy and regulatory direction also deter investors. However, initiatives like the Natural Capital Investment Alliance are emerging to promote investment in nature.

Ways to invest in nature

Investors can impact nature through direct investments in natural capital or by investing in entities that reduce nature-related risks or support nature-positive outcomes.

• Direct investments into natural capital: This can be done through nature-based solutions (NbS), biodiversity credits, or real assets strategies. NbS projects protect, manage, and restore ecosystems, addressing societal challenges and benefiting both people and nature. Real assets, like agriculture and forestry, offer intrinsic value and can generate income through leases or commodity production.
• Investments in corporates delivering innovative ways to address nature-related risks and opportunities: Investors can target companies developing solutions to nature-related risks or capitalising on nature-related opportunities. This includes venture capital/private equity investments in nature technology and thematic equity investments in companies addressing drivers of nature and biodiversity loss. Sustainability-linked bonds (SLBs) are another option, linking coupon payments to an issuer’s progress towards sustainability objectives.

Key takeaways

The case studies presented in the report highlight several key takeaways for investors considering nature-based investments:

• Impact measurement and standards: Robust frameworks are crucial for evaluating investment effectiveness. The use of recognised standards, such as the Biodiversity Footprint for Financial Institutions and the IRIS+ framework, provides assurance and helps prevent greenwashing.
• Diverse investment opportunities: Investors have a wide range of options, from listed funds to private equity strategies and enabling technologies.
• Long-term commitment: Restoring ecosystems and improving biodiversity require long-term dedication from investors.
• Risk mitigation and return expectations: Investing in nature-focused strategies often involves unique risks, and mitigation strategies like loan guarantees and convertible debt can be employed.

Beyond investing

Investors can drive system change to reverse the decline in natural capital and ecosystem services by working collaboratively, engaging in policy and advocacy, and focusing on reporting and disclosure. They can participate in financial sector initiatives like the Finance for Biodiversity Pledge and the Glasgow Financial Alliance for Net Zero (GFANZ). Additionally, investors can advocate for ambitious national action on nature protection, the alignment of public and private economic incentives, and mandatory disclosures of nature-related impacts and risks.

Engagement with portfolio companies is crucial to promote understanding of nature risks and encourage sustainable practices. Investors can focus on supply chains, consumer preferences, market opportunities, and the evolving policy and legal landscape. By requiring disclosures from investee companies, investors can ensure the growth of a high-integrity market for natural capital investments.

In summary, the guide invites readers to consider and play a part in realising the opportunities that nature presents as an asset class.