Investments in the natural sector maintain stability despite facing challenging political conditions, as indicated by a recent report
Institutional Investors Increase Interest in Nature-Based Investments
A new study by Pollination, a climate change investment and advisory firm, reveals a growing trend among institutional investors to increase their exposure to nature investments. According to the survey, 99% of the investors polled are planning to increase their nature-based investments, with a significant shift in investor appetite for these investments.
The study, based on a survey of 500 institutional investors in the UK, US, Australia, Singapore, and Japan, with assets under management ranging from $10bn to $500bn, shows that investors are increasingly aware of the central role that nature plays in long-term value creation and economic resilience. Mila Cerecina, non-executive director at Pollination, stated that investors need a stronger pipeline of investable projects, greater confidence in the data, and more consistent standards for nature-based investments.
Challenges and Risks
While the trend towards nature-based investments is promising, it also brings challenges and risks that need to be addressed with targeted solutions. One of the main challenges is the measurement and verification of the environmental impact and financial returns of nature-based solutions (NbS) like forest restoration or wetland rehabilitation. Quantifying these impacts can be complex, requiring robust and transparent metrics to ensure credibility and investor confidence.
Another challenge is the integration of nature-related projects into global carbon markets, which remains fragmented and evolving. The regulatory frameworks for these markets are still new and not universally adopted. Additionally, natural capital assets, such as farmland and timberland, often require long-term investments with illiquid markets, posing challenges for institutional investors seeking liquidity and shorter investment cycles.
Solutions and Opportunities
To address these challenges, there are several solutions and opportunities that can be pursued. Establishing and adopting clear standards and certifications for NbS projects can enhance transparency and trust, enabling monetization and scaling of investments. Integrating natural capital assets within portfolios can provide risk mitigation through ecosystem service benefits and correlation diversification while aligning with global sustainability goals.
Collaboration between governments, private investors, and international organizations can help sustain the growth of nature investment markets and help align incentives and policies for risk reduction and scaling impact. Innovative finance mechanisms, such as green financing tools like sustainability-linked loans, blended finance, and carbon markets, offer ways to optimize financing costs and align investor returns with environmental outcomes.
Active engagement and stewardship by investors with companies on sustainability practices have demonstrated improved environmental performance and financial value, indicating active stewardship as a valuable strategy.
Conclusion
In conclusion, while institutional interest in investment in natural capital and nature-based solutions continues to rise, success depends on addressing challenges of measurement, market development, liquidity, and environmental risks through robust frameworks, partnerships, and innovative financing approaches. This dual focus on financial returns and positive environmental impact is critical for scaling these investments effectively and sustainably. The shift in investor appetite for nature-based investments is significant, with only 0.2% of those surveyed this year saying they aren't planning on boosting their allocation.
- The increasing interest in nature-based investments by institutional investors indicates a growing recognition of the social impact that such investments can have on long-term value creation and economic resilience.
- To ensure investor confidence, a stronger pipeline of investable projects, greater confidence in data, and more consistent standards for nature-based investments are necessary, as highlighted by Mila Cerecina.
- Despite the potential of nature-based investments, challenges such as measuring and verifying environmental impact, integrating natural capital assets into global carbon markets, and addressing illiquid markets persist.
- To overcome these challenges, the adoption of clear standards and certifications for NbS projects, integrating natural capital assets into portfolios, collaborative efforts among governments, private investors, and international organizations, and the use of innovative finance mechanisms like blended finance and carbon markets can provide solutions and opportunities.
