The evolution of the Natural Capital asset class
Natural Capital, impact and climate represent a growing sleeve for investor allocations, writes David Shelton
There has been growing interest in the concept of a new Natural Capital asset class, combining forestry, agriculture and conservation assets. Currently, Natural Capital is estimated to represent 4.5% of global GDP but just 0.2% of institutional assets under management globally.
The UNEP estimates that 50% of the world’s GDP is dependent on nature and its value to society is in the order of $125 trillion or x1.25 of global GDP1. This suggests investment in Natural Capital needs to increase, but where should it sit within an institutional investor’s portfolio?
To understand where Natural Capital fits in a portfolio, one should consider both the fundamentals of the risk return profile, as well as alignment of the assets with broader objectives.
The diversification benefits investors typically seek from investing in these assets include low volatility with low correlation to other asset classes, relatively predictable income streams and positive correlation with inflation.
There are two important additional benefits of investing in Natural Capital. The increasing revenue streams from various climate and environment related investment options, such as carbon credits, biodiversity credits, biofuels, or renewable energy leases.
Secondly, the impact benefits such as climate change mitigation, becoming nature positive, or creating impact outcomes such as supporting rural communities.
Historical versus current Natural Capital allocations
A typical institutional investor has historically allocated between 1% to 5% of their overall portfolio to forestry and/or agriculture. This is usually in the context of a larger 15-25% allocation to private real assets within a broader infrastructure or alternatives allocation.
More recently we have seen institutional investors allocate capital as part of a newly created and dedicated climate investments allocation, investing in forestry and agriculture for their positive impact on mitigating climate change, in addition to the other attributes around correlations, volatility and attractive returns.
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