Sustainable investing How to invest in nature

About USD 58tr, which is more than half of the global GDP, is generated through economic activities that are moderately or highly dependent on nature, according to the World Economic Forum. Biodiversity, or the variability of living organisms in nature, is closely tied to food security and drug development. Industries that are not directly dependent on nature may have “hidden dependencies” throughout their supply chains; apparel and textile companies or tourism are some examples.

Natural capital is also intrinsically tied to climate change. Ocean habitats such as mangroves and sea-grass beds can sequester four times more CO2 from the atmosphere than forests. Yet, the absorption capacity of these habitats has dramatically decreased as a result of pollution, land/sea use and climate change. As investment interest in climate action continues to rise, we have seen increased focus on nature-based solutions (NBS) to generate returns for the planet, people, and profits.

The World Bank defines NBS as actions to protect, sustainably manage, or restore natural ecosystems, that address societal challenges such as climate change, human health, food and water security, simultaneously providing human well-being and biodiversity benefits.

Nature-based solutions represent an alternative to the traditional investment focus on technologies, and their use is not limited to rural forest areas or farmlands; they can be used in urban centers as well, such as to fight urban heat by cooling buildings with the use of green roofs. The spectrum of solutions ranges from conservation to restoration of natural habitats, including reforestation, sustainable management of forests, fisheries, and farms.

The sectors that stand to benefit the most from the growth in nature-based solutions are those that have a high dependency and/or a high impact on nature and biodiversity, such as food and agriculture, forestry, and tourism. While NBS was traditionally seen as an area for philanthropy, technological and financial innovations are beginning to unlock the scalability and accessibility of these projects to commercial-rate investors. Additionally, global carbon pricing is turning into wild card in further boosting the return potential.

But biodiversity opportunities and risks will impact public and commercial investment markets, too. In public markets, investors can focus on long-term investment themes addressing topics such as the circular economy or sustainable food and agriculture, which can minimize the negative impact on nature while allowing for diversification, or avoiding sectors with the most significant impact on biodiversity, including extractives (oil and gas, minerals, renewable energy), infrastructure, and consumer goods. Investors may also consider investing in biodiversity leaders, companies which are operating or growing most synergistically with biodiversity. Fixed-income investors can look at green bonds and blue bonds, where capital is used for protection or restoration. Private markets are also slowly but steadily creating opportunities for conservation and restoration, and their long-term investment nature could strongly align with the goal of protecting and restoring our habitats.

So what’s next on the nature investing scene? There is one more acronym investors have to remember: TNFD. The Taskforce on Nature-related Financial Disclosure is aiming to shift global financial flows away from nature-negative outcomes and toward nature-positive outcomes. The goal of TNFD is to develop and deliver a risk management and disclosure framework for organizations to report and act on evolving nature-related risks and opportunities. More work and discussion is expected, with a final version due for release in September 2023.

See the full report, Sustainable InSIghts: Ideas on the horizon, for a Q2 review of “burning questions on SI" and areas of development, 25 May 2023.