Unlocking the Potential of Natural Capital

Media Release

25 Nov 2024

Unlocking the Potential of Natural Capital: A New Frontier for Sustainable Investment

 By Martin Potgieter, Director: Natural Capital at RMB

The world is facing a biodiversity crisis of unprecedented proportions. The loss of species, habitats, and ecosystems is accelerating at an alarming rate, with far-reaching consequences for our planet and its inhabitants. This crisis is not merely an environmental issue; it is a profound economic and societal challenge.

One of the most pressing challenges is how to incentivise the conservation and restoration of biodiversity. While there is a growing awareness of the importance of biodiversity, funding remains inadequate. Traditional sources of funding, such as government grants and philanthropy, are wholly insufficient to meet the scale of the challenge. We need to find new sources of funding.

The concept of "natural capital" has emerged as a powerful framework for understanding the value of nature. Natural capital refers to the finite resources and services that nature provides, such as forests to clean air, catchments to provide water, insects and birds to pollinate crops and wetlands to provide flood mitigation. This is similar to the capital or assets found in other asset classes, eg property in real estate and bonds in fixed income markets.

Natural capital assets are essential for human well-being and economic prosperity, yet they are often undervalued or ignored in traditional economic models. But this is fast starting to change, with an ever-increasing list of natural capital transactions being structured by investment banks. This includes biodiversity bonds, biodiversity credits and debt-for-nature swaps.

By transforming nature into an investable asset, we demonstrate value in the traditional sense. This enables the mobilisation of much-needed capital from new sources of funding such as the capital markets and corporates, to support conservation and biodiversity projects. This approach has the potential to unlock significant funding for biodiversity and nature, while also providing investors with opportunities for both financial returns and positive environmental impact.

One example of this approach is the development of "biodiversity outcomes-based bonds."

These bonds are financial instruments that link investor returns to the success of specific biodiversity projects. For instance, a rhino bond might generate higher returns for investors if the number of rhinos in a protected area increases. By aligning investor interests with conservation outcomes, nature bonds can incentivise effective stewardship of natural resources.

However, creating a thriving market for natural capital requires overcoming several challenges. One key obstacle is the difficulty of measuring and valuing natural capital in a way that is comparable to traditional assets. Developing robust valuation methodologies is essential for attracting investors and ensuring that conservation projects are financially sustainable.

Another challenge is the need for innovative financial instruments that can accommodate the long-term nature of biodiversity conservation. Traditional investment horizons may be too short to capture the full benefits of conservation projects. Therefore, new financial products, such as impact bonds or blended finance structures, are needed to bridge the gap between short-term financial returns and long-term environmental outcomes.

In addition to financial innovation, effective governance and accountability are crucial for ensuring the success of natural capital investments. Transparent reporting, strong governance structures, and independent verification are essential to build trust among investors and stakeholders.

In all of this a key underpin is also ensuring that consideration and consultation with local communities and stakeholder in their areas are considered and that these communities benefit socially and if possible economically from natural capital investments.

The creation of a new asset class in natural capital represents a significant opportunity to address the biodiversity crisis and secure a sustainable future for our planet. By harnessing the power of financial markets, we can mobilise the resources needed to protect and restore our natural heritage. This is not only a moral imperative but also a sound economic strategy.

Investing in nature is an investment in our collective prosperity.

The Business Case for Natural Capital

Beyond the ethical imperative, there is a compelling business case for investing in natural capital.

Studies have shown that biodiversity loss poses significant risks to businesses, including supply chain disruptions, reputational damage, and regulatory liabilities. By investing in biodiversity and nature, companies can mitigate these risks and enhance their long-term sustainability and pension funds can not only secure their beneficiaries financial wellness but also secure a livable environment for their beneficiaries.

Moreover, natural capital investments can offer attractive financial returns. Nature-based solutions, such as ecosystem restoration and sustainable agriculture, can provide a range of benefits, including improved water quality, health, reduced soil erosion, tourism and increased carbon sequestration. These benefits can translate into tangible economic value for businesses and communities.

The Role of Governments, Corporations and Investors

Most Governments support biodiverse areas and conservation, but they are constrained by fiscal considerations and often biodiversity is not a priority spend in budget allocations. They can still play a crucial role in creating the enabling conditions for natural capital investment. This includes developing clear policies and regulations, providing financial (including tax) incentives, and supporting research and development in this area.

Corporations and investors can also play a significant role by integrating biodiversity considerations into their business and investment strategies and investing in natural capital investment opportunities and nature-based solutions.

Establishing nature as an investable asset class assists in securing our natural resources for our current generations and ensures that our future generations and the stakeholders in those areas can continue to enjoy the benefits of the land for future generations.

Conclusion

Investing in natural capital is not about offsetting carbon or promoting biodiversity; it's about recognising that our economic systems are inherently linked with natural systems.

By integrating natural capital into our investment strategies, we're not only diversifying our portfolios but also contributing to a sustainable future where economic prosperity is in harmony with environmental health.

The financial sector has the tools and the potential to lead this transformation, turning natural capital from an afterthought into a fundamental pillar of investment strategy.

As we move forward, the real question isn't whether we should invest in natural capital, but how we can do so effectively and at scale, ensuring that the wealth of nature enriches both our planet and our portfolios.

Ends