The market for nature-based solutions is growing in demand and scale, as larger institutional investment managers begin to enter, an academic paper has said.

“Clear signs of change” in the market suggest new opportunities for nature-based solutions, while supporting the need for more regulation, University of Oxford’s Environmental Change Institute researchers said in a paper seen by Carbon Pulse.

However, despite the positive signs, much more investment is needed to close the biodiversity financing gap, Dorian van Raalte and Nicola Ranger said in a report on nature-positive investing.

Global funding harmful to nature stands at a massive $7 trillion per year, while funding with a positive impact last year reached just $200 billion, UN Environment Programme (UNEP) said in a report released at COP28.

Annual spending falls far short of the $542 bln needed by 2030 to meet the world’s Global Biodiversity Framework targets, UNEP said.

“We are seeing the emergence of a new generation of investment managers and strategies specialising in nature positive investing,” van Raalte said.

“Despite their modest size, these innovative specialists can deliver outsized impact and complement other actors such as development finance institutions through structuring impactful transactions, executing blueprint transactions and contributing to a collective knowledge base,” he told Carbon Pulse.

SIGNS FOR OPTIMISM

The report reviewed 25 specialist nature-focused funds, as there was “limited information” available on the performance of these specialists due to the “opaque” nature of private markets.

Those examined ranged from Goldman Sachs and Santander Asset Management, to Kilter Rural’s Australasian Farmlands Fund and Clarmondial’s Food Securities Fund.

Signs of industry evolution included the larger investors acquiring existing strategies, and bringing specialist investment managers in house.

For example, in 2023, Lombard Odier launched sustainable investment platform Holistiq, a joint venture with Systemiq, and Generations Investment Management subsidiary Just Climate announced a nature-focused strategy.

In 2020, HSBC launched Climate Asset Management in partnership with investor and advisor Pollination, while three years before Natixis Investment Managers subsidiary Mirova acquired Althelia, the report said.

“We find many signs for optimism, including growing investor demand, strong commercial returns in some sectors, and the entry of larger mainstream asset managers to the market. To achieve scale, it’s time for the public sector needs to step up,” Ranger said.

In general, the assessed funds have complex structures that make use of a wide array of financial instruments including equity, mezzanine loans, and bonds, the report found.

They have “sophisticated” environmental, social, and governance as well as impact features, such as interest-rate step ups and downs based on impact performance.

However, the majority of the funds managed assets of less than $250 million, and have been “slow to scale”, with “many underperforming” their fundraising targets at launch.

“Larger nature funds tend to favour investees that mostly rely on traditional revenue streams, e.g., sale of agricultural produce or timber, while new revenue streams, including the sale of carbon credits and payments for ecosystem services are often seen as secondary revenue sources, likely due to the nascent nature of these markets,” the report found.

Van Raalte said specialised financial entities dealing in these underdeveloped new revenue streams “are likely to play a crucial role in directing targeted investments towards nature, often acting as trailblazers”.

Examples of funds that have been able to access commercial private capital include Mirova’s Land Degradation Neutrality Fund in agriculture, the Aqua-Spark fund in aquaculture, and Climate Fund Managers’ Climate Investor Two fund in water infrastructure, the report said.

Specialised investment managers and funds can play a “critical role” in linking projects to global capital.

By Thomas Cox – t.cox@carbon-pulse.com

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