Half of UK institutional asset owners have already invested in natural capital or will do so within the next 18 months, and are far more interested in developing their own carbon or biodiversity credits than purchasing offsets in the secondary market.

That’s according to research carried out by London-headquartered Mallowstreet, a community for the institutional investment industry, and commissioned by London-based alternative asset manager Gresham House.

The analysis surveyed 22 UK institutional asset owners in March – 12 of which were local government pension schemes (LPGS) – gathering perspectives on a total of £360 billion (€418 bln) in assets under management.

Researchers showed that investors’ appetite for natural capital is growing, as they are becoming increasingly aware of its potential to deliver both resilient and impactful returns.

They found that allocations to natural capital are likely to comprise 3-5% of total assets, with 59% of asset owners saying they would invest up to 3%, and an additional third potentially investing up to 5%.

“Natural capital is a nascent investment theme and we expect to see significant evolution over the coming years as best practice emerges and becomes more established, but it is clear that there is growing interest in the area from UK asset owners,” Ally Georgieva, head of insight at Mallowstreet, said.

“As the asset class continues to mature, asset managers, owners, and regulators need to purposefully work together to establish the frameworks and approaches needed to drive further long-term investment and deliver positive impacts for nature.”

CLIMATE ABOVE NATURE

As for the reasons behind the choice, 73% of UK asset owners said they would invest in natural capital to support climate mitigation and adaptation, alongside making a return.

Another 68% said they would invest in natural capital to be good stewards of their members’ and policyholders’ assets.

However, researchers highlighted that they seem less interested in targeting specific impacts, including enhancing biodiversity, minimising nature damage, or supporting the production of sustainable resources.

Only around a quarter of them are explicitly interested in restoring and protecting biodiversity, showing a “disconnect” between their climate goals and the means to reach them, according to the report, adding that nature restoration and stopping biodiversity loss are crucial issues for the climate transition.

“While there is more work to do to build understanding of natural capital among end investors, the theme is clearly gathering momentum and it is exciting to see that UK asset owners are increasingly aware of the potential to deliver both financial and environmental benefits by backing natural capital solutions,” said Rebecca Craddock-Taylor, director of sustainable investment at Gresham House.

“Equally, it is crucial for asset managers to respond to this growing demand by offering a tailored range of natural capital products that reflects the complex and varied requirements of different types of investors and addresses the wide-ranging challenges facing biodiversity and nature around the world,” she added.

CARBON AND BIODIVERSITY CREDITS FOR OFFSETTING

As well, investors appear to prefer generating voluntary carbon or biodiversity credits in order to offset the emissions and nature loss in their portfolios (52%) rather than purchasing them in the open market (5%), with some of them willing to realise a return upon selling them (48%).

Yet, investors reckoned that more rigour and standardisation are needed to make them more comfortable with the voluntary credit markets.

According to the Mallowstreet/Gresham House report, the recent decision of the Science-Based Targets Initiative (SBTi) to allow the use of environmental attribute certificates including carbon credits to offset Scope 3 emissions, will likely prompt many to reconsider how they obtain and use carbon and/or biodiversity credits.

After this controversial move, a recent BloombergNEF analysis claimed that prices for these credits could peak at $243, and the market could reach an annual value of $1.1 trillion.

On the contrary, the SBTi move could have detrimental consequences for the nascent voluntary biodiversity credit markets, which are paralysed by confusion, a legal expert told Carbon Pulse.

Experts warned almost unanimously that biodiversity credits should differ from biodiversity offsets, by not implying harm to nature in another location while boosting ecosystems, but the market is not shaped yet.

By Giada Ferraglioni – giada@carbon-pulse.com

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