Natural capital investing “inextricably linked” to fighting climate change, says Federated Hermes

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Investors are growing increasingly aware of investment opportunities in ‘natural capital’, including assets important for carbon storage, carbon sequestration, soil erosion protection, flood risk management, biodiversity, and water quality.

A recent report from Mercer found that biodiversity and natural capital are rising up institutional investors’ allocation agendas, with 24 per cent of European allocators now looking at these asset classes as they deepen their focus on the environment.

“Early areas of focus for sustainable investors have been climate change and engagement, but investors are now broadening out into other important areas,” wrote Mercer, one of the world’s largest outsourced asset management firms.

According to speakers at a natural capital investment conference last week, interest in natural capital is “inextricably linked” with the greater awareness of climate change’s risks to investor portfolios.

“Investment in climate change, and in natural capital are inextricably linked. And the reality is only a joined-up approach that can succeed. As investment managers, we must play our part, alongside governments, and policymakers, landowners, corporates, and regulators,” said Federated Hermes’ head of international investment, Eoin Murray, speaking at a Natural Capital Finance & Investment 2021.

Federated Hermes is a US-headquartered investment manager with over GBP460 billion in assets under management, and GBP1.3 trillion in assets under advice.

Murray said that investment managers will need to “step outside our usual competitive mindsets and seriously evaluate meaningful opportunities for collaboration” in order to play their part in securing the world’s natural capital.

Earlier this year, asset managers HSBC Pollination Climate Asset Management, Lombard Odier and Mirova launched an investment collaboration with the aim of directing USD10 billion toward into natural capital across a variety of asset classes.

“We know that roughly a staggering USD44 trillion of economic value generation is moderately or highly dependent on nature, and yet also that more than one million animal and plant species are faced with extinction because of human activity,” said Murray.

Countries are facing substantial investment gaps for securing important natural outcomes like clean water, the protection of biodiversity, and biological carbon storage.

The UK alone requires an estimated GBP56 billion of additional investment to secure its natural resources over the next 10 years, according to a recent report commissioned by the Green Finance Institute.

However, the actual finance gap could be as large as GBP97 billion, noted the study.

“The data is conclusive that public investment - even if funding commitments increase - will not be enough to fund the UK’s nature recovery ambitions,” said Dr Rhian-Mari Thomas OBE, CEO of the Green Finance Institute, at the launch of the report. 

“Private investment is therefore urgently required in addition to public sector funding if we hope to transition to a net zero and nature-positive economy.” 

There is a need for biodiversity to have its “Paris moment” in order to build momentum around the issue, in the same way that the Paris Agreement in 2015 catalysed action on climate change.

Thomas highlighted upcoming conferences on biodiversity and climate change, COP15 and COP26, with Glasgow-based COP26 dedicated entire days to focusing on Finance and Nature respectively.

Federated Hermes’ Murray believes that COP15, the first part of which takes place virtually in October, could provide a “meaningful path to change”.

“Given the weight of expectation for a transformative outcome from COP26, I confess that my money is actually on COP15 for the transformative outcome, which I think, given the impetus from the UN Environment Programme, The Inter-governmental Science-Policy Platform on Biodiversity and Ecosystem Services and The World Economic Forum, to mention just a few, will prove to be biodiversity’s ‘Paris moment’, a meaningful path to change,” said Murray.

Another key aspect of promoting natural capital investment will be improving corporate disclosures on nature-related risks. 

Murray said: “The lack of clarity in the financial services community over what natural capital impact truly is, can of course be a hindrance to our efforts. It's difficult to define science-based targets, for it's not like climate change, where we have just the comfort of a single metric that captures nearly everything.” 

This will involve agreeing on metrics for monitoring and evaluating everything from soil, air and water quality to species diversity.

In June, reporting initiative the Taskforce for Nature-related Disclosures was launched, with members including senior executives at financial firms including AXA, Bank of America, BlackRock, BNP Paribas, HSBC, Rabobank, and UBS.

The initiative is building a framework to give companies and financial institutions a full picture of their nature-related risks, which will be launched in 2023.

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