Over 50 asset managers now offer strategies categorised as ‘natural capital’, encompassing investments across agriculture, timberland, and ‘natural climate solutions’, according to a report by Bfinance.
The strategies have developed in a response to growing desire as searches for ‘natural capital’ manager surpassed searches for real estate managers for Bfinance for the first year. The report, entitled Natural Capital Investing: An Introduction to Forestry, Agriculture and Carbon Credits, defines a natural capital asset as “direct ownership of an asset whose value relies on natural capital. Forests and farms, for instance, rely on soil, water, microorganisms and so forth to derive economic value”.
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Of the more than 50 strategies, 32 create carbon credits for investors that are looking to raise $19bn in equity commitments all together. These come in the form of ‘avoidance’ or ‘removal’ credits, which either stop activities that would generate emissions, or remove carbon from the atmosphere.
“(Avoidance credit) effectiveness has been questioned: it is challenging to prove the extent to which emissions are avoided beyond ‘business as usual’ (or, in the language of impact investing, to demonstrate ‘additionality’),” the report said.
“As such, there has been a 20% drop in the issuance of avoidance credits according to a 2023 Carbon Direct report. Today, investment managers developing carbon credits through natural capital strategies tend to be more focused on removal credits derived from sources such as afforestation, reforestation and IFM. That being said, a removal credit is not inherently of high quality: variability is high, particularly for IFM-based credits.”
Bfinance explained that many of the funds offer “very low or no recurring yields” and 16% of the funds’ returns come from carbon credit production while others have commercial returns supplemented by the credit revenue.
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The report said that funds with significant exposure to natural climate solutions often do not offer yields until the three-year mark, when credits are able to be generated.
Sarita Gosrani, director of ESG and responsible investment at Bfinance, said: “We have been working with a number of investors to implement allocations to natural capital recently: it has been a fascinating time to research this rapidly evolving space.
“It is a complex area to say the least, with investment managers taking very different approaches (some still at early stages), and so finding the right partner is very important.”
Within agriculture, which has a typical target return within its ‘core’ segment of 7-8%, funds with buy-and-lease assets provide low-risk investments, while direct farming operation exposure presents a higher-risk option. There are few funds in this space that rely on carbon credits. Timberland, which targets core returns of 6-7%, focuses on the ‘acquisition of mature forests or construction of new plantations’ and has been growing into the carbon credit space. ‘Natural Climate Solutions’, which are categorised as projects to better protect and restore the environment, rely primarily on carbon credits for returns.
Nikki Howard, senior associate private markets at Bfinance, said: “There are now over 50 institutional-quality managers spanning agriculture, forestry and natural climate solutions, and these numbers continue to grow.
“Investing in each of these asset classes poses very different considerations for investors from an impact and environmental perspective, as well as the risk-return profile. In this report, we explore the emergence of carbon as a return driver, as well as the critical considerations when assessing the impact and credibility of the different strategies currently on offer.”
