Investing in nature is gaining attention. Is that enough?

A big reason for this is that in 2022, nearly US$7 trillion of public and private funds were directed toward companies and economic activities that directly harm nature, versus so-called nature-based solutions (NbS) investments. That means it was only US$200 billion. According to the report, they are engaged in the protection, conservation, restoration or sustainable management of land and water ecosystems, as defined by the United Nations Environment Assembly No. 5 (UNEA5).

“Increasing NbS funding will have limited impact unless there is a significant reversal of naturally negative financial flows,” the report said.

But the report also says this misalignment presents “a huge opportunity to turn around the flow of private and public finance” to meet the goals set by the UN's Rio Convention on climate change, desertification and biodiversity loss. “It shows,” he said.

The treaty aims to limit climate change to 1.5 degrees Celsius above pre-industrial levels, protect 30% of the Earth's land and oceans by 2030, and achieve “land degradation neutrality” by 2030. This is the goal. To achieve these goals, more than twice as much will be needed. According to the report, nature-based investments will reach US$436 billion from current levels by 2025 and reach US$542 billion by 2030, almost three times current levels.

Most of the USD 200 billion currently invested in NbS comes from governments, but private investors have also contributed USD 35 billion, including USD 4.6 billion from impact investment funds and USD 3.9 billion from philanthropy. . The largest source of private funding was in the form of biodiversity offsets and credits. [An offset is designed to compensate for biodiversity loss, while a credit is the asset created to restore it].

According to Liqian Ma, head of sustainable investing at Cambridge Associates, many wealthy individuals and families concerned about climate change and the environment have traditionally focused on climate solutions, technology, infrastructure, food and water. The company said it has focused its investment funds on technological innovations that support efficiency.

But “there is increasing recognition that nature has many gifts and solutions to offer if we manage our nature-based assets carefully and responsibly,” Marr says.

For example, investments can be made in wetland mitigation, conservation, and ecosystem services, as well as sustainable forestry and sustainable agriculture that help sequester carbon.

“These areas are not mainstream, but they are an additional tool for investors,” Ma said.

Finance Earth, a London-based social enterprise, is one organization working to make these tools more mainstream by creating a range of nature-based solutions in addition to related investment vehicles. is.

Finance Earth categorizes nature-based solutions into six themes: agriculture, forestry, freshwater, marine/coastal, peatland, and species conservation. Underpinning many of these sectors is a range of so-called ecosystem services – the benefits that nature provides, such as absorbing carbon, promoting biodiversity and providing nutrients, says Rich, director of Finance Earth.・Mr. Fitton says:

Each of these ecosystem services is behind established and emerging markets. Carbon-related disclosure requirements (in various stages of approval in the US and other countries) have stimulated demand in the most mature of carbon markets for many years.

For example, Cambridge Associates works with a dedicated asset manager approved by the California Air Resources Board to buy carbon credits, Marr said.

California's carbon credits will outperform global stocks this year as the board is expected to reduce the supply of credits available to meet the state's emissions reduction goals, the company said in its annual investment outlook. Said it should form. The value of these credits is expected to rise as supply decreases.

In September, the G20 Task Force on Nature-related Financial Disclosures issued recommendations (which the Task Force on Carbon-related Financial Disclosures has been working on for several years) providing guidance on how companies can look across their supply chains and assess their resources. (similar to the one previously submitted) was published. “You look at the impact on nature, water and biodiversity, and then you start understanding what the nature-related risks are for your business,” says Fitton.

The recommendations will continue to further stimulate the already thriving biodiversity market that exists in more than 100 countries, including the US. In the UK, new rules called “biodiversity net gains” come into force this month, allowing developers to for every project they create.

For example, developers can plant trees on land developed for housing, but they are also required to purchase biodiversity credits from environmental nonprofits and wildlife trusts to replace and increase lost biodiversity. Fitton says there will be.

This new compliance market for biodiversity offsets could reach around £300m (US$382m) in size, he says.

Finance Earth and Federated Hermes are currently raising money for the UK Nature Impact Fund. The Fund has the potential to invest in these offsets in addition to other nature-based solutions, including voluntary offset markets for biodiversity forest and peatland restoration.

The fund has been seeded with £30 million from the UK Department for Environment, Food and Rural Affairs and is designed to absorb initial losses if required. Government investment gives mainstream investors more peace of mind to enter a relatively new sector, Fitton said.

“The public sector and philanthropy needs to take a little more downside risk,” he says. In doing so, Finance Earth is telling mainstream investors, “Look, I know you've never invested directly in nature before, but we believe that we can generate commercial-level returns to a considerable degree.'' We can say, 'I'm confident, and we have this public sector.' [entity] Who's backing the fund and taking on more risk?'' Fitton said.

In December 2022, 188 government representatives attending the United Nations Conference on Biodiversity in Montreal agreed to address biodiversity loss, restore ecosystems and protect the rights of indigenous peoples. Since then, some asset managers have started “developing new strategies or refining their strategies to be more nature- and biodiversity-focused,” Ma said. Say.

However, he cautioned that some asset managers are more honest about this than others.

“Some people are seriously thinking about hiring scientists to make sure this is done properly and that it's not just greenwashing or impact washing,” Marr said. “Some of these strategies are starting to come to market and that's why we think we'll see that growth this year in terms of actual decisions and deployments.”

Fitton also noticed that institutional investors are hiring natural capital experts, recognizing that natural capital is a separate asset class that requires expertise.

“Once that starts happening across the board, you're going to see meaningful amounts of money moving around,” he says. “There are a lot of projects out there, a lot of things to invest in. As these markets become more and more mature, there will be more and more projects to invest in.”