Investors bank on natural capital, but can it live up to the hype?

The Palo Verde cloud forest, a natural reserve in the province of Cartago, Costa Rica, 31 December 2020. (Keystone/EPA/Jeffrey Arguedas)

At the One Planet biodiversity summit on 11 January, Lombard Odier joined forces with investment manager Mirova and HSBC Pollination Climate Asset Management to launch a new coalition aimed at mobilising $10bn toward “natural capital” investments by 2022. But it begs the question: Can preserving ecosystems be a lucrative business?

Dorothee Herr, manager of the International Union for the Conservation of Nature (IUCN) Global Marine and Polar Programme, and who also largely manages the IUCN's work around climate financing, helps us break down the concept of natural capital and how conserving nature can be profitable.

How natural capital investment works. The idea behind natural capital investment is not new. It entails financing projects that protect and restore ecosystems, but this is not the only objective. The aim is that they also yield returns. Herr explains:

“The traditional way of protecting and restoring nature is through public money, or donations and philanthropy. The goal is to support projects with a high environmental and social value. But none of these donors are expecting their money to come back to them. What we talk about here are return-on-investment transactions.”

Quantifying the value of nature. First coined in 1973 by economist E.F. Schumacher in his book Small Is Beautiful, natural capital is essentially the world's stock of natural resources, from the air, to the soil, to the species and whole ecosystems.

“These assets provide us humans with specific benefits, from food to shoreline protection and carbon mitigation and adaptation,” Herr says.

These services have been widely viewed as free of charge, that is until climate change brought to the surface the high cost of losing those benefits. But how can that cost be measured in dollars?

“The value of nature is estimated via so-called ecosystem valuation exercises. This is an economic calculation which gives a monetary value to an ecosystem and/or its ecosystem benefits. For example, the role of wetlands or forest areas for flood risk reduction or for carbon sequestration.”

However, arriving at a hard number can be complex:

“Efforts such as the Natural Capital Protocol are offering an internationally standardised framework for the identification, measurement, and valuation of impacts and dependencies on natural capital in order to inform decisions.”

Cashing in on nature. There are a number of ways in which ecosystems can generate revenue, says Herr.

“The most straight forward investments are looking at natural resource management activities, which per se are not new, as there are existing markets for trading the products. But these projects are now done in a much more holistic manner.”

For example, many ecosystems absorb carbon, which can be traded in the market. Protecting marine ecosystems such as mangrove areas, which act as nurseries for fish, is important not only for the environment but also the sustainability of commercial activity.

Even tourism depends on healthy environments: “A damaged coral reef will not attract tourists, assuming tourism will become a source of income again soon,” Herr explains.

According to management consultant firm Mckinsey, doubling nature conservation in land and national waters by 2030 could create or safeguard 27 million to 33 million jobs and generate $290bn to $470bn in GDP from ecotourism and sustainable fishing.

But the report also notes that making the case for individual business opportunities remains a challenge as benefits tend to be “opaque and disperse”.

A growing trend. Herr says that the focus on natural capital has been observed for some time.

“In the last years the names have become bigger, as well as the numbers. I think more than ever, many in the investment sector see a clear opportunity. Also due to the fact that they are being, rightly so, pressured to divest from decades of harmful investments, the investment sector is now, more than ever, forced to look at natural capital investments more carefully.”

Despite this, certain risks might make investors weary. “The return on your investment can be slow to materialise. Conservation actions, like restoring a mangrove or other forest area can be slow. Thus, revenues associated with those actions are often not as quick as with other, more traditional investments.” Returns can also be lower, she adds.

“However, there seems to be a more general trend to care primarily about an actual impact (both on the environment and people), and more secondary about a (high) economic return; hence why all these nature funds are being established left, right and centre.”

Climate benefits. For Herr, the private sector is paramount for the world to achieve the Paris target of limiting global warming below 2 C.

“A reason why we see so many natural capital funds being launched is that public (and philanthropic) money is not enough to reach climate, as well as biodiversity goals.”

“Unless executed poorly, you can’t do wrong by investing in nature,” she says. Nonetheless Herr warns that by itself, it will not be enough to tackle climate change.