Is ‘Nature’ an Asset Class?

Article written by the Natural Capital team at ThirdWay Partners.

In the world of constant change and Nature becoming more and more at the forefront within the realms of finance and investment, we need to review the concept of asset classes which are well-defined and widely accepted. Asset classes like stocks, bonds, real estate, and commodities have long been the pillars of traditional investment portfolios. However, in recent years, there has been a growing recognition that the idea of nature itself being considered as an asset class. In this article, we will explore what an asset class is, define what is meant by "Nature as an Asset Class," and examine how nature can in fact qualify independently. 

 

What do we mean by Asset Class? 

In the realm of finance, an asset class refers to a group of financial securities or investments that exhibit similar characteristics and behave in a similar way within the marketplace. Asset classes are categorised based on their risk-return profiles and include: (list is not exhaustive) 

 

  • Equities (Stocks): These represent ownership in a company and typically offer the potential for capital appreciation through share price increases and dividend payments. 

  • Fixed Income (Bonds): Bonds are debt securities issued by governments, corporations, or municipalities. They provide periodic interest payments and return the principal at maturity. 

  • Real Estate: Real estate investments involve owning physical properties such as residential or commercial buildings, land, and REITs (Real Estate Investment Trusts). 

  • Commodities: Commodities encompass physical goods like gold, oil, agricultural products, and more, which are traded on commodity exchanges. 

  • Cash and Cash Equivalents: This category includes short-term, highly liquid investments like money market funds and Treasury bills. 

 

Nature as an Asset Class 

The concept of "Nature as an Asset Class" is a relatively recent development, born out of the growing awareness of environmental and sustainability issues. It proposes that nature, in all its forms, can be recognized as a valuable and investable asset. This idea is rooted in the understanding that ecosystem services, biodiversity, and natural resources provide a wide range of economic and societal benefits. 

 

Ecosystem Services 

Ecosystem services encompass the various benefits that natural systems provide to humans. These services include clean air and water, pollination of crops, climate regulation, disease control, and more. Investors can potentially profit from investments that protect or restore these subcategories that make up Ecosystem services. An example is, projects focused on reforestation or wetland restoration which can be seen as investments in nature where a financial credit return mechanism can be adopted while preserving essential ecosystem services. 

 

Natural Resource Investments 

Investments in natural resources such as timber, minerals, and water have long been considered asset classes in the traditional sense. These assets can generate income and appreciate over time. Sustainable management practices in these sectors can ensure long-term returns while minimising the impacts of environmental degradation. 

 

Biodiversity Conservation 

Biodiversity, the variety of life on Earth, is another aspect of nature that can be considered an asset class. The conservation of biodiversity not only has intrinsic value but can also lead to opportunities for ecotourism, bioprospecting, and the development of pharmaceuticals and biotechnology products. 

 

Impact Investing 

The rise of impact investing has further promoted the idea of nature as an asset class. Impact investors seek to generate positive social and environmental impacts alongside financial returns. Investing in businesses and projects that promote sustainability and environmental stewardship aligns with the concept of nature as an asset. 

 

Risks and Challenges 

While the concept of nature as an asset class is compelling, it is not without its challenges. Several factors make it difficult to integrate nature seamlessly into financial markets: 

  • Valuation Complexity: Assigning a monetary value to ecosystem services is complex and often subjective. Valuation methodologies need refinement to accurately reflect the worth of nature that can be transferrable across all the variables which natural environments create. This can be seen in the current delays and trends of the development in the Biodiversity Credit market, unlike the more standardised approach in the Carbon Market.  

  • Property Rights and Ownership: Determining property rights and ownership of natural assets can be contentious, especially in rural landscapes where some of the more formalised processes are not always adhered to. Additional complexities are uncovered when ecosystems span international boundaries and are subject to multiple stakeholders. 

  • Regulatory and Policy Frameworks: Effective integration of nature into financial markets requires supportive regulatory and policy frameworks. Governments need to create incentives and enforce regulations that encourage sustainable practices, while providing a value proposition for all. 

  • Lack of Standardisation: The lack of standardised metrics and impact reporting templates of which to follow for natural assets poses a challenge for investors seeking to incorporate them into their broader portfolio practices. 

 

The World Bank estimates that the global economy could lose $US 2.7 trillion by 2030 (compared to business as usual) if certain ecosystem services collapse (pollination, carbon sequestration and storage, fisheries and timber provision). In low-income countries, GDP could decline 10% annually on average, with higher losses in countries particularly dependent on ecosystem services. 

 

While the idea of nature as an asset class is still evolving and faces challenges such as valuation and measurement, it represents a significant shift in how we perceive and interact with the natural world. Nature is not only a source of inspiration and wonder but also a critical foundation for our economic well-being. Recognising nature as an asset class emphasises the importance of sustainable and responsible investing practices that protect and enhance the value of our natural capital. 

 

Nature possesses many attributes that align with traditional asset classes, such as the potential for financial returns and the ability to generate economic value. As society increasingly recognises the finite nature of our planet's resources and the need for environmental stewardship, the concept of "Nature as an Asset Class" is likely to gain more prominence in the world of finance and investment. Embracing this concept may not only lead to profitable investments but also contribute to the preservation and restoration of the invaluable ecosystems that sustain our life on Earth. 

Kone Eburajolo