corporate
Revaluing nature – the world’s most under-priced asset class
On 8 September, the United Nations Framework Convention on Climate Change (UNFCC) released a synthesis report of the global stocktake technical dialogue.1 It paints a worrying picture. Despite the near-universal setting of climate goals in the wake of the Paris Agreement: “progress is still inadequate. The world is not on track to meet the long-term goals of the Paris Agreement. The window to keep limiting warming to 1.5 degrees Celsius within reach is closing rapidly.”
2023 has become a year of ‘stocktaking’ firsts. In July, delegates met for the first UN Food Systems Stocktaking Summit in Rome. Meanwhile the UN’s recently published stocktaking report will form the basis for the first ever ‘Global Stocktake’ at December’s COP28 in Dubai, “a milestone moment when the world will take stock of its progress on the Paris Agreement.”2
Read also: Food systems under growing pressure to reform
Despite calls for more ambition and urgency, fears are growing that sustainability is still not a sufficient priority at the highest level. In the UK, for instance, Prime Minister Rishi Sunak has just announced a U-turn on several net-zero policies, having pushed back to 2035 a commitment to end the sale of new combustion engine cars, and exempted some households from a plan to phase out the installation of new gas boilers.
Against this backdrop, world leaders joined scientists, activists and finance leaders at New York Climate Week, held in conjunction with the annual meeting of the UN General Assembly. After years of international focus on carbon emissions, the spotlight is now expanding to biodiversity and nature.
A ‘decisive decade’
Nature is the engine of our economy. Nature preservation and restoration is essential to achieving the 2030 Agenda for Sustainable Development – made up of 17 Sustainable Development Goals (SDGs)3 – adopted by all UN members in 2015. Delegates at Climate Week heard that while we are now halfway through the 2015-2030 timeline, we have achieved just 15% of the progress needed to reach the SDGs.
When it comes to energy, and the impact of fossil fuels on the natural world, a World Economic Forum roundtable discussion reiterated the warning that we are falling behind schedule. “We are three years into the decisive decade,” the panel was told, “and not enough is happening fast enough.”
For those sectors that are hardest to decarbonise there is no “holy grail” solution, instead we must place bets on multiple technologies, including ‘green’ hydrogen and ammonia (both of which are produced using zero-carbon renewables), Sustainable Aviation Fuels, and Carbon Capture and Storage. While good progress has been made in renewable electricity production, investment is still lagging in sectors where electricity cannot provide an immediate zero-carbon energy solution.
Despite these concerns, delegates heard that promising momentum is now building with public funding mechanisms such as the US Inflation Reduction Act (IRA) and the EU Green Deal, which each offer multi-billion dollar financing to accelerate the energy transition. For green hydrogen, the impact of this new funding is likely to be particularly pronounced. In the US, the IRA’s ‘clean hydrogen credit’ is expected to fast-track cost parity between green and grey hydrogen (which is produced from natural gas). While in the EU, more than USD 5 billion of funding will support the construction of electrolysers (which are used to produce green hydrogen from water) and green hydrogen storage and transport infrastructure.
Read also: Green hydrogen: the key to decarbonising heavy industry
Nature-related risks
Climate Week’s sharp focus on nature became apparent early on, with the launch of a landmark set of guidelines by the Taskforce for Nature-Related Financial Disclosures (TNFD). Hosted by the New York Stock Exchange, the taskforce outlined 14 measures by which businesses should assess and report their reliance on nature and the threats they face as climate change causes ecosystems to destabilise.
According to consultancy PwC, 55% of global GDP (USD 58 trillion) is dependent on nature and the ecosystems services it provides. In the eurozone this dependency is higher still – the European Central Bank estimates that 72% of companies in the euro area are highly dependent on nature, while 75% of bank loans are given to firms that rely on the ecosystem services nature provides.
Calling for firms to account publicly for their exposure to nature, David Craig, co-chair of the TNFD, said, “nature loss is accelerating, and businesses today are inadequately accounting for nature-related dependencies, risks and opportunities. The costs of inaction are mounting quickly.”
While markets are increasingly recognising nature risks, at Climate Week’s ‘Nature Positive Hub’, leaders from the public and private spheres, academia, and indigenous communities turned the debate to the opportunities created by nature and nature regeneration. Delegates were told: “Nature-based solutions can play a key role in achieving climate mitigation – they can contribute up to 37% of the emissions reductions needed by 2030. Regulators, industry and financial market participants now fully appreciate the importance of Nature-based Solutions in achieving the goals of the Paris Agreement.”
Read also: Indigenous communities in the fight to protect tropical forests
Revaluing nature – from liability to asset
Across Climate Week, attention is turning to how nature preservation and restoration can be financed, and how exposure to nature can be turned from a liability into an investment asset.
A panel entitled “Collaborating for Scaled Investment in Forests and Nature” heard how the opportunity to create new nature-based asset classes is stoking investor appetite. Speaking at the event, Ruben Lubowski, Chief Carbon and Environmental Markets Strategist at Lombard Odier Investment Managers, said, “Some of the most exciting investment opportunities are in sustainability. Capturing these opportunities requires a truly systemic approach – we’ve entered into exciting partnerships to achieve this. There’s a hunger in the market for diversification and for alternative asset classes.”
At Lombard Odier, nature is an investment conviction. Through holistiQ, our sustainability-centred investment platform launched in partnership with systems change firm Systemiq, we aim to revalue what we believe is currently the world’s most underpriced asset class. By innovating new ways to invest in nature, we target long-term returns in a way that actively accelerates the transition to a nature-positive economy.
Regenerative commodities
We believe that fast-growing demand for “regenerative commodities” – those produced in harmony in with nature – will drive the biggest revaluation of the next century. On the ground this could take the form of agroforestry-grown coffee, for example, with investment used to finance the restoration of formerly degraded land alongside coffee production. For investors, the newly restored forest could form the basis for carbon or other nature-based credits, while simultaneously producing ‘regenerative’ coffee that will command a premium among producers.
When it comes to the world’s food systems, fragmented supply chains make it difficult for large producers to ensure the sustainability of their products. This can be solved by going back to the source – the soil itself. Delegates at New York Climate Week heard that governments and industry are now recognising ‘Soil Organic Carbon’ (carbon levels in soil) as a way to measure the reliability of claims that products are truly regenerative. holistiQ has already begun putting this theory into practice by collecting datapoints on soil organic carbon for a number of large food and agriculture companies. At Lombard Odier we believe that this will become an increasingly important measure for producers across multiple industries.
Speaking during New York Climate Week, Elise Beaufils, Deputy Head of Sustainability Research at holistiQ, said: “Knowing that more than 50% of our global economy is at risk from nature loss, we are thrilled to see Nature taking centre stage during Climate Week in New York. At holistiQ, we firmly believe that investing in nature-positive activities and assets is not only crucial for a successful and just transition but also holds the potential to unlock long-term returns. This 2023 edition of Climate Week will probably be remembered as the tipping point where nature as an asset-class left the niche market it has been confined to so far, and started to grow exponentially.”
1 Technical dialogue of the first global stocktake. Synthesis report by the co-facilitators on the technical dialogue | UNFCCC
2 COP28 UAE | United Nations Climate Change Conference (UNFCCC)
3 THE 17 GOALS | Sustainable Development (un.org)
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
Read more.
share.