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Why invest in nature, the world’s most undervalued asset class?
Since 1950, the world’s rapid economic growth has been synonymous with greenhouse gas emissions and resource extraction.1 This connection is now broken.
In our energy systems, the gradual abandonment of fossil fuels in favour of renewables is offering us the prospect of carbon-free electricity. In the materials sector, progress in product recycling and reuse alongside the emergence of innovative natural materials is facilitating growth without resource extraction. These transitions are being accelerated thanks to carbon pricing, which imposes costs on companies that create greenhouse gas emissions. And, at the heart of this transformation, a new approach to the Earth and its oceans is radically changing our relationship with nature.
Nature is the heart of our economy
There is no system that means more to the global economy than nature: 55% of all economic activity depends on it.2 From the crops we grow to the energy we consume and the buildings we build, nature is at the heart of our economy.
The services that nature offers us free of charge, known as “ecosystem services”, take on many forms. Pollinating birds and insects boost crop yields to an extent that could be worth up to USD 577 billion every year.3 Oceans sustain the fisheries sector, estimated to be worth USD 400 billion a year4, and facilitate the transportation of over 90% of the goods purchased worldwide5. Forests filter water, preventing floods, absorbing and capturing carbon on a large scale, and providing the ingredients of many of our most precious medicines6. The sun’s rays offer us the means of producing the cheapest electricity in our history.7
Read also: COP28 and the re-NATURE Hub – putting nature at the heart of climate action
However, this vast wealth – our natural capital – is under threat. With deforestation, chemical and plastic pollution and greenhouse gas emissions, we have already crossed six of the nine planetary boundaries defined by science as regulating the stability of the environment. As the pressures on these boundaries intensify because of changes in land use, the loss of biodiversity and climate change, the interactions between them mean we could cause irreversible damage to entire ecosystems.
Read also: The rapid rise of nature-based investments
Nature-based solutions
For over 20 years, the world’s main focus has been on carbon emissions. However, scientific experts and policymakers now recognise that global warming is inextricably linked to the health of our natural world. Climate change and the decline of nature are two inseparable crises.
A healthy ecosystem will absorb significant amounts of carbon. The world’s forests take in close to 25% of the emissions generated by the burning of fossil fuels.8 Unfortunately, as ecosystems are degraded or damaged, they lose their ability to store carbon and become net emitters instead. This leads to a vicious circle of nature degrading still further and emissions increasing. In other words: there can be no net zero without nature.
These conditions are leading governments to deploy significant new financial support. Europe has its Green Deal9 while the United States has the Inflation Reduction Act10. Both aim to replace industrial monocultures that consume vast amounts of chemical products with nature-positive, regenerative farming. Alongside these new initiatives, there is a growing desire among consumers to end the trade in raw materials that are responsible for deforestation, such as palm oil, soy and rubber11.
Read also: Defending nature – biodiversity funds promise end to the extinction crisis
Let’s invest in nature
For investors, this represents an unprecedented opportunity. Nature is the world’s most undervalued asset class. This may be the case today, but degraded environments will ultimately become tangible, prized assets. Financing will be used to transform deforested spaces into productive agroforests where crops will grow within and under natural forest cover. It will also convert industrial monocultures into biodiversified and regenerative agricultural businesses. As natural habitats regain their health, the land will once again begin to absorb carbon. Raw materials produced in this way will be sold at a higher price to buyers who want to reduce the environmental impact of their supply chains.
This potential is already starting to materialise. Farmers in Ghana are seeing 50% increases in yields following the restoration of tropical forest canopy in cocoa monocultures.12 Corn growers in the United States who have adopted regenerative farming are recording 78% rises in profits thanks to being able to sell “regenerative corn” at a higher price.13
At Lombard Odier, we are convinced that nature is the world’s most undervalued asset class and that demand for regenerative raw materials will give rise to the biggest economic revaluation of this century.
Sustainable investment has become essential to reduce climate risk within portfolios and produce long-term returns. Focussing on nature means investors can generate “green alpha”, enabling them to outperform the market while contributing to the transition towards a nature-positive, net-zero economy.
The time has come to turn a new page in our relationship with nature because nature is worth investing in.
1 CO2 emissions; World GDP over the last two millennia | Our World in Data (ourworldindata.org)
2 sbpwc-2023-04-19-Managing-nature-risks-v2.pdf
3 Overview of bee pollination and its economic value for crop production | PMC (nih.gov)
4 The state of world fisheries and aquaculture | UN Food and Agriculture Organisation (fao.org)
5 Our economy relies on shipping containers. This is what happens when they're 'stuck in the mud' | World Economic Forum (weforum.org)
6 Forest medicines | Forest Stewardship Council (fsc.org)
7 Solar is now ‘cheapest electricity in history’, confirms IEA | Carbon Brief (carbonbrief.org)
8 CO2 emissions | Our World in Data
9 Green Deal: Halving pesticide use by 2030 | PEI-AGRI (europa.eu) and European Commission – Biodiversity financing – Environment (europa.eu)
10 How to maximise IRA’s Investments in farmers and agriculture (nrdc.org)
11 Regulation on deforestation-free products (europa.eu)
12 In Ghana, sustainable cocoa-forest practices yield carbon credits | The World Bank (worldbank.org)
13 Is regenerative agriculture profitable? (forbes.com)
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.
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