The rapid rise of nature-based investments

Sustainable investing often focusses on these early movers, the so-called ‘best-in-class’ when it comes to cutting emissions. Or on the ‘solutions providers’, those producing innovative new technologies – such as high-capacity batteries – that can help firms across multiple sectors to decarbonise. Other sustainable funds take an exclusionary approach, avoiding carbon-heavy sectors altogether.

Common to all approaches is a focus on emissions and climate. Until recently, little attention has been paid to nature as an investment asset – now this is changing.

Emptying the bathtub

The flow of carbon into our atmosphere is often likened to a bathtub filling with water. If water flows from the tap more quickly than it drains, the bath will overflow. Similarly, there is an upper limit to the amount of carbon emissions our atmosphere can safely hold, while carbon ‘drains’ away through absorption into the natural environment. The ‘tap’ and the ‘drain’ are both important.

Since the 1997 Kyoto Protocol, international climate change efforts and, increasingly, sustainable investments, have focussed on reducing carbon emissions. In effect, we have targeted the tap. However, according to the UN’s recent global stocktake, we are not switching off the flow of carbon quickly enough.²

Now increased efforts are being made to remove carbon from the atmosphere, to buy us time as we decarbonise our economy, and to turn down the dial on some of the consequences we are already experiencing from excess carbon build-up. This is where nature comes in.

Every year, the world’s oceans absorb 25% of man-made greenhouse gas emissions (GHGs).³ The world’s forests absorb a similar amount – equivalent to 1.5 times the entire emissions of the US economy.⁴ Other natural ecosystems are similarly important – peatlands, for instance, store 16 times more carbon than is emitted by the entire global economy in a year.⁵ While mangroves can store as much as four times more carbon per acre even than tropical forests.⁶ If we want to empty the bathtub, we need nature.

Read also: Figs, wolves and starfish: the regenerative power of keystone economics

Beyond climate

Recognising this, delegates at 2022’s UN COP15 Biodiversity Conference in Montreal reached a landmark agreement to protect 30% of all land and ocean environments by 2030. More recently, at the Building Bridges Conference in Geneva, the Taskforce on Nature-related Financial Disclosures launched a ground-breaking set of new guidelines that aim to push companies to report on the impact their business models have on nature.

As policymakers and the corporate world turn their attention to nature, sustainable investment funds are beginning to look beyond climate. Increasingly, biodiversity and the natural world are becoming asset classes in their own right. According to data provider Morning Star, investment funds with a combined value of USD 1.6 billion are now investing in firms that either have a low impact on biodiversity or work to actively preserve it. While biodiversity investments are still a minnow in comparison to the broader sustainable investment universe, the report notes, “Asset managers have already started to update their…voting policies on biodiversity preservation. [They] are looking to better understand companies’ material biodiversity impacts.”⁷

At Lombard Odier, we believe this is the beginning of what may become the biggest economic revaluation of the next century. Just as climate-focussed sustainable investments have moved from niche to mainstream, so, too, will nature-based investments.

Read also: Hope from the ashes: unearthing ancient value in our forests

Nature is worth investing in

This will be most apparent in our food systems, which are the leading driver of deforestation and biodiversity loss.⁸ With food systems coming under pressure to reduce their impact on nature, some of the world’s biggest food producers are pledging to source their produce from regenerative farms instead of from industrial, chemical-intensive monocultures, and to ensure that their supply chains are deforestation-free.

For farmers, this switch to regenerative agriculture can bring multiple benefits. In the UK, for instance, Stephen Briggs runs the country’s largest agroforestry system, where cereal crops are grown amongst specially-planted fruit trees.⁹ The trees, he says, prevent soil erosion, create a habitat for pollinators, and provide a cash crop that arrives just as the cereal harvest is over, building in resilience for years when cereal harvests are poor. Further, by shunning chemical inputs, and relying instead on natural pollinators and pest predators, his produce sells at a premium, increasing the farm’s profitability.

A similar story is being told in Brazil, where pilot studies show that coffee farmers can adapt to rising temperatures by planting rubber trees, turning coffee monocultures into agroforestry farms. The result is healthier soils that store more carbon, coffee trees protected from temperature extremes, and additional income from tapping the rubber trees for their resin.¹⁰

For investors, degraded industrial croplands and deforested landscapes will become tangible assets. Both land values and profitability will rise as a regenerative approach to farming rejuvenates soils and restores ecosystems to health. This will build resilience against rising global temperatures and enable farmers to sell at a premium to buyers looking to minimise their impact on nature.

Read also: The CLIC^® Chronicles: Sustainability grabs the headlines at leading Swiss news agency AWP

Embedding nature into our economy

We can measure nature’s value. For instance, research estimates that pollinators contribute up to USD 577 billion each year to the world’s food systems by boosting crop yields.¹¹ While in China, scientists calculated that every individual ladybird is worth USD 0.01 to cotton farmers, thanks to the ladybirds’ ability to control the aphid population.¹²

According to the Organisation for Economic Cooperation and Development (OECD), in total, nature’s free ecosystems services – including crop pollination, water purification, flood protection and carbon sequestration – are worth an estimated USD 140 trillion each year, roughly one and a half times the total GDP.¹³ Similarly, we can measure the cost of the loss of these services. The OECD also estimates that every year we miss out on ecosystems services worth up to USD 31 trillion due to land degradation and land-use change, as we turn natural landscapes over to industrial, chemical-intensive agriculture, mining or urban environments.¹⁴

As the international focus on nature grows, businesses are likely to coming under increasing scrutiny for the harm they do to biodiversity and ecosystems. Firms with the biggest ‘nature footprint’ could find themselves the wrong side of both consumer sentiment and a regulatory framework that may grow to mirror rules on carbon emissions. As with decarbonisation, the laggards will be left stranded, while those quickest to adopt nature-positive business practices will gain a competitive edge.

At Lombard Odier, nature is an investment conviction. That is why we have led the way by being the first bank to appoint a Chief Nature Officer, a role that we believe will become essential across all sectors as we transition to a net-zero, nature-positive economy.¹⁵ When it comes to tackling the climate challenge, the world has focussed its attention on carbon for more than 20 years. Now we are turning to nature, our economy’s most underpriced, and yet most precious, asset.

¹ GSIR-20201.pdf (gsi-alliance.org)
² Window to reach climate goals ‘rapidly closing’, UN report warns | UN News
³ The ocean – the world’s greatest ally against climate change | United Nations
⁴ Environment: How much carbon do forests absorb? | World Economic Forum (weforum.org)
⁵ Peatlands and climate change - resource | IUCN; CO2 emissions - Our World in Data
⁶ Mangroves among the most carbon-rich forests in the tropics; Coastal trees key to lowering greenhouse gases | ScienceDaily
⁷ COP 15: A Turning Point for Investor Approaches to Biodiversity (contentstack.io)
⁸ Our global food system is the primary driver of biodiversity loss (unep.org)
⁹ Case Study: Farmer Stephen Briggs - Woodland Trust
¹⁰ Carbon sequestration in an agroforestry system of coffee with rubber trees compared to open-grown coffee in southern Brazil | SpringerLink; ScientiaAgricola-2023-CoffeeCropsAdaptationAgroforestrySystems.pdf (embrapa.br)
¹¹ Overview of Bee Pollination and Its Economic Value for Crop Production - PMC (nih.gov)
¹² Uncovering the economic value of natural enemies and true costs of chemical insecticides to cotton farmers in China - IOPscience
¹³ Executive-Summary-and-Synthesis-Biodiversity-Finance-and-the-Economic-and-Business-Case-for-Action.pdf (oecd.org)
¹⁴ Idem
¹⁵ Is It Time To Appoint A Chief Nature Officer? (forbes.com)

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.