Peter Harrison: why we must make nature investible
Peter Harrison: why we must make nature investible
Because we don’t quantify the benefits of nature, we overlook them altogether. Johan Rockström, the Swedish climate scientist who I recently shared a platform with at London Climate Action Week, reaffirmed this point – that if it weren’t for nature we’d already have crossed the 1.5 degree threshold.
There’s a well-known saying in management that “what gets measured gets managed”: a cliché, perhaps – but frighteningly accurate in the case of nature.
The world is waking up to the fact that our global economy must become not just net zero, but also nature-positive. Heatwaves and other extreme weather events are reminding us of the fragility of our natural environment. That means knowing what nature is worth.
It took us 15-20 years to get the language of carbon – and the disclosures of carbon – to become an intelligible feature of company reports. Today, it is virtually impossible to get good data around nature. But we haven’t got 15-20 years.
More than half of our global GDP is dependent on the natural world. Protecting and preserving nature can make a powerful contribution to efforts to mitigate climate change. And there is a social imperative too: unless natural climate solutions create positive social impacts for local citizens and communities living on the land, they won’t be sustainable. Investors must partner broadly and deeply.
The response must be vigorous. As a company, we learned that to make meaningful change on diversity and inclusion would involve a revolution in our culture. The same root-and-branch revision is required in our approach to nature.
Asset managers, in particular, have to fundamentally change the way they operate.
At Schroders, we are taking a three-pronged approach. We have pledged to change the behaviour toward nature of every company we invest in; we will create new nature-based investment products, and use our solutions business to channel capital into new and existing funds. By doing so, we help our clients make a positive impact while also diversifying the sources of their returns.
Just as with net zero, the role of the financial sector in efforts to halt and reverse nature loss is both clear and critical. Following the recent delay of the United Nations biodiversity summit, COP15, to December 2022, we must use these months to bring more of the finance sector to the table. There is no time to waste.
Action on nature starts with action to end deforestation. The IPCC estimates that “agriculture, forestry and other land use” contributes 22% to global emissions and half of that (11%) is from deforestation and land conversion.
That means getting measurement and data right. At Schroders, we’ve built a deforestation scorecard to look at exposure to and management of deforestation risk for companies. And we have made natural capital and biodiversity a priority for active engagement with companies.
Deforestation is increasingly an investment risk, but nature is also a significant investment opportunity. Natural climate solutions are efforts to conserve, restore or improve ecosystems in order to absorb and store carbon from the atmosphere. Analysis has estimated that these solutions have the potential to provide around a third of the climate action needed to achieve the Paris Agreement goals and avoid the worst effects of climate change.
One statistic starkly captures the issue: they may be a third of the solution, but today, natural climate solutions receive less than 3% of all global climate finance. How do we close that gap?
I believe that we can create a tipping point, and accelerate investment.
The investment case gets stronger by the day, rooted in the price of carbon credits. Demand for high-quality carbon offsets is set to grow exponentially, driven by national net-zero ambitions alongside major private sector commitments. This opportunity is underpinned by increasingly sophisticated data and tools that are allowing us to start to value the world’s natural assets.
While supply of projects remains a challenge, the growing demand and activity in this space is creating new opportunities to institutionalise project financing, structuring and development.
Schroders is excited to go into partnership with Conservation International with plans to create one of the first dedicated natural capital impact investment managers in Singapore. Called Akaria Natural Capital, the venture aims to achieve the scale and expertise to deploy with impact – and contribute new ideas for how to solve some of the bottlenecks for funding.
Getting to grips with the social imperatives around nature action is fundamental to this partnership, to ensure these investments work for people, as well as places.
What’s exciting is the increasing collective momentum of the investment industry on this agenda. There are now $21 billion assets under management in natural climate solutions – doubling in the last five years. The Natural Capital Investment Alliance, launched by the Prince of Wales at COP26, is an important step in this shift. The 15 members of this group all have, or will have, investment vehicles that help channel capital into nature-focused projects.
The energy transition is complex. The transition to a nature-positive world will be fiendishly difficult. But it is imperative, urgent, and we have to make it investible. That’s why as we look ahead to the second half of the year, the financial sector must join the chorus of actors stepping up to take action on nature.
- Value’s resurgence: flash in the pan or here to stay?
- Contagion or contained: banks in focus
- Watch: Is the Asian credit market a bright spot for investors?
- The dollar smile theory: what is it and is it still valid in the new market regime?
- Crisis, what crisis? Fed tightens despite banking stress
- Three factors steering Asia Pacific markets in 2023
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.