Europe Leading the Way in Biodiversity Investments
Europe is at the forefront of creating biodiversity investments, with France introducing Article 29, which mandates large companies to report on biodiversity from 2022. Financial institutions will need to measure their impact on biodiversity, adopt new investment strategies to reduce this impact, report on Scope 3 emissions, and align with the Paris Agreement on Climate Change.
While progress is happening in Europe, one of the leaders in the natural capital investment space has ties to Australia. London-based Climate Asset Management, a joint venture between Pollination and HSBC Asset Management, aims to raise a $1 billion natural capital fund and a $2 billion carbon fund. The fund focuses on sustainable forestry, regenerative agriculture, biofuels, water supply, and "blue carbon" - carbon captured by oceans and coastal ecosystems.
Projects and Investments
Climate Asset Management has already secured three natural capital deals, covering over 3000 hectares of farmland assets. These projects involve converting underutilized or degraded farmland to produce higher-value crops and implementing regenerative practices and biodiversity action plans to improve the landscape. The fund also includes carbon sequestration projects as part of its land management strategy.
Some notable projects include a land development project in Extremadura, Spain, which will convert flood-irrigated farmland to regenerative almond production. Another project involves restoring two million hectares of land across six African countries in collaboration with the Global EverGreening Alliance.
In the long run, Climate Asset Management aims to become the largest dedicated investor in the natural capital space, managing $6 billion while achieving better biodiversity outcomes and generating commercial returns.
The Importance of Measuring and Managing
A key challenge in the natural capital scene is the availability of reliable data to establish measurable baselines for progress. However, progress is being made in developing technology to measure environmental activity. This includes advancements in acoustics, DNA testing, and video equipment to measure biodiversity. Making sure there is a baseline for measurement and reporting is essential to drive improvements in environmental outcomes.
O’Donnell advises built environment firms in the natural capital market to focus on integrating biodiversity into their structures. Rather than relying solely on offsets, companies should aim to make their buildings more environmentally friendly by incorporating elements such as trees, water flow, pollinators, insects, and habitat.
The Need for Government Regulation
While there is significant interest in biodiversity as a tradable instrument, the markets are still nascent and primarily driven by corporations needing to offset biodiversity loss. O'Donnell emphasizes the importance of government regulation to encourage a broader, regulated market and institutional demand for natural capital credits. Without this demand, natural capital investments may struggle to compete with other investment opportunities.
Voluntary action alone is not enough, and governments must prioritize the environment in their regulations and fiduciary obligations. Currently, there is no market where regulation drives demand for credits that combat biodiversity loss. To generate more demand and supply, regulatory changes are necessary, which will ultimately help markets repair and thrive.
Overcoming Index Hugging
O’Donnell believes that the investment community's tendency to follow benchmark indexes and avoid deviating from the herd contributes to the lack of progress in natural capital markets. He emphasizes the need for a shift in mindset, away from solely focusing on risk and return, and towards prioritizing environmental outcomes. By integrating natural capital into investment strategies, institutions can make a positive impact while fulfilling their fiduciary obligations.
