Investing in Nature: A Comprehensive Guide to Natural Capital

Posted On August 14, 2020

Natual Capital

Natural capital is the term given to the elements of the natural environment that are capable of providing tangible goods and services to consumers. For instance, woodland could be considered a natural capital asset, with valuable ecosystem services like flood risk mitigation and carbon reduction. 

Fundamentally, natural capital is built upon many varied assets such as soils, wetlands, urban green spaces, hedgerows and much more. Natural capital is strongly interlinked with green infrastructure and sustainability, and is wholly intent on the notion that natural resources should be upheld as a primary way of delivering viable services and solutions for individuals both locally and globally. 

Coined by economist E.F. Schumacher in the 1970s, the term natural capital formed a central part in the Forum for the Future’s Five Capitals model for sustainable development. In recent years the natural capital concept has continued to gain recognition and grow in popularity as some parts of government and various industries have attempted to mount a case as to why the environment should be held in a much higher regard by businesses. 

EEA

(Image: EEA)

The core components of natural capital, detailed above, illustrate the different subsets of natural resources and how they can be utilised as viable energy options and supplements. With various levels of access to geological and ecological resources, natural capital champions accessible sustainability for businesses worldwide. 

So What Actually is Natural Capital? 

In a nutshell, natural capital can be defined as the world’s stocks of natural resources, including soil, air, water and livestock. 

Natural capital aids humans in creating a range of sustainable services, typically known as ecosystem services which can help to facilitate human life, and the necessities that make makes day-to-day human life possible. 

When we cast our minds to ecosystem services, the first things that spring to mind are essential food supplies and drinking water, as well as plant materials that we use for fuel, construction and medicines. There’s also the notion of flood defences that forests provide people and the billions of tonnes of carbon that’s captured by forestation – as well as the pollination of crops by insects. In addition to this, natural capital also covers the wider spectrum of ecosystem services that we can take from sustainability, like the many cases where humans use the natural environment and wildlife for design inspiration of services. 

Speaking at the World Forum on Natural Capital, UN Goodwill Ambassador Pavan Sukhdev said: “…there are both serious risks to business, as well as significant opportunities, associated with biodiversity loss and ecosystem degradation. There is also a need for business to quantify and value its impacts on biodiversity and ecosystems, in order to manage these risks and opportunities and enable a better future for all”

How Valuable is The Role of Natural Capital?

Human capital, alongside manufactured capital and financial capital is commonly considered a major factor in financial and managerial decision-making. To any parties promoting the natural capital concept, it’s important to illustrate how the concept carries significant ramifications for the environment and various economic activity as a whole. 

The wider aim is to ensure that businesses and individuals alike not only adhere to the flow of benefits in the form of ecosystem services that the environment offers, but also its capacity to yield these benefits in the form of natural capital stocks. 

Putting a Price on Nature

The notion of placing a valuation on natural resources seems unnerving at a glance. However, there are plenty of arguments for appropriating value as a means of securing sustainability. Rosimeiry Portela, an Ecological Economist at the Moore Centre for Science argued that “we have historically ignored [nature’s] benefits and the value they provide to society. Those benefits have been taken for granted — and we are using them at a rate that the Earth cannot replenish.”

With the world’s resources becoming increasingly limited, pricing up the benefits of nature can help to apply a quantifiable value to the contribution that nature makes to the lives of billions and the economic aid that comes with it. 

Doing this can help to offer businesses more sustainable choices, like market-based conservation practices that could ultimately prove crucial in keeping nature protected from significant levels of consumption. The benefactors of natural resources extend way beyond businesses to individuals and society as a whole. By attributing a value to nature, it’s possible to focus our efforts towards accounting for nature’s benefits more effectively – ensuring that more responsibility is taken when utilising natural resources in future. This, in turn, can help to create a steady and sustainable flow of consumption over time, rather than the Wild West-style free-for-all that some natural locations are suffering from such as in the Amazon Rainforest. 

Earth Overshoot Day

(Image: PHYS)

With environmental experts agreeing that current trends in human consumption are leaving harmful ramifications for the ecosystem, there’s a compelling argument to be made that natural capital can help to introduce greater levels of sustainability to the resources being used. 

Of course, it’s worth noting that the use of natural resources has aided many to earn greater incomes which, in turn, has helped millions of people to lift themselves out of poverty. But widespread population growth and consumption have led to the introduction of the Earth Overshoot Day theory. 

With an ever-increasing demand for resources from around 7.5 billion inhabitants, burdens on land use, rising pollution, usage of woodland and wetlands along with water bodies, soil and air have left the world struggling to replenish its reserves. 

It’s become clear that humans are consuming more than it’s possible for Earth to regenerate, and an updated estimate on how quickly consumption is happening suggests that the usage of resources is only increasing year-on-year. 

Earth Overshoot Day, as demonstrated by the graph above and calculated by the non-profit Global Footprint Network, references the date when humanity’s consumption exceeds the point in which Earth can regenerate on a year-on-year basis. Recently the date has been pushed back to July 29th – which is the earliest it’s ever been set. This means that we’re consuming around 1.75 Earth’s worth of natural resources year-on-year – a wholly unsustainable total. 

How Can We Apply Value to Nature?

It’s impossible to truly put a price on nature, but the World Forum on Natural Capital believes that it’s possible to place a value on natural resources. Not only that, but there has been plenty of studies that have calculated the value of natural capital in real financial terms. For instance, trees lining the streets across California provide as much as $1bn in ecosystem services each year. This is done through atmospheric regulation and flood prevention. 

Elsewhere, Mexico’s mangrove forests have been found to bring in an extra $70 billion to the economy through storm protection yearly – as well as additional fisheries support and eco-tourism. 

Back in 2013, the TEEB for Business Coalition released a report which valued the primary production and processing sectors directly responsible for ‘environmental externality’ at a seismic $7.3 trillion USD. One year later, a Global 

In 2013, the TEEB for Business Coalition published a famous report which estimated that the world’s primary production and processing sectors are responsible for ‘environmental externality’ costs totalling a staggering US$7.3 trillion annually. A year later, a study published in the journal of Global Environmental Change revealed that the total value of the World’s ecosystem services amounted to twice as much as global aggregate GDP – as much as $124.8 trillion per year.

What Natural Capital Projects Already Exist?

Natural capital projects can be broad and far-reaching. Whether it involves creating new wetlands for greater biodiversity purposes or improving water quality in regions and local areas, or maintaining salt marshes and restoring woodlands, there are plenty of ways for organisations to get involved in championing natural capital in order to improve the environment. 

Despite natural capital projects coming in all shapes and sizes, the most common cause for businesses and organisations pertains to the reduction of carbon usage, as this is a more quantifiable and tradeable benefit due to the global carbon market. 

Oftentimes, there’s a clear business case that drives projects. For example, a nationwide supermarket chain might invest in improving the soil quality within their supply chain of farmers because it will directly impact the subsequent quality and consistency of the stocks that they’ll receive as a result. Likewise, many projects carry more local benefits that can’t be traded – such as improvements in air quality and human life. 

For instance, in Surrey, UK, stakeholders created four wetland nature reserves – helping to restore essential minerals and natural flood defences to the Redhill area alongside fresh public spaces. The move also benefited biodiversity conservation and led to new habitats for wildlife in the area while also offering new development opportunities for the leisure industry in the area. 

It’s clear to see the benefits of the above example for residents, business, health services, wildlife and the wider ecosystem as a whole. The full list of beneficiaries is too vast to list out and, significantly, the vast majority of individuals and organisations who benefitted from the natural capital project didn’t actually invest themselves. 

Why We Should Invest in Natural Capital

By investing in natural capital, it’s possible to deliver or contribute to the provision of infrastructure services – helping to reduce the amount and cost of conventional ‘grey’ infrastructure required while providing wider social and environmental benefits along the way. These natural climate solutions can help to significantly mitigate the seismic task of combating global warming, and keeping the world within its 2-degree target by 2030. 

Services provided by ecosystems around the world are fundamentally crucial to supply chains and business models alike, helping to produce sustainable raw materials that are needed within the world of manufacturing and wider industries. 

The natural capital asset class also has qualities that can make it a wholly attractive investment proposition for stakeholders. There’s lower correlation towards other traditional asset classes because the state of natural resources are generally more detached from macroeconomic developments – this helps to offer a greater level of diversification when it comes to building investment portfolios. 

Furthermore, it means that when other assets within a portfolio are performing badly due to economic downturns or inflation, your natural capital investments could find themselves better protected from market negativity. 

Another perk associated with natural capital investing is that they carry much lower risk levels at the construction stage than the vast majority of other infrastructure. From the planting of woodland to catchment management, conservation groups around the world have developed a comprehensive understanding of the processes involved in bringing ideas into reality. 

Of course, investments in natural capital will be imperative in meeting the UN’s Sustainable Development Goals, which various nations around the world are committed to. It’s through the realisation of natural capital investments that the world can achieve the levels of sustainability that it needs. 

Weighing Up The Risks of Natural Capital

Sadly, there are still some barriers associated with natural capital. One of the most significant drawbacks relates to issues in revenue streams

If, say, an organisation were to take out a loan to pay for a natural capital project, how exactly could they pay it back? How would an investor looking to make a profit on their natural capital investments make money directly from planting woodland?

The whole notion of natural capital hinges on the realisation that nature can carry tangible value for other industries. Significantly, healthcare services can experience lower outgoings as a result of more natural and healthy developments in a local area. While other benefits like greater levels of wellbeing can lead to money saved elsewhere in a more indirect manner. 

Natural capital approaches have sought to bridge the gap between investment and ROI by creating correlations between resources and the benefits they’ll produce. For example, the Office for National Statistics in the UK valued the removal of pollution and carbon dioxide by woodland at £1.8 billion back in 2015. This value was priced up by taking into consideration savings on health costs associated with cardiovascular diseases and the death avoided as a result. 

While costs may not currently guarantee revenue at the moment, it may soon be possible for insurance companies to deliver a form of revenue stream based on ‘avoided costs’. 

There’s also a key issue appropriated to scale and liquidity. Currently, natural capital projects are relatively small in scale and take place on a more local level as opposed to regional or national levels. However, institutional investors typically favour larger scale projects because of the associated returns. 

Because these types of projects are typically run by smaller conservation groups, there’s often little that can be offered in the way of collateral by organisations – leaving them with limited access to debt financing. 

Finally, because natural capital infrastructure is a wholly illiquid asset for investors, there can be limits in place over the stakes that investors can take on such assets – making projects less appealing overall. 

Solutions For The Future of Natural Capital

While there are plenty of obstacles in the road ahead for natural capital, there are lots of solutions that can be supported either through the medium of government intervention or fresh innovation opportunities. 

One of the biggest opportunities for the world of natural capital comes in the form of corporate action. Because the private sector owns much of the world’s natural capital and businesses are arguably the largest benefactors of natural capital due to their reliance on supply chains and natural resources, ramping up corporate involvement in the development of natural solutions could help to bring on new investment opportunities

Greater wealth of information can help in highlighting the operational risks and opportunities attached to the usage of natural resource management and how it will affect natural capital investment may lead to more potential for investors too. 

With more robust data available, investors can find better transparency that helps them to better understand the environmental impacts of their investments and the risks to their portfolios. Clearly tagging investments that carry natural capital benefits can help to establish more useful parallels between natural regeneration and financial performance. 

Naturally, one of the greatest potential strengths of natural capital projects is the ability for investors to collaborate to overcome the silos of expertise and build more comprehensive links between finance, conservation, stakeholders and developers. 

As the world continues to gravitate towards an environmental emergency, the necessity of natural capital is more profound than ever. By calculating a consistent value to attach to natural benefits of conservation and sustainable developments, investors could play a key role in helping to build towards a brighter future.

Written by Daglar Cizmeci
Investor, Founder and CEO with over 20 years’ industry experience in aviation, logistics, finance and tech. Chairman at ACT Airlines, myTechnic and Mesmerise VR. CEO at Red Carpet Capital and Eastern Harmony. Co-Founder of Marsfields, ARQ and Repeat App.

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