Institutional Investors Embrace Nature-Based Investments Amid Growing Challenges
Investment in the natural sector remains resilient in the face of political turbulence, according to a recent report
A significant shift is underway in the world of institutional investing, as more and more investors are turning their attention to nature-based solutions (NBS) to boost their portfolios. According to a recent study, 44% of Australian investors are planning to form new partnerships to increase their nature investments, with only 0.2% of those surveyed not planning on boosting their allocation.
The survey, which polled 500 institutional investors from the UK, US, Australia, Singapore, and Japan, with assets under management ranging from $10bn to $500bn, reveals a growing interest in NBS. The study found that 96% of investors are concerned about the politicisation of ESG (Environmental, Social, and Governance) issues, but 99% are planning to increase their nature-based investments.
The increased interest in NBS is driven by a recognition of their potential as both a value driver and a moral imperative, especially in the face of global crises such as climate change and biodiversity loss. Institutional investors are targeting natural capital assets like farmland, timberland, and ecosystem restoration projects, which promise diversified cash flows and risk mitigation. These assets are increasingly seen as complementary to traditional asset classes, offering stable returns and inflation hedging.
However, despite the progress being made, global underinvestment in nature remains stark. Many NBS markets, such as those for carbon credits, biodiversity offsets, and ecosystem services, are still nascent, lacking liquidity, standardization, and clear pricing mechanisms. This hinders large-scale capital deployment and poses challenges for investors in assessing and verifying the environmental and financial performance of NBS projects.
Assessing and verifying the performance of NBS projects is complex due to inconsistent methodologies, gaps in biodiversity data, and difficulties in attributing impacts. This makes risk assessment and benchmarking challenging for investors. Additionally, the policy landscape for nature-based investments is evolving but fragmented. Uncertainty around long-term regulatory support, land tenure issues, and the risk of changing carbon market rules can deter institutional participation.
To overcome these barriers, collaboration among governments, investors, and civil society will be key. Building credible, scalable, and investable markets for natural capital will require the development of proven, bankable investment models at scale. Advances in data, monitoring, and technology will also play a crucial role in making NBS projects more measurable and bankable, supporting due diligence, aggregation of risks, and impact reporting.
Investors are also turning to tools such as nature-linked debt, blended finance, and real asset funds, especially in agriculture and infrastructure. However, investors still face practical challenges like a lack of investable opportunities, difficulty in measuring impact, and limited internal expertise.
A new study by Pollination, a climate change investment and advisory firm, finds that institutional investors are increasing their exposure to nature investments. However, structural barriers such as a lack of returns, capability, and access to opportunities remain for nature-based investments. Investors in Singapore are focusing on bringing in experts to boost nature investments, while investors in the UK are planning to buy specialist investment firms to increase their nature exposure.
In conclusion, nature-based investments are transitioning from niche to mainstream as institutional investors recognize their dual potential for financial returns and planetary impact. However, substantial barriers remain, especially around market development, data quality, and policy stability. Overcoming these will require collaboration and innovation to build a sustainable and profitable future for nature and finance.
- The growing interest in nature-based solutions (NBS) among institutional investors is driven by their potential as both a value driver and a moral imperative, particularly in addressing global crises such as climate change and biodiversity loss.
- To boost their nature investments, 44% of Australian investors are planning to form new partnerships, according to a study that polled institutional investors from various countries
- Institutional investors are focusing on natural capital assets like farmland, timberland, and ecosystem restoration projects, which promise diversified cash flows and risk mitigation.
- Overcoming barriers to nature-based investments will require collaboration among governments, investors, and civil society, as well as advancements in data, monitoring, and technology for more measurable and bankable projects.