UK investors shift towards nature-focused, profit-oriented financial strategies for a second time
In a significant shift towards sustainable finance, UK institutional investors are increasingly adopting nature-positive investing, driven by regulatory pressures, emerging market mechanisms, and the recognition of the financial materiality of nature risks.
At a recent Nature Positive Investment Forum, Drew Henley-Lock, a partner at Lane Clark & Peacock, discussed this trend. His comments were echoed by Adam Gillet, senior investment manager at UK DB fund Railpen, who emphasised the need for investments to have a certain ticket size and move the needle in nature-positive investing.
One of the organisations leading this change is Nest, which has begun embracing sustainable forestry as part of nature-positive investing. Oxfordshire Pension Fund is also branching out into nature investment, suggesting a broader trend among pension funds.
Josephine Richardson, head of research at the Anthropocene Fixed Income Institute, advocates for a holistic approach to nature investing. She argues that investors can achieve better returns and use the cost of capital as a lever for driving change in nature investing. Richardson suggests considering nature-related risks across public markets portfolios, particularly in fixed income investments.
The growing emphasis on nature-positive investing is reflected in the increasing number of UK pension funds with net zero targets. According to the Pensions and Lifetime Savings Association (PLSA), 65% of UK pension funds have net zero targets in place. However, only one in five currently consider nature a key concern, despite more than 90% viewing climate as a priority.
Regulatory pressures and frameworks play a crucial role in this shift. The Taskforce on Nature-related Financial Disclosures (TNFD) emphasises the financial risks linked to nature degradation, pushing investors to account for these in their decisions. While TNFD reporting is not mandatory for larger UK pension funds, unlike TCFD reporting, there are growing regulatory pressures encouraging investors to monitor nature-related risks.
Government funding and collaboration are also driving this trend. Funds like Scotland’s Facility for Investment Ready Nature in Scotland (FIRNS) channel public and private investment into natural capital projects. England’s Natural Environment Investment Readiness Fund has supported many projects, some of which have secured further investment through environmental unit sales, indicating growing market viability.
However, investors face challenges in this new landscape. Evolving regulatory landscapes, difficulties in quantifying nature-related financial risks, and complexity in natural capital asset governance are some of the hurdles. The delay in comprehensive regulatory disclosures such as those advocated by TNFD adds to uncertainty.
Despite these challenges, nature-positive investments offer significant benefits. They generate environmental, social, and economic gains — improving air, soil, water quality, enhancing biodiversity, and potentially providing sustainable financial returns. This aligns institutional portfolios with increasing ESG expectations and the UK’s net-zero and environmental restoration goals.
In conclusion, UK institutional investors are increasingly embracing nature-positive investing due to mounting regulatory emphasis on nature risk disclosures, government-backed funding mechanisms fostering private investment readiness, and growing recognition of the financial and societal returns from protecting and restoring natural capital. However, challenges remain around risk visibility, standardization, and complex governance of natural assets. These dynamics are shaping a maturing market for sustainable investments beyond traditional climate-focused ESG frameworks.
- Josephine Richardson, head of research at the Anthropocene Fixed Income Institute, suggests that investors could achieve better returns by considering nature-related risks across public market portfolios, particularly in fixed income investments, and using the cost of capital as a lever for driving change in nature investing.
- In their efforts to align institutional portfolios with increasing ESG expectations and the UK's net-zero and environmental restoration goals, nature-positive investments offer significant benefits such as improving air, soil, and water quality, enhancing biodiversity, and potentially providing sustainable financial returns.
