Oliver Withers, biodiversity lead within the global sustainability team at Credit Suisse, says that the case for nature and biodiversity-based investment is pretty straightforward.
“We talk a lot about the need to invest in carbon-capture technology, but that technology already exists, it’s called trees and mangroves,” he points out.
Nature and biodiversity-focused funds lag behind their climate peers in attracting capital flows. Yet they represent a big opportunity to accelerate global decarbonization.
The Paulson Institute’s Financing Nature report highlights an $800 billion funding gap in nature-based solutions (NBS), which constitute a core element of global decarbonization tools.
NBS investments are overwhelmingly driven by public funds, with only 14% of total flows coming from private finance, according to the UNEP. Meanwhile, the latest Capgemini World Wealth Report highlights an annual growth in the high net-worth population of 7.8% in 2021 as global wealth increased by 8%.
Could that private wealth be the key to closing the biodiversity funding gap?
It seems that the wealthy and ultra-wealthy are engaging with sustainable investment trends, while nature-based solutions resonate well with younger private banking customers.
The Capgemini report highlights that 78% of UHNWIs and 81% of HNWIs under the age of 40 are likely to request environmental, social and governance scores from their wealth managers. Some 28% of HNWI clients ask for theme-based investment products that support specific causes.
“The demographics have changed” says AJ Singh, sustainable investment strategist at Quintet Private Bank. “Millennials who were in their 20s when these conversations began are now in their 30s, and some are in charge of the family wealth.”
Biodiversity as a bonus
The myth that sustainable portfolios sacrifice returns has largely been debunked in public markets, but for private clients concerned with wealth preservation, the return on investment in impact portfolios does not always align with their risk appetite.
Managers have been able to mitigate this by bringing nature and biodiversity ventures as add-ons to mainstream investment vehicles.
Most NBS available to private wealth are set up as ESG funds with an investment universe much larger than 'nature' and are paired with a conservation or plantation project to reach net-positive.
Quintet Earth for example, is a €277 million fund investing in green bonds and low-carbon equities, and has a forestry project in Nicaragua that offsets remaining emissions and brings the fund to climate neutral.
Similarly, large banking institutions are well versed in the establishment of charities and foundations to streamline client donations.
Credit Suisse’s SFr150 million ($152 million) umbrella foundations and UBS's Optimus Foundation enable the banks to create sub-foundations for clients to cover themes such as the protection of natural capital – and the banks have the resources to measure the long-term impact of projects.
These projects sit alongside traditional wealth management, however, not within.
“We need to differentiate between investing in NBS to achieve returns and NBS funds that have a pure philanthropic strategy for net-zero requirements” says Catherine Hampton, sustainable investment lead at Cazenove Capital, part of Schroders Wealth Management.
Accessibility challenges
The challenge then falls on wealth managers to source investment opportunities with both a net-positive impact on ecosystems and attractive returns.
This is straightforward enough on the equities side, where thematic funds identify companies contributing to reducing biodiversity loss in sub-sectors such as water management or agritech and biomaterials.
HSBC Global Private Banking recently launched a global biodiversity discretionary strategy with Lombard Odier for its HNW professional clients.
But, typically, NBS available to wealth clients are in private equity or listed closed-end fund form, which limits the investable universe for some management firms.
We would like to see more investment trust structures or listed vehicles available to offer to our smaller clients who can’t tolerate the illiquidity of private asset
Not every client can deal with the five- to 15-year lock-up periods of private equity funds however, and managers dealing with a range of wealth profiles need more options.
“We have to cater to the risk and liquidity profiles of each client,” adds Hampton. "We would like to see more investment trust structures or listed vehicles available to offer to our smaller clients who can’t tolerate the illiquidity of private asset."
These structures are more likely to be found in sectors where both biodiversity loss is well reported and where the market is mature enough to offer investable solutions.
“Forestry and agriculture are the biggest driver of biodiversity loss,” says Withers. "We need to have robust solutions for those very material sectors."
Carbon credit markets
If private wealth is to have a role in financing nature, individual investors need to be able engage with existing structures, not least with the carbon-credit and the biodiversity-credit markets.
In the UK, soon-to-be mandatory biodiversity net gain (BNG) will allow investors to find pockets of opportunities.
According to one wealth manager: “A few pitch decks have come across our radar that target nature-based solutions, particularly opportunities to transform farmland into wild-life nature and for selling carbon credits”.
Innovative solutions are slowly materialising, but again structural uncertainties make it difficult for wealth managers to develop solutions for their clients. They want more transparency on three things: who the off-takers are, the setting of prices and what are trading mechanisms.
“We haven’t yet been able to get comfortable with investing in the voluntary carbon-credit market to achieve returns, but it is an area that we are monitoring,” says Hampton.
