Peter Harrison: why we need to make nature investable – Insurance Asset Management

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Because we don’t quantify nature’s benefits, we completely neglect them. Johan Rockström, the Swedish climatologist with whom I recently shared a platform during London Climate Action Week, reiterated this point – that without nature, we would have already crossed the 1.5 degree threshold.

There’s a well-known saying in management that “what gets measured gets managed”: cliché, perhaps – but frighteningly accurate in the case of nature.

The world is waking up to the fact that our global economy must become not only net zero, but also positive for nature. Heat waves and other extreme weather events remind us of the fragility of our natural environment. It means knowing what nature is worth.

It took us 15 to 20 years for the language of carbon – and carbon disclosures – to become an intelligible feature of corporate reporting. Today, it is practically impossible to obtain good data on nature. But we are not 15-20 years old.

More than half of our global GDP depends on the natural world. Protecting and preserving nature can greatly contribute to climate change mitigation efforts. And there is also a social imperative: unless natural climate solutions create positive social impacts for local citizens and communities living on the land, they will not be sustainable. Investors need to associate broadly and deeply.

The response must be vigorous. As a company, we learned that making meaningful changes to diversity and inclusion would mean a revolution in our culture. The same overhaul is required in our approach to nature.

Asset managers in particular need to fundamentally change the way they operate.

At Schroders, we take a three-pronged approach. We are committed to changing behavior towards nature in every business in which we invest; we will create new nature-based investment products and use our solutions business to channel capital into new and existing funds. In doing so, we help our clients make a positive impact while diversifying the sources of their returns.

As with net zero, the role of the financial sector in efforts to halt and reverse the loss of nature is both clear and essential. Following the recent postponement of the UN Biodiversity Summit, COP15, to December this year, we must use these months to bring the financial sector more to the table. There’s no time to lose.

Action on nature starts with action to end deforestation. The IPCC estimates that “agriculture, forestry and other land uses” contribute 22% of global emissions, half of which (11%) comes from deforestation and land conversion.

This means getting correct measurements and data. At Schroders, we have developed a Deforestation Dashboard to examine the exposure and management of deforestation risk for businesses. And we have made natural capital and biodiversity a priority for active engagement with business.

Deforestation is increasingly an investment risk, but nature is also an important investment opportunity. Natural climate solutions are efforts to conserve, restore or enhance ecosystems to absorb and store carbon from the atmosphere. The analysis estimated that these solutions have the potential to deliver about a third of the climate action needed to achieve the goals of the Paris Agreement and avoid the worst effects of climate change.

One statistic clearly illustrates the problem: they may be a third of the solution, but today natural climate solutions receive less than 3% of all global climate finance. How do we close this gap?

I think we can create a tipping point and accelerate investments.

The investment case is getting stronger day by day, rooted in the price of carbon credits. The demand for high quality carbon offsets is expected to grow exponentially, driven by national net zero ambitions as well as major private sector commitments. This opportunity is underpinned by increasingly sophisticated data and tools that allow us to begin valuing the world’s natural assets.

While the supply of projects remains a challenge, the growing demand and activity in this space is creating new opportunities to institutionalize the financing, structuring and development of projects.

Schroders is delighted to partner with Conservation International to create one of the first investment managers dedicated to impacting natural capital in Singapore. Called Akaria Natural Capital, the company aims to achieve the scale and expertise needed to scale with impact – and bring new ideas on how to solve some of the funding bottlenecks.

Addressing the social imperatives around action for nature is fundamental to this partnership, to ensure that these investments benefit people, as well as places.

What is exciting is the investment industry’s growing collective momentum on this program. There are now $21 billion in assets under management in natural climate solutions, doubling over the past five years. The Natural Capital Investment Alliance, launched by the Prince of Wales at COP26, is an important step in this evolution. The 15 members of this group all have, or will have, investment vehicles that help channel capital into nature-based projects.

The energy transition is complex. The transition to a nature-friendly world will be devilishly difficult. But it is imperative, urgent, and we must make it investable. This is why, at the dawn of the second half of the year, the financial sector must join the chorus of players who are mobilizing to act on nature.

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