Investing in nature to address climate change, support biodiversity, and protect ocean health—and more—is expected to reach record levels this year in response to more regulation and market demand, according to Cambridge Associates, a global investment firm.
Still, the amount of private capital invested to support natural systems will fall far short of what’s needed, according to the annual “State of Finance for Nature” report published in December from the United Nations Environment Programme.
A big reason is that nearly US$7 trillion in public and private finance was directed to companies and economic activities in 2022 that caused direct harm to nature, while only US$200 billion was directed to so-called nature-based solutions, or NbS—investments that protect, conserve, restore, or engage in the sustainable management of land and water ecosystems, as defined by the United National Environment Assembly 5, or UNEA5, the report said.
“Without a big turnaround on nature-negative finance flows, increased finance for NbS will have limited impact,” it said.
But the report also said that the misalignment “represents a massive opportunity to turn around private and public finance flows” to meet targets set by the United Nations Rio Conventions on climate change, desertification, and biodiversity loss.
The conventions aim to limit climate change to 1.5 degree Celsius above pre-industrial levels, protect 30% of the earth’s land and seas by 2030, and to reach “land degradation neutrality” by 2030. Reaching those goals will require more than double the amount of current levels of nature-based investing by 2025, to US$436 billion, and nearly triple today’s levels to US$542 billion by 2030, the report said.
Most of the US$200 billion invested in NbS today is by governments, but private investors contributed US$35 billion—including US$4.6 billion via impact investing funds and US$3.9 billion via philanthropy. The largest source of private finance was in the form of biodiversity offsets and credits. [An offset is designed to compensate for biodiversity loss, while a credit is the asset created to restore it].
Many wealthy individuals and families concerned about climate change and the environment so far have focused their investment dollars on climate solutions and innovations in technology and infrastructure, or in technologies supporting food and water efficiency, says Liqian Ma, head of sustainable investment at Cambridge Associates.
But “increasingly there is growing awareness that nature provides a lot of gifts and solutions if we prudently and responsibly manage nature-based assets,” Ma says.
Investments can be made, for instance, in sustainable forestry and sustainable agriculture—which can help sequester carbon—in addition to wetland mitigation, conservation, and ecosystem services.
“Those areas are not in the mainstream, but they are additional tools for investors,” Ma says.
Finance Earth, a London-based social enterprise, is among the organizations working to make these tools more mainstream by creating a wider array of nature-based solutions in addition to related investment vehicles.
Finance Earth groups nature-based solutions into six themes: agriculture, forestry, freshwater, marine/coastal, peatland, and species protection. Supporting many of these areas are an array of so-called ecosystem services, or benefits that nature provides such as absorbing carbon dioxide, boosting biodiversity, and providing nutrients, says Rich Fitton, director of Finance Earth.
Each of these ecosystem services are behind existing and emerging markets. Carbon-related disclosure requirements (at various stages of approval in the U.S. and elsewhere) have long spurred demand for carbon markets, the most mature of these markets.
Cambridge Associates, for instance, works with dedicated asset managers who have been approved by the California Air Resources Board to buy carbon credits, Ma says.
In its annual investment outlook, the firm said California’s carbon credits should outperform global stocks this year as the board is expected to reduce the supply of available credits to meet the state’s emission reduction targets. The value of these credits is expected to rise as the supply drops.
In September, the G20 Task Force on Nature-Related Financial Disclosures released recommendations (similar to those put forward several years ago by the Task Force for Carbon-related Financial Disclosure) that provide guidance for how companies can look across their supply chains to assess their impact on nature, water, and biodiversity “and then start to understand what the nature-related risks are for their business,” Fitton says.
The recommendations will continue to spur already thriving biodiversity markets, which exist in more than 100 countries including the U.S. In the U.K., a new rule called “Biodiversity Net Gain” went into effect this month requiring developers to produce a 10% net gain in biodiversity for every project they create.
Though developers can plant trees on land they’ve developed for housing, for example, they also will likely need to buy biodiversity credits from an environmental nonprofit or wildlife trust to replace and add to the biodiversity that was lost, Fitton says.
This new compliance market for biodiversity offsets could reach about £300 million (US$382 million) in size, he says.
Finance Earth and Federated Hermes are currently raising funds for a U.K. Nature Impact Fund that is likely to invest in those offsets in addition to other nature-based solutions, including voluntary offset markets for biodiverse woodlands and for peatlands restoration.
The fund was seeded with £30 million from the U.K. Department for Environment, Food and Rural Affairs—money that is designed to absorb first losses, should that be needed. The government investment gives mainstream investors more security to step into a relatively new sector, Fitton says.
“We need the public sector and philanthropy to take a bit more downside risk,” he says. That way Finance Earth can tell mainstream investors “look, I know you haven’t invested in nature directly before, but we are pretty confident we’ve got commercial-level returns we can generate, and we’ve got this public sector [entity] who’s endorsing the fund and taking more risk,” Fitton says.
Since December 2022, when 188 government representatives attending the UN Biodiversity Conference in Montreal agreed to address biodiversity loss, restore ecosystems, and protect indigenous rights, several asset managers began “creating new strategies or refining strategies to be more nature or biodiversity focused,” Ma says.
He cautioned, however, that some asset managers are more authentic about it than others.
“Some have taken it seriously to hire scientists to do this properly and make sure that it’s not just a greenwashing or impact-washing exercise,” Ma says. “We’re starting to see some of those strategies come to market and, in terms of actual decisions and deployments, that’s why we think this year we’ll see a boost.”
Fitton has noticed, too, that institutional investors are hiring experts in natural capital, recognizing that it’s a separate asset class that requires expertise.
“When that starts happening across the board then meaningful amounts of money will move,” he says. “There’s lots of projects there, there’s lots of things to invest in and there’ll be more and more projects to invest in as more of these markets become more and more mature.”
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Report by the San Francisco Fed shows small increase in premiums for properties further away from the sites of recent fires
Wildfires in California have grown more frequent and more catastrophic in recent years, and that’s beginning to reflect in home values, according to a report by the San Francisco Fed released Monday.
The effect on home values has grown over time, and does not appear to be offset by access to insurance. However, “being farther from past fires is associated with a boost in home value of about 2% for homes of average value,” the report said.
In the decade between 2010 and 2020, wildfires lashed 715,000 acres per year on average in California, 81% more than the 1990s. At the same time, the fires destroyed more than 10 times as many structures, with over 4,000 per year damaged by fire in the 2010s, compared with 355 in the 1990s, according to data from the United States Department of Agriculture cited by the report.
That was due in part to a number of particularly large and destructive fires in 2017 and 2018, such as the Camp and Tubbs fires, as well the number of homes built in areas vulnerable to wildfires, per the USDA account.
The Camp fire in 2018 was the most damaging in California by a wide margin, destroying over 18,000 structures, though it wasn’t even in the top 20 of the state’s largest fires by acreage. The Mendocino Complex fire earlier that same year was the largest ever at the time, in terms of area, but has since been eclipsed by even larger fires in 2020 and 2021.
As the threat of wildfires becomes more prevalent, the downward effect on home values has increased. The study compared how wildfires impacted home values before and after 2017, and found that in the latter period studied—from 2018 and 2021—homes farther from a recent wildfire earned a premium of roughly $15,000 to $20,000 over similar homes, about $10,000 more than prior to 2017.
The effect was especially pronounced in the mountainous areas around Los Angeles and the Sierra Nevada mountains, since they were closer to where wildfires burned, per the report.
The study also checked whether insurance was enough to offset the hit to values, but found its effect negligible. That was true for both public and private insurance options, even though private options provide broader coverage than the state’s FAIR Plan, which acts as an insurer of last resort and provides coverage for the structure only, not its contents or other types of damages covered by typical homeowners insurance.
“While having insurance can help mitigate some of the costs associated with fire episodes, our results suggest that insurance does little to improve the adverse effects on property values,” the report said.
While wildfires affect homes across the spectrum of values, many luxury homes in California tend to be located in areas particularly vulnerable to the threat of fire.
“From my experience, the high-end homes tend to be up in the hills,” said Ari Weintrub, a real estate agent with Sotheby’s in Los Angeles. “It’s up and removed from down below.”
That puts them in exposed, vegetated areas where brush or forest fires are a hazard, he said.
While the effect of wildfire risk on home values is minimal for now, it could grow over time, the report warns. “This pattern may become stronger in years to come if residential construction continues to expand into areas with higher fire risk and if trends in wildfire severity continue.”