The new CEO of Climate Asset Management, Martin Berg, tells Thomas Cox about the challenge of scaling natural capital.
Martin Berg took over from Christof Kutscher as CEO last week at the firm trying to scale natural capital investments.
Berg has been with Climate Asset Management since its launch in 2020, stepping into the role from his previous position as chief investment officer of nature-based carbon strategy.
He helped establish the company on its mission to catalyse institutional investment into projects via its nature and carbon funds, in emerging and developed markets. Climate Asset Management has so far attracted $650 million, split equally across the two funds.
Nature-related initiatives that sequester carbon have "fascinated" Berg since the beginning of his career as a student at the UN Framework Convention on Climate Change, he tells Environmental Finance. His first formal role was at the Organisation for Economic Co-operation and Development, working with the EU Emissions Trading Scheme, prior to moving into carbon finance at Merrill Lynch before a position at European Investment Bank (EIB).
As EIB's head of environmental funds and climate finance policy unit, he supervised the development of the Natural Capital Financing Facility, a joint EIB and European Commission initiative.
"Back then, we were looking at different ideas for how we could support forestry and agricultural initiatives with direct investments. With that, we moved into natural capital projects," he said. The EIB-EC Natural Capital Financing Facility provides financing of up to €15 million ($16 million) per biodiversity-positive project.
But Berg wants to go bigger. Climate Asset Management has targeted $1 billion for the nature strategy and $600 million in the carbon fund. It also manages Apple's $200 million Restore Fund, which straddles both nature and carbon.
Berg's priorities are to raise capital while implementing projects for each strategy, he says. "We were one of the first asset managers that identified this as an investment theme for mainstream investors, and that's something we want to build on. We want to maintain the lead.
"There was an impact community around natural capital that was very small and tended to not be scalable. The whole idea of Climate Asset Management was to lift it out of that and say: 'Look, this can actually absorb larger investments from real institutional capital and corporates.'"
The pollination process
Part of the expansion includes bigger offices in London, with the company moving its headquarters from near Bond Street to the district of Fitzrovia, on a floor above Pollination, six months ago. Climate Asset Management has around 30 people globally.
Investment and advisory firm Pollination and HSBC have equal board representation, but Climate Asset Management emphasised its own identity when it cut "HSBC Pollination" from its name in 2021. "Everybody that we met said: 'That's quite a mouthful'", Berg says of the former name, HSBC Pollination Climate Asset Management. "And then the shareholders said: 'Perhaps it's time to shorten this'.
"We want to build our own brand identity. We want to be recognised as an independent leader on natural capital. Having said that, both shareholders are playing a big role. HSBC is helping us also reach markets where we would otherwise have difficulties, and Pollination is very much involved in strategic development and thought leadership."
Nature fund
The natural capital fund has won investments from nine insurers including German company Gothaer Asset Management, alongside HSBC, Berg says.
The strategy is attractive to insurers as it has long liabilities, of at least 15 years, linked to inflation, he says. In addition, "many" insurance companies are looking for sustainable opportunities where they can invest outside of renewables, he says.
Furthermore, the fund can help French investors fulfil their obligations under Article 29, he says. This legislation requires financial institutions to disclose their biodiversity-related risks and strategies, or a plan for how they will do so in future.
Climate Asset Management told Environmental Finance in 2020 it wanted to "mainstream" natural capital. "It probably hasn't become mainstream yet," Berg admits.
"We believe with more disclosure requirements, especially with the Taskforce on Nature-related Financial Disclosures (TNFD), investors will move from the risk assessment to the opportunity side." TNFD plans to release its final recommendations in September.
"There was a lot of momentum at the end of last year with COP15." But many investors are struggling with how to allocate natural capital as an asset class, he says. "Where does this sit? Is it impact, real assets, forestry or agriculture? It's probably fair to say that [natural capital] is still an emerging theme for many investors."
The macroeconomic environment is more challenging than when the company launched, he says. Nevertheless, "we are very confident that we will raise more money".
The Natural Capital Strategy is focused on the US, Europe and Australia. The fund buys land with the aim of managing it more sustainably through forestry or regenerative agricultural practices before selling it.
"We are looking for opportunity, usually for land use or landscape change. We're [looking] to increase both the yield but also the impact on the ground. One way of achieving this is to aggregate smaller parcels of land into larger projects."
For example, the fund is interested in farming almonds in Europe, where they are usually imported from California, to reduce the distance they need to journey, Berg says.
Finding the right forestry and agriculture projects is "always a challenge", as is finding the right implementation partners, he says. Axa Investment Managers Alts said this month that the "biggest bottleneck" for scaling natural capital projects is hiring local experts.
Aside from forestry and agriculture, a minority of the fund is focused on 'environmental asset projects', he says. "For example, biodiversity credits or offsets, or conservation easement payments. These rely much more heavily on payment for ecosystem services. That's one area where we're really trying to show some innovation."
These biodiversity credits could be based in a sustainable agricultural project that has biodiversity benefits, he says. Biodiversity credits are a way of improving the biodiversity profile of an area through sustainable land practices.
"It's still very early days. It remains to be seen whether we can build it in scale." The fund has a few projects where the credits could play a role, but none have yet been completed, he says.
"We are now in the due diligence [phase]. We're seeing a large number of different opportunities in that space. In the past, the challenge was that it's very difficult to achieve a financial return from biodiversity unless it's a governmental payment or an offset scheme." Biodiversity offsets differ from credits in that they aim to compensate for adverse biodiversity impacts.
"The key challenge at the moment is scale, and business model." The fund gathers its own biodiversity data in house, with the type of information depending on the project.
Carbon Fund
The carbon fund has six corporate investors, as well as HSBC, including US company Carrier Global.
The emerging market-focused strategy has scaled back its target for this year of $600 million from an initial $2 billion – a figure that was pinpointed "very early on" in 2020 without a deadline, Berg says.
"The $2 billion target was when we had the initial discussions about the long-term vision over a much longer time period." The higher goal could be "something for the future", he says.
"The key question is how do you demonstrate quality? It used to be that you could just say: 'We're using standards such as Verra or Gold Standard. What we see now is that you have to move beyond that and you have to go the extra mile and you have to demonstrate that you have [in house] additional measurements, additional impact assessments to demonstrate that these are high-quality projects."