In the face of climate change, biodiversity loss, and mounting environmental degradation, the global financial system will need to undergo a paradigm shift, writes David Brand, founder of the global investment manager of nature-based real assets and natural capital strategies New Forests.
Investors, asset managers, governments, and regulators are is linked to the health of the natural world. In response, natural capital – especially forests, agricultural land, and coastal and aquatic ecosystems – is starting to be considered as a distinct and investable asset class. This new asset class holds the promise of delivering both competitive financial returns and measurable environmental and social impacts.
Historically, major economic systems have treated nature as a free and unlimited resource, external to financial calculations. In the 1990s, however, ecological economists popularised the term 'natural capital' by extending economic theories of capital to nature and its associated environmental goods and services. A controversial paper published at the time, on the 'Value of the World's Ecosystem Services and Natural Capital', argued that the world's ecosystems provided approximately $33 trillion per annum in economic benefits to human society, roughly equal to the Gross World Product (GWP) at the time. Today, over half of
global GDP, approximately $44 trillion, is said to be moderately or highly dependent on nature and its ecosystem services.
While the concept of natural capital was initially criticised by both environmentalists and corporates, there has been continued pressure and momentum over the past three decades to reconsider how economic systems are designed, measured, and operating beyond solely financial outcomes. This article highlights five drivers of natural capital and why investing in nature is no longer optional, it is a fiduciary responsibility – and one of the most promising opportunities in finance.
Drivers of the rise of natural capital investment
Natural capital assets can take many forms. They include sustainable forestry, regenerative farming, biodiversity conservation areas, and carbon sequestration projects (such as reforestation or peat restoration). These assets not only generate income through sustainable land use, product sales, or ecosystem services but also create positive environmental externalities, such as increased carbon storage, improved water quality, soil restoration, and enhanced biodiversity. Several intersecting trends are propelling the rise of natural capital as a mainstream asset class, including the integration of climate and nature risk into financial decision-making, the growth and expansion of nature-based carbon markets, increasing regulatory and policy support, and ongoing innovations in finance.
1. Integrating climate and nature risk as financial risks
Institutional investors increasingly recognise nature-related risks as material financial risks. The Taskforce on Nature-related Financial Disclosures (TNFD) – launched in 2021 and built on the momentum of the Taskforce on Climate-related Financial Disclosures (TCFD) – encourages companies and investors to disclose how nature risks affect their portfolios. The TNFD, an international framework for corporate and financial institution action, operates within an ecosystem of comparable frameworks (e.g., Science-Based Targets Initiative), corporate reporting standards (e.g., Global Reporting Initiative, International Financial Reporting Standards), sustainability disclosures and accounting frameworks (e.g., International Sustainability Standards Board (ISSB), European Corporate Sustainability Reporting Directive), and ratings agencies (e.g., MSCI and Morningstar). New Forests was an early signatory of the TNFD, and in 2020, its portfolio company Forico produced Australia's first natural capital report, placing a dollar value on the ecological assets on Forico's Tasmanian estate.
2. Nature-based carbon markets
The voluntary carbon market (VCM) has and continues to grow as companies pursue net-zero goals. Likewise, several regulated carbon markets operate around the world, including in the European Union, Australia, and North America, where verified carbon credits are monetisable and can trade at commercially attractive prices.
The shift toward natural capital investing represents a reimagining of capitalism – one that recognises that human and economic wellbeing depends on thriving ecosystems
In the US, for example, these carbon credits have the potential to add 200 to 400 basis points to the overall return of the portfolio. Carbon credit projects can also provide regular income to local and indigenous communities. Natural climate solutions play a critical role in these markets and can make an important contribution to global decarbonisation pathways.
3. Regulatory and policy support
Increasingly, governments are establishing and mandating nature-positive frameworks. The Kunming-Montreal Global Biodiversity Framework, adopted at the United Nations' Convention on Biological Diversity COP15 in 2022, called for redirecting $500 billion in annual harmful subsidies toward biodiversity-positive investments. Public finance is also being deployed to de-risk private capital, particularly in emerging markets. Brazil, for example, plans to raise $125 billion for the Tropical Forest Forever Facility (TFFF), as a solution for conserving approximately 1 billion hectares of tropical forests worldwide.
4. Innovative financial instruments
New structures – such as natural capital funds, blended finance models, biodiversity credits, conservation finance, and sustainability-linked bonds – are expanding access to the asset class. For example, New Forests' Africa strategy, which has been developed with four impact targets, one of which is to increase the area (in hectares) of quality of habitat protected or restored by 14%. A portion of New Forests' remuneration is tied to achieving these four impact outcomes across biodiversity, climate change, gender diversity, and communities and livelihoods.
5. Performance and returns
Natural capital assets are proving that achieving environmental outcomes is not at the expense of financial returns.
- Sustainable forestry has the potential to deliver stable, inflation-hedged returns over time, which are uncorrelated with other asset classes. For example, in developed markets, the net Internal Rate of Return (IRR) can be in the range of 7-11%, while in emerging markets the net IRR can be in the range of 10-15%.
- Carbon credit-generating projects can provide both asset value appreciation and yield, particularly as global carbon prices are projected to rise significantly over the next decade.
- Regenerative agriculture practices can improve soil health, water retention, and yield over time, often resulting in lower input costs and improved profit margins.
- Ecosystem restoration projects increasingly attract results-based payments from governments, corporations, or multilateral institutions.
The road ahead
The shift toward natural capital investing represents a reimagining of capitalism – one that recognises that human and economic wellbeing depends on thriving ecosystems. In the coming years, we believe we are likely to see:
- Greater standardisation of impact metrics and taxonomies (e.g., through TNFD, International Sustainability Standards Board, or the European Union's Nature Restoration Law).
- Emergence of new markets for biodiversity.
- Expansion of public-private partnerships to mobilise capital for global biodiversity hotspots.
- Increased allocations to natural capital, becoming a key part of investors' portfolios.
Natural capital is fast becoming a strategic pillar of sustainable finance. By aligning investment strategies with the regeneration of ecosystems, the natural capital asset class not only meets the demands of climate action and biodiversity recovery but can also unlock new avenues for value creation and long-term resilience.
In a world where natural systems are under pressure, investing in nature is no longer optional; it is a fiduciary responsibility – and one of the most promising opportunities in global finance.
For more information, see: newforests.com