Working on Nature Finance is a parabolic flight. Moments of maximum compression alternate with zero-traction. One moment you are at the heart of the world’s most critical agenda, and the next moment all attention evaporates and returns to the investments into the extractive status quo. But these last couple of days have been different. Very different.
Accountants started saving the world. Accountants, specifically from Japan from the Sustainability Standards Board of Japan (SSBJ) - tightly connected to the ISSB - have not only aligned with IFRS S1 and S2, but also included specific mentions to nature and biodiversity in their newly released standards meant for all publicly listed companies on the Tokyo stock exchange. It marks an important step of recognizing thriving nature as a critical asset for business and economies.
The announcement of Goldman Sachs sticks out. It takes the discussion further: The $1.3 trillion behemoth communicated a $500m biodiversity bond fund, investing in labeled and unlabeled corporate bonds across developed and emerging markets. This will include bonds directly funding biodiversity-related projects as well as bonds to companies generating revenue aligned with biodiversity protection and restoration. It will abide to 4 SDG goals. This is a pivotal moment for capital markets: Brands are telling the world that it is not only possible to invest into nature, but that it is worthy of leverage, and it is so mature of an asset class, that one can structure indirect financial incentivization based on said investments. The fact that Goldman Sachs also came up with its methodology to assess the assets that will compose the portfolio and that there are underwriters crunching away at biodiversity is just a cherry on this sweet, fixed income cake. Clearly, there have been other financial instruments with underlying investments into nature before - blue chip financial institutions issuing corporate (un)labelled outcome or biodiversity bonds (e.g. Citi), sovereign debt for nature swaps (e.g. JPMorgan), real asset funds (e.g. Nuveen), and landscape level blended funds (e.g. World Bank). These instruments are urgently needed. But nature is a finite and fragmented resource with often unclear legal ownership and tenure, making it hard to scale such instruments. The paradigm shift occurs when nature, and the natural capital it provides, takes its rightful place across financial statements and becomes a driver of enterprise value creation or disruption.
Thirdly, NBIM, the entity managing the Norwegian sovereign wealth fund, the largest in the world - sitting at $1.6 trillion - released its climate and nature disclosure methodology and results, and revealed that they not only internalized a nature and biodiversity methodology, which includes a scoring and vetting mechanism, but that they are using that methodology on 96% of their portfolio. This includes drilling into key aspects of policy, strategy, risk management, stakeholder engagement, and disclosure, including whether companies are transparent about how they depend on and impact biodiversity and ecosystems. The fund expects their investees to address any arising material nature issues, and not doing so can result in divestment, which has occurred in 2024. The fund can then reverse the divestment once the company has adequately addressed these risks. This is foundational. The largest single investor in the world, which on average holds 1.5% ownership in every listed company that exists, is now making investment decisions not only informed, but driven, by natural capital. Board rooms across the globe have now been made aware that their position on the capital markets also depends on how they decide to interact with nature.
Finally, in parallel to the largest single investor in the world, the largest asset manager in the world has also spoken up. Blackrock has released its opinion paper on natural capital, stating the current underpricing of natural capital, both as a risk and as an opportunity. Financial markets, like anything else that humans have developed in order to rally millions, and now billions, of individuals, are a collective piece of fiction. They are an imagined order implemented to ensure boundary conditions, the rules of the game, and maximize growth fueled by economic and human capital increase. So, it’s there to maximize, not qualitatively optimize, growth. Instead, all capitals, not only economic and human capital, must be included. The missing link is natural capital, and that should be no surprise, given more than half of the market cap listed on the world’s largest stock exchanges are dependent on nature.
So, what does last week teach the financial sector? Commercial banks must reassess their lending practices and the fair and true extent of their Risk-Weighted Assets (RWA). Asset managers, wealth managers and institutional investors will have to make sense of Blackrock’s guidance. Central banks need to refresh their Basel II Pillar 1 frameworks. And investment banks have their own role to play, from reconsidering underwriting and financial analysis, to bringing innovation and natural capital investment options to the markets. Corporations that value short-termism over survival will keep at it with the status quo, and they will see their enterprise value be slashed. Any financier, insurer, or shareholder connected to them will be hit. Generally, investors will need to understand that sound investment strategies going forward require the inclusion of nature. The main issue is that not anyone can buy land, there is just not enough of the stuff going around. But one can buy the services that the land produces and hold the rights to its natural capital. That is the most groundbreaking asset class of our time. It combines gold’s counter-cyclical and inflationary hedge properties with crypto’s scarcity value, and yet much more importantly, it explains whether a company or an investment portfolio will be rewarded or penalized once the capital repricing event occurs.
As nature is fundamentally reinterpreted by capital markets, and natural capital becomes recognized as an asset class in its own right, the optionality menu will become virtually endless, from nature indexes and ETFs, to NACs, all the way to nature-backed currencies. Natural capital as an asset class is the biggest financial bandwagon over the course of this century. At The Landbanking Group, we are enabling corporates and financial institutions alike to not only understand their nature risk, but making their resulting mitigation strategies actionable; though science, AI, contracting and sound financial engineering. The change is underway and you can be one of the first to witness the Nature Finance parabolic flight change course into one of exponential growth.
