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Natural capital beats real estate: bfinance

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Investor demand for natural capital – timber, agriculture and nature-based solutions – has outpaced interest in real estate for the first time.

Research from consultancy bfInance reveals “a remarkable swing of real asset appetite” away from property investment towards natural capital manager searches in the past year, as investors seek opportunities that align with their ESG objectives, while also promising liability-matching returns. 

In response, asset managers are offering a greater range of funds including 32 strategies that generate carbon credits, which bfinance says is “an emergent group that is now collectively seeking to raise USD 19 billion in equity commitments”.

Pooled funds are available from more than 50 asset managers, many of whom offer multiple strategies, or obtain separately managed accounts with an appropriate mandate size. 

These strategies include timberland funds – the most mature sector of the market – agriculture funds, diversified funds and, largely available since 2021, nature-based solutions.

However, given natural capital is a relatively nascent asset class and comes with risks with which investors may have little experience, bfinance warns of the complexities in assessing the funds on offer.

Nikki Howard, Senior Associate Private Markets at bfinance, says: “Investing in each of these asset classes poses very different considerations for investors from an impact and environmental perspective, as well as the risk-return profile. The ability to assess and manage the wide variety of risks in play is often a key differentiator between stronger and weaker managers in the natural capital sector.”

For example, investors need to assess managers on how well they value assets, which Howard says has not proven an exact science. 

“There has been some controversy and uncertainty surrounding valuations in the timberland and agriculture sectors. We note a significant current disparity between market pricing and appraisers’ valuations, which is affecting benchmarks and creating challenges for buyers.”

And while natural capital may look like a potential win from an environmental perspective, certain projects create potential conflicts across social and governance factors. These include issues with land rights; land conversion; illegal logging; impacts on local communities; labour standards; and bribery and corruption.

Howard says: “ESG considerations are imperative to success in this sector, particularly the management of physical climate risks, biodiversity and engagement with local communities. Not all asset managers are equally sophisticated in terms of approaches and resources.”

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