The push-back on high profile ESG (Environment, Social and Governance) strategies has not stopped the growing interest among institutional investors in exploring how supporting nature and the natural world can be integrated into their approach to non-traditional assets.
No-one is pretending that this is top of the list for any chief investment officer (CIO) but the enthusiasm for all things ESG of a few year ago has not just evaporated, especially at board level, writes Contributing Editor David Worsfold.
With many insurers finding their involvement in fossil fuels, either as insurers or investors, or both, being questioned, they are still looking for ways of appealing to the strong environmentalist lobby that has certainly not gone away or been silenced. Supporting nature, promoting biodiversity and influencing major infrastructure projects to be more sensitive to their impact on the natural world are all valuable in creating stories that counter the bad-boy image many feel the world’s major insurers deserve.
Alongside that reputational dimension is the impact of climate change on them as insurers, with claims from climate-related weather incidents rising all the time. Global insured losses from natural catastrophes have been growing at roughly 5–7% per year in real terms since the 1990s, according to the Swiss Re Institute. since 2020, insured losses from natural catastrophes have exceeded US$100bn annually for six consecutive years.
Swiss Re estimates that annual insured catastrophe losses could reach around US$150bn a year in the next decade.
This has significant implications for solvency and capital requirements so it is no surprise that insurers are looking at how they might use their huge investment portfolios to mitigate these threats.
While institutional investors already gain exposure to nature through a wide range of assets and investments (see list), discussion about whether nature will emerge as a distinct asset class is gathering momentum.
• Sustainable forestry
• Regenerative agriculture
• Farmland
• Water infrastructure
• Carbon-credit projects
• Biodiversity credits
• Natural capital funds
• Renewable energy
This has been helped along by a range of organisations such as the World Economic Forum, UN Principles for Responsible Investment, and the Taskforce on Nature-related Financial Disclosures, all of which have promoted frameworks for measuring nature-related risks and opportunities. These are creating the foundations of a tentatively emerging asset class.
Supporters of treating natural capital as a distinct asset class argue that it would create visibility, standardisation and scale. They also point to other features that should appeal to insurer CIOs, including returns that are not likely to be neatlycorrelated with other major assets in their portfolios and which do not move in line with broader economic trends. They may already hold some assets that are heavily invested in farmland and forestry which often perform well during inflationary periods.
At a recent Investing in Nature event, a panel session explored some of the pros and cons of creating a distinct nature-related asset class or integrating nature deeper within existing investment frameworks, such as infrastructure, property and private equity. The consensus was that the latter approach was more likely to win favour.
The panel moderator, Charlotte O’Leary, CEO of Investors with Purpose, summarised her thoughts on the session in a LinkedIn post.
• Nature can be a liability (nature loss) and an asset, so how you are recognising it in your accounting and investments matters.
• Nature solutions can be uncorrelated, act as an inflation hedge and produce competitive returns but demand is needed, upfront due diligence costs have to be recognised and addressed (perhaps through syndication), and investors need to support a conducive policy environment.
• Every hand went up when I asked the audience if they thought pension funds should invest in nature. Ultimately demand drives everything else.
• Inequality (particularly income/wealth) is intrinsically linked with achieving positive nature outcomes.
• We need transparent nature markets, BNG [biodiversity net gain] and a recognition that outcomes and additionality need to be delivered alongside returns.
It seems unlikely that we see a distinct assert class created around natural capital any time soon but that there will be gradual evolution as more consensus emerges around definitions, measurement and reporting standards.
Nature will grow in importance and take its place alongside wider climate risk considerations and be gradually integrated into institutional portfolios.
