Risky start-up or steady infrastructure asset? Oxfordshire Pension Fund is branching out into nature

It all began with a meeting of likeminded people. About a year ago, Oxfordshire’s responsible investment officer Josh Brewer bumped into Tim Coates at a conference about green opportunities in Oxfordshire and the two began exploring the idea how the pension fund could support nature restoration and sustainable farming.

Coates is a third-generation farmer who is a co-founder of Oxbury Bank the UK’s only specialist agricultural bank, specialising among others in flood risk mitigation and water cycle restoration.

He is also part of the North East Cotswolds Farmers Cluster, a collective of some 150 farmers and landowners who aim to collaborate on nature restoration and the protection of local food networks in the region.

Could there be scope for collaboration between the farmers and Oxfordshire Pension Fund? The £3.5bn fund, which holds about a third of its portfolio in alternatives is no stranger to investing in climate solutions. Just last year, it has committed some £30m into Wessex Gardens, a portfolio of renewable energy assets in the southwest of England managed by Schroders. These commitments are part of the fund’s wider ambition to meet its net zero targets, Brewer explains. "Sustainable agriculture is an area which is of great interest to us, in part because we have a responsible investment policy which has a strong commitment around nature and biodiversity."

A start-uppy feel

But while the fund has already around a third of its portfolio invested in private markets, ranging from infrastructure to property, private equity and debt, investing in the sustainable agriculture collaboration would nevertheless pose a new challenge, he acknowledges.

“If you look at what the project is trying to deliver, some of it is new markets, for example some revenue is derived from biodiversity credits, these are business models that are in many ways untested, so it has a bit of a start-uppy feel about it. If you look at LGPS pension funds, we are not your typical venture capital investors, we prefer to invest into more established longer-term markets” Brewer says.

Having said that, both Coates and Brewer believe that an investment in nature restoration could to some degree be treated as an infrastructure asset. "The nature of the kind of project we’re doing, restoring the three rivers in our catchment, does have the characteristics of infrastructure" Coates argues

"The changes we make will have a really good lifetime cost-benefit. It’s a nice long-duration project with nice long cash flows coming out the back of it as nature markets develop” he believes.

"If you can establish natural capital projects that operate like project finance, like infrastructure, and generate long-term revenues, with risk adjusted returns, that fits very well with our objectives as a pension fund" Brewer adds. 

How could it actually work?

The idea behind the farmer’s network is simple: nature restoration can best be achieved at scale, and scale in agriculture can best be reached through collaboration. To date, more than 150 farmers, covering 42,000 hectares are part of the group.

"We’re a pretty progressive bunch of farmers—quite innovative, willing to take a bit of risk, and very much on the regenerative transition rather than just thinking about it" Coates explains.

"We’re very interested in mitigating flood risk in Oxfordshire, cleaning the water in our rivers, improving biodiversity, and sequestering carbon, but our self-interest is making our farming landscape more resilient."

Over time, the collaboration will have a significant climate impact: "The project will sequester nearly a million tonnes of carbon. A lot of that through woodland, which will be traded under the Woodland Carbon Code" Coates predicts.

In addition, Coates and his peers are working to register the collaboration with VERRA (Verified Carbon Standard) to access the voluntary carbon market and are exploring the scope for biodiversity credits.

Ultimately, Coates and his peers are hoping to raise £75m. The government is expected to cover one third of the sum, among others through nature market revenue guarantees.

Beyond that, the network is in active discussions with the National Wealth Fund, whose mandate extends to nature positive investments, and also with a range of fund managers specialising in natural capital.

While the initial £75m to be raised seems like a fairly small sum of money in institutional investment terms, nature’s funding needs in the region are far bigger, Coates explains. "We only need to raise about £75m, but Oxfordshire’s requirement alone in the next five years is a £1bn in deployment into nature if the County is to meet legally binding targets."

For Oxfordshire, it is still early days. Much now hangs on next year’s upcoming asset allocation review, with another county council election still due to take place later this year, Brewer says. But he is cautiously optimistic that “a pretty significant allocation to natural capital” could be on the cards.

The fund would not be the first to turn towards nature. West Yorkshire Pension Fund has last year taken a significant stake in Rebalance Earth, aimed at tackling flood and drought risks, improving water quality and sequestering carbon.

Meanwhile, the LGPS Pool London CIV has recently launched a Natural Capital Fund while LPPI intends to include natural capital assets in in its Environment Opportunities Fund.

Brewer is confident that Oxfordshire will soon follow in their footsteps: "We’ll be committing to natural capital. What I can't say at the moment is whether we'd be committing to this specific project. That would depend on a number of factors, most importantly that the investment case stacks up."

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Growing Returns: West Yorkshire's Darran Ward on on natural capital investments