“Unprecedented” private market demand for nature-based solutions
Investors are tapping into a once-in-a-generation wave to drive decarbonisation and halt biodiversity loss, AXA IM claims
An “unprecedented” private market demand for nature-based solutions (NbS) reflects a “once-in-a-generation investment opportunity”, according to AXA IM portfolio managers.
NbS typically aim to protect, sustainably manage, and restore natural ecosystems while delivering social and economic benefits.
This demand comes from three main pools of capitals. Firstly, there are classic asset owners that see NbS investments as a “valuable” part of their decarbonisation strategy. Then, there are the corporates that are interested in “securing access to the outcomes financed” by NbS. The final group is investors that have “made the connection” between NbS and climate and social objectives.
“NbS in in the top three conversations that we have with clients when it comes to discussing their alternatives exposure to nature-based opportunities,” said Jonathan Dean, deputy head of natural capital & impact PE at AXA IM.
Those conversations often focus on transitioning away from traditional forestry investments to a new model in which returns are based on the intensity “not of timber production but of restoration and protection”.
The impact market has grown from $50bn in 2012 to $1.5trn in 2024, according to Global Impact Investing Network. A “material part” of that increase has been a “recognition” of NbS, Dean said.
Yet NbS investments need to quadruple before 2050 if the world has a chance of meeting its biodiversity and climate targets, he added. While 85% of NbS funding comes from the public sector, Dean noted a “growing pressure” on institutional investors to fill that financing gap, which won’t come from public sources.
Anna Väänänen, head of listed impact equity at AXA IM, stressed an increase in investor interest in the listed equity space too. The demand has been partly driven by the Kunming-Montreal Global Biodiversity Framework and the publication of the Task Force for Nature-related Financial Disclosure’s (TNFD) reporting recommendations. As a result, a “broad” base of investors are now looking to include nature-related targets in their investment strategies.
Moreover, this interest transcends the anti-ESG movement, especially the on-going environmental rollbacks happening in the US under the second Donald Trump presidency.
“Every single business in the world is in some way dependent on functioning ecosystem services,” she said. “It’s very important to have a future-proof business model. That’s just how good investors run their portfolios. It does not depend on how politics comes and goes.”
Mismatch between risk awareness and investment
Even with this is unprecedented demand for NbS, a recent survey by investment manager Nuveen highlighted a mismatch between nature risk awareness and nature investment strategies. While 45% of the surveyed institutions identify nature loss as a top five economic risk, only three in 10 are increasing their focus on nature-related themes within their portfolios.
In private markets, one of reasons for the lag may be that it’s “very hard for some asset owners to decide where to allocate to nature”, according to Dean.
“Large asset owners have rigid allocation policies when it comes to targeting a risk-return for a certain asset class,” he said. “They may not always know how to treat NbS.”
NbS are not an asset class but a “series of activities” which can be structured through a variety of asset classes on both the listed and unlisted side. This may confuse asset owners, who often need to put NbS “into a box” before they commit.
“I would suggest treating NbS like an infrastructure investment due to their long-term financing structures, operator developer models, and offtake agreements,” he said.
Investors that already have forestry or agriculture allocations may find it easier to allocate to NbS, he added.
Here, asset managers can play a role by offering a “diverse range of investment solutions”. “I certainly see our alternative asset manager peer group moving in this direction,” he said.
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