Natural capital is a new asset class that now features in the Environment Agency Pension Fund’s (EAPF)’s investment strategy, with 4% of its strategic asset allocation to be spent on protecting and enhancing biodiversity. It links its approach to tackling climate change with its approach to addressing nature and biodiversity loss.

For EAPF, reducing carbon emissions, building resilience to a warming climate and protecting and enhancing nature and biodiversity are interdependent and, from an investor risk perspective, one cannot be tackled without the other.

EAPF’s strategy seeks to demonstrate that its investments in natural capital will be net-nature positive and deforestation free. It already has investments in nature-based solutions that meet this aim. Its approach is based on good governance and science and it looks for baseline scientific assessments, regular environmental monitoring and reporting of biodiversity metrics to understand impact.

Furthermore, EAPF expects its natural capital managers to commit to assessing their deforestation risk across direct operations and supply chains and reporting on this to address any risk.

To inform its future approach, EAPF analysed its current investments in sustainable forestry and agriculture and the standards it had set for asset managers. This led to examples of best practice, such as one of its underlying asset managers in South America placing beehives in their orchards during avocado and cherry blooming seasons. This allows bees to feed and sustain their hives from native vegetation after the blooming period, supporting hundreds of millions of bees.

Another example is EAPF finding a nature-based solution investment in Paraguay to convert degraded grazing land into a sustainably managed forest with a guaranteed minimum of 25% set aside for natural regeneration. It is also now analysing with the same scientific rigour investment proposals that could restore peat bogs, saltmarshes or oceans.

STRATEGIC TAKEAWAYS

Investments in farmland and timberland complement the Church Commissioners for England’s overall investment strategy of seeking long term stable returns from a well-diversified portfolio. The farmland portfolio totals some 80,000 acres across England. This has been a strong performing asset class over the medium and long term characterised by substantial capital growth between 2002 and 2015. The timberland portfolio currently comprises 88,000 acres in the UK, US, Ireland and Australia, generating stronger than anticipated returns to date overall.

Velliv, Pension & Livsforsikring considers timberland as an attractive asset class due to several valuable features embedded within the asset class. These features can contribute to positive performance by reducing and diversifying the risk of the overall portfolio, while offering an attractive risk-adjusted. Characteristics such as low sensitivity to swings in the economy and financial markets and low correlation with other asset classes are other important characteristics of the asset class.