Acknowledging the understanding that, for sustainable finance, there are a lot of opportunities but equally a lot of money and investment needed, a panel of experts at SF.live tackled how to reinvent the value of nature as an asset class.
Providing some insights into the scale of the problem and the current approaches, panel moderator Rachel Barza, associate director, lead climate adaption and nature finance, EBRD, described how projects are currently done on a "one-off basis" and feel like a heroic effort. She pointed to remediation projects in Moldova and Kosovo and described how each is funded with municipal assistance but still requires a significant effort to finalise.
Addressing the lack of speed, Barza said: “We talked about projects that took 10 years to develop. We talked about how the analytics behind it needs a PhD dissertation in six months. We can’t do that for every project; we need to find a better way, whether that’s leveraging data sources, AI or just simplifying the project cycle so that these aren’t new and innovative every single time.”
Beyond the perpetual pilots
Answering the question “what are the conditions that can get us out of this perpetual pilot landscape?”, Stuart Schofield, partner, co-head, energy transition and climate change, Opus Corporate Finance, helped characterise the average investor and what it is they’re looking for from a new asset class. Schofield gave a brief history of the first of these projects, from wind and solar, to biogas in the 2010s, and more recently to vertical farming. He said each still took a lot of work to communicate value to investors, but that a key fundamental component all investors look for is the evidence of repeatable large, long-term capital deployment opportunities.
Schofield explained how the typical ‘one-off’ projects mentioned are not seen as a good use of an investor's time due to a large degree of complication. Instead, investors should be convinced to invest in one for the safety of future projects in a similar vein; more of a condition of repeatability than signing on for a one-and-only attachment.
Building from zero
With a stark description of the market, Eoin Murray, chief investment officer, Rebalance Earth said: “I think a degree of honesty would say the market is not there today, and that is the plain truth. So what do we need to evolve that? My thinking is we need the generation of returns through appropriate levels of demand from corporates to pay for nature. So, again, the vast majority of corporates today would value nature at zero.”
According to Murray, there are two fundamental solutions to this current lack of interest and investment:
- Make nature visible
Nature should be on the balance sheet. Murray described how, beyond its current perception, it needs to be seen as a literal asset with a corresponding liability. He underlined accountants’ ability to change the world when implementing this.
- Derisk nature portfolios
A popular suggestion among the panel, Murray emphasised the importance of the ability to derisk nature by viewing it within a portfolio: “That means I probably want to blend some terrestrial projects with some marine projects," he said. "I don’t want to be all in just on carbon. I want to have some biodiversity net gain...I want to have that blend available to me.”
Murray further outlined the benefits, explaining how investors are often happy to support traditional infrastructure projects, which tend to depreciate over time - whereas nature appreciates.
Guillaume Levannier, director, PwC echoed earlier calls to make nature more predictable, benchmarked and blended. Levannier argued the industry needs three developments (strong regulation, blended finance, and the creation of great buyers through disclosure guidance) and three enablers (integrity, standardisation and liquidity).
Speaking from a more public-focused perspective, Charlotte O’Leary, CEO, Pensions for Purpose, provided the context of pension funds and how there are some people who are not aware of what they invest in and what impact it has. O’Leary defined the risk as multi-faceted, but with a great positive impact if the public is encouraged to be active in the placement of their investments.
O'Leary believes that the industry currently monetises ignorance and a lack of understanding, and should instead be less focused on highest return, and more on progressive impact. Progressive funds, she belives, think in three dimensions: risk, return, and impact. Using vertical farming as an example, O’Leary said that if the public is shown the positive impacts of investment, it will invest more. Concluding her point, she said this decision must come from the top, with leaders and c-suites needing to care more about these aspects, through employee pressure and governmental regulation, such as the NC17 amendment to the Pensions Schemes Bill:
"This is all about changing the way we think about systems...in the long term and not the short term," she noted. "Pensions for Purpose has done research on impact investments with our members and we've demonstrated you can make a market rate risk to return across pretty much every asset class. So it's not really one of those things up for debate. It is very much down to our psychology that returns come first."