Personal impressions from Fabian Huwyler about how the nature investing market has developed since early 2020, as presented at the CPIC Bi-Annual Members Meeting on September 22, 2020:
First of all, the COVID-19 crisis has helped to establish nature investing as a legitimate investment theme with mainstream investors. The number of household names with active interest in deploying funds in nature has exponentially increased since March. When talking to these entities, they often cite the fear of another ‘green swan event’ as the reason for their accelerated involvement. And these actors are arguably here to stay – I saw some of them going through internal decision processes in April and May, approving new nature-focused investment products for launch later this or next year.
On a less positive note related to the COVID situation, we are unfortunately seeing in our industry an increasing number of what the finance world calls distressed assets. From an investor’s perspective, this might offer welcomed opportunities to invest at a bargain. More practically on the ground, it means that projects are lacking the required funds to run their operations, leading to detrimental impacts on successful conservation outcomes that have been built up in some cases over a long time.
Following on the accelerated investor interest, I have witnessed an opening of the asset class spectrum. Investing in nature should be asset class agnostic, but it isn’t today. Very much like impact investing more broadly traditionally had a narrow focus on private markets but has moved over time towards a more balanced split between public and private markets allocations, conservation finance is slowing getting on that trajectory.
There is a huge need for aligning capital markets with the protection of nature and its ecosystems. As Planet Tracker rightly pointed out earlier this week, existing fixed income markets are capable in the immediate term of mobilizing hundreds of billions of dollars for conservation through sovereign debt restructuring or new green or blue bond issuances by supranationals, sovereigns, municipalities and last but definitely not least corporates.
Further to that, existing macroeconomic factors such as low interest rates and more specifically fixed income market dynamics such as liquidity or debt maturities support the assertion that this asset class is ready to be conquered. We are already seeing more bond issuances with nature-related use of proceeds this year that in any previous year with volumes getting closer to benchmark size. This is now opening up opportunities to create pooled investment vehicles in that space.
Another notable development is around the notion of what I would call systemic investing – as compared to opportunistic investing. There is a willingness by more investorsto dig deeper and understand impact beyond the fences of a particular portfolio project or company. Instead, portfolio construction is approached through a systemic lens. After all, any investments in the conservation finance market are meant to lead to some kind of positive environmental outcome. Some outcomes are definitely better than others – and as an industry we need to have the ambition to finance these.
A fourth development centers around the inclusion of new types of investors in a fast growing, diversifying market. Over the last few months, corporates with nature-based supply chains have made previously unseen announcements to invest significant money through proprietary venture capital and private equity-type funds. To what extent such initiatives will serve the broader market development – rather than purely private interests – remains to be seen.
But also a third of the global investment market, which traditionally has not been provided access to investing in nature, is seeing opportunities now. I have had the privilege of working with Triple Jump, a Dutch 1bn impact asset manager, as well as a Dutch bank and a global conservation NGO on developing what might be the first conservation retail fund at institutional scale.
Lastly, there is a growing recognition – at least behind the scenes – that the pipeline of investment opportunities with risk-return profiles that meet the proposed investment strategies of the ever-increasing number of nature-focused funds is insufficient. If I had to characterize an early market response, it is the uncoordinated mushrooming of incubators, accelerators and venture builders along the different capital stages.
So in a nutshell, I sense a growing divergence between bold capital commitments by institutional investors and an increasing, but still smallish global pipeline of market-ready opportunities. I also sense a tipping point where we as industry can eventually move from niche to mainstream if we do it the right way – not taking the fast lane too long.
