In recent years, as capital allocators seek to significantly expand their exposure to sustainable investing, natural capital is rapidly emerging as an asset class that can offer a unique combination of financial returns, risk mitigation, and positive environmental impact. While its economic contribution is significant – 4.5% of global GDP – it remains underrepresented in institutional portfolios, making up just 0.2% of assets under management worldwide.
Natural capital refers to the world’s natural assets – soil, air, water, geology, all living organisms – and the processes around them that provide essential ecosystem services such as carbon sequestration, water filtration, soil health, and biodiversity.
Within investment portfolios, it encompasses a range of strategies, from regenerative agriculture and forestry to carbon credit markets and biodiversity-focused service businesses. As of yet, there is no accepted industry standard for natural capital investing.
Global commitments such as the 2015 Paris Agreement and pledges made at COP summits continue to shape the sustainability agenda, while more targeted national policies are emerging to accelerate change.
Regulatory policies can play a vital role in driving interest in natural capital, though their impact varies by region, explains Ryan Cameron, CIO of specialist impact investment manager Regenerate Asset Management.
In the United Kingdom (UK), for instance, the Biodiversity Net Gain initiative, introduced in February 2024, mandates that new property developments enhance biodiversity by at least 10%, either on-site or through the purchase of biodiversity credits.
Nicholas Burlington, Head of Investor Relations at Regenerate Asset Management, explains investors are also increasingly drawn to natural capital for its financial advantages.
Unlike traditional equity investments, natural capital is largely uncorrelated with broader markets, providing lower volatility and greater stability. Land-backed strategies, in particular, can offer sustainable cashflows and a baseline land value appreciation, which serves as an effective inflationary hedge. While the downside risk is limited, the upside potential is strong.
The regulatory push, combined with a strong base of capital allocators in pooled investment funds committed to real environmental change, has positioned the UK as a leader in the natural capital sector, Cameron says.
The real key to unlocking the potential of natural capital is innovating how capital is invested, he adds. The focus must be on designing investment strategies that harness the true value of natural assets and deliver competitive financial returns, while structuring risk and uncertainty out of the core investment case.
By getting this right, there is opportunity to align nature’s value with market rate investment models, and in turn facilitate the natural capital asset class to mature, he says. Through his work at Regenerate, he speaks from experience.
Approaching natural capital
Regenerate takes a combined approach to natural capital. First, it provides capital and liquidity to enhance business operations. Second, it applies regenerative principles to improve soil health. This delivers both economic and environmental benefit, explains Burlington, expanding and diversifying revenue streams, while also enhancing carbon sequestration, water resilience, and improving biodiversity.
While Regenerate’s investments will offer the opportunity to sell carbon credits through sequestration and storage in farmland soils, the primary focus is on driving value from the underlying assets. Burlington says this is received positively by investors, because while there is potential future value in the carbon credit market, Regenerate’s strategy has been designed to deliver performance from asset fundamentals and operational performance first.
Regenerate’s European Agriculture (RESA) strategy targets the delivery of 15%+ net IRR for investors and has recently deployed €50m into its regenerative agriculture platform in Spain.
The investment will convert existing farming practices from intensive cereal production into high value tree crops of pistachios and cherries, alongside livestock.
Key attributes of the deal include increasing and diversifying revenue potential per hectare with high demand, high-value crops; creating opportunities to scale with further acquisitions from an extensive pipeline; optimising soil regeneration by cover cropping between rows to enhance biodiversity and the farming system as a whole.
In line with the Regenerate’s commitment to education and training, a regeneration plan will also be implemented across the farms to upskill the local team to restore soil health and revitalise biodiversity.
“It’s a win-win for the environment and the bottom line,” says Cameron.
Is it sustainable?
The term ‘sustainability’ has faced increasing scrutiny of late, particularly following President Donald Trump’s decision to withdraw the US from the Paris Climate Agreement.
His opposition to green initiatives has prompted major asset management firms, including BlackRock, JP Morgan, and Bank of America, to reassess their ESG commitments – with some going so far to leave Net-Zero Banking Alliance.
Despite the backward step, those at Regenerate feel confident that sustainable investing is the way forward as, when it comes to regenerative agriculture, “sustainability” is one part of a much wider range of benefits.
“Regenerative agriculture is also about increasing profit and resilience per hectare, by farming with nature to produce an abundance of food and fibre. The positive environmental impact is a benefit created anyway,” says Cameron. “Whether one looks at the investment prospect through the lens of sustainability, or not, it is highly compelling to produce healthy food without chemical residue, and in the process improve soil health and biodiversity.”
Burlington agrees: “The investors we’re speaking to right now have made strategic commitments to allocate capital to this space because they are passionate about catalysing real environmental change.”
While broader macroeconomic factors will continue to influence day-to-day decision-making, he emphasises that “those who are committed are only strengthening in their conviction.”
