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Proving the case for natural capital investments

As Climate Asset Management celebrates passing $1 billion of assets, its CEO Martin Berg says it hopes to launch a follow-up fund next year.

Four years ago, when Climate Asset Management (CAM) launched as a joint venture between HSBC and recently formed consultancy Pollination, it laid out ambitious plans to become the biggest investor dedicated to natural capital.

In September it announced that, by closing its first two funds, it had passed $1billion in assets.

The four-year journey to raise capital has been an uphill battle, but CEO Martin Berg says he is “super happy” with the progress the firm has made.

“For anyone raising funds in 2022 and 2023, it has been challenging. To have raised over a billion in less than four years as a first-time fund manager, we are very happy.

“What we basically said back then [when we launched] is ‘We want to mainstream natural capital. We believe it has to be an investment opportunity that both has impact and return.’ And I think that’s exactly what we have done.”

The capital raised so far has been roughly evenly split across CAM’s two strategies:

  • The Natural Capital Strategy, which targets financial returns alongside improved environmental outcomes from real asset investments in regenerative agriculture, sustainable forestry and environmental assets across developed markets. This strategy has attracted allocations from pension funds and insurance companies, such as the asset management arm of German insurer Gothaer, which committed$100 million.
  • The Nature Based Carbon Strategy, which targets the generation of high quality carbon credits from large-scale landscape restoration and conservation projects. This strategy has appealed to corporations with net zero targets, such as GSK, Tokyo Gas and Carrier. The corporates commit to retire, rather than sell-on, the credits, explains Berg.

CAM manages a third fund, which invests across both strategies. The RestoreFund, which was jointly designed by Apple and Climate Asset Management, is designed to receive allocations from Apple and companies in its supply chain. Apple initially committed $200 million. Earlier this year, the fund received additional commitments from two Apple suppliers – Taiwan’s TSMC, which contributed $50million, and Japan’s Murata, which contributed $30 million.

Berg admits that, while investors have been increasingly aware of natural capital risks and opportunities in recent years, converting this sentiment into capital allocations has been hard work.

“What we probably didn’t see coming four years ago was the importance of corporate investors in this market”

“We have no shortage of investors who want to speak about nature. It’s very personal to some of them. So, there’s this big interest,” he explains.

“But then transferring this into real investments, real allocations, that’s a real struggle – because once you move on that journey … then the question is, ‘Okay, but what are we going to invest in?’

“This is why we created Climate Asset Management,” he explains, to create vehicles suitable for such investors.

“The biggest problem for investors is that this is a new asset class. We think we offer a diversified and scalable product to those investors that are trying to understand how to get into this asset class.”

Yet there is more work to be done: “In order to take the next step, we have to convince the asset allocators. There are different reasons why there’s inertia: ‘We don’t know where it sits [in our investment portfolio], and we need more data. What are the risks? There’s not enough information, how does it smell and feel, and in what bucket does it sit?’

“We see a huge increase in investor demand to talk about nature, but a lot of them are still struggling to find the exact home and how they should play this. Should they create a special allocation for that? Is this part of either the infra or real estate[buckets]? That’s one of the real issues we find.”

But he adds: “I think it is shifting, from an allocation perspective. At the moment, investors seem to get their heads more easily around forestry, because it’s probably closer to infrastructure and investment in the way it’s managed, and it’s quite different to agriculture.”

But he continues that investors are also warming to agriculture, describing “the trend towards regenerative agriculture” as “unstoppable”.

“There’s a huge investment opportunity there”, he adds, and it should prove interesting “also for those investors that may not necessarily come immediately from the environmental or sustainable finance world”.

For Berg and his team, the solution to this investor inertia was making the case that natural capital investments can make strong returns at the same time as achieving a positive impact.

“You cannot make the case for this asset class just by saying: ‘It is impact’. You have to demonstrate the impact and the return, [and that] there’s actually no contradiction, and you can generate both.”

He didn’t want to be drawn on the returns of the funds, but described them as “real asset returns”, “close to infrastructure”.

Asked to provide an example of an investment, he cites a “flagship” project in Queensland, Australia, in which 1,700 hectares of sugar cane are being converted to growing macadamia nuts.

“This is significant, because the sugar cane requires a lot of chemicals. The run-off[is] one of the causes for the bleaching of a Great Barrier Reef, and so by converting to macadamia with cover cropping, we actually really have a huge environmental impact.

“On top of that, for this project, it’s actually located between two national parks, and we’re restoring native habitat in between these two national parks through our project, and [this is leading to] a significant increase in biodiversity.”

This includes the discovery of an indigenous plant species, called Macrozamia lomandroides, that was believed to have become extinct, he says with pride.

“And then on top of that, this is a really attractive investment opportunity, because macadamias are a super nut – it has a good outlook from Asian demand in general, nuts with the healthier lifestyle have a have a positive outlook, especially [as] the macadamia is a higher priced product, and there’s a high propensity of consumers looking for more sustainably managed products.”
Other examples of projects include almond, pistachio, walnut and olive farms in Spain and Portugal, and agroforestry projects in Africa. (See box below for more details.)

The Natural Capital Fund only invests in developed markets, partly to help it appeal to investors.

“We hear a lot the argument that you can have more impact in emerging markets, but you’d be surprised how much impact you can generate on assets in developed markets,” he says. “The problem of biodiversity loss is as acute in the Northern Hemisphere as it is in the tropics.”

“We have demonstrated that, in the long term, going for more sustainable practices is actually good for returns when thinking from a financial perspective. We can use that momentum to launch a follow-on vehicle.”

While CAM was convinced about the rationale for investors to allocate to natural capital, Berg admits that “what we probably didn’t see coming four years ago was the importance of corporate investors in this market”.

They are investing in the Nature Based Carbon Fund to help them offset their emissions and meet their net-zero targets. This is despite the controversy that has swirled around the voluntary carbon markets in recent years.

“I’ve been asked many times whether all the criticism of the voluntary carbon market has impacted us, and I always say it’s a double edged sword: on the one hand, of course, it was very negative because there were a lot of corporates that were putting everything on hold and turning away from the market.

“But we also saw that it actually pushed another group of very committed corporates to say: ‘Okay, that means we cannot buy from intermediaries. We need to be involved in the actual project generation’.”

He says this drove investors to the fund, helping them have a more direct link with high-quality projects.

The fund now counts more than 10 large corporates as investors. That trend is exemplified by Apple, which is also bringing its own suppliers into the Restore Fund.

The Taskforce on Nature-related Financial Disclosures (TNFD) could also help drive both investor and corporate demand, although he says it is early days for the initiative, and the first TNFD-aligned reports are only just emerging.

But he is optimistic that reporting on impacts and dependencies on nature will improve. Nature currently lacks a single, universal metric to capture progress, in the way that carbon dioxide equivalent can be applied to climate change. But Berg believes progress will be made.

He points to the signing of the Kyoto Protocol in 1997: “It was not just CO2 – it was six greenhouse gases,” he says. “I think we will get there over time [with nature metrics]. We need to work on what are the important metrics and combine them in one approach – it will come.”

As the understanding of nature risks and opportunities develops, it should drive greater capital allocation.

Now its two funds are closed, Berg is already thinking about the launch of a second natural capital investment fund.

“We are very well advanced in developing [the strategy] and will finalise it this year, and next year go back to the market,” he reveals. “We hope to have a much better way of explaining and showing how to invest in projects, with success stories[about] integrating impact.

“We have demonstrated that, in the long term, going for more sustainable practices is actually good for returns when thinking from a financial perspective. We can use that momentum to launch a follow-on vehicle.”

He adds: “We will assess whether it is possible to launch another carbon fund.”

While CAM is still “in listening mode” about the design of the future funds, andwhether “tweaks” are required, Berg fundamentally feels the concept for the fundshas been proven.

“When we look back now, in 2020 we were probably one of the few players makingthe statement [that] we have to mainstream [natural capital, and that] this has tobecome a mainstream asset class.

“Fast forward to 2024, and one of the things we are observing is we are no longeralone – there’s a huge focus on nature.

“Almost anyone who is in agriculture or in forestry has now some form of offering, oris at least participating in the debate. We see a lot of other players that were outsideof the natural capital space and are coming in with new products.

“So, I think the one thing that makes me – and I think also our shareholders – proud is that when we said this will become the next thing, we were right.

“If you ask me, ‘what gets me out of bed in the morning, or why I’m excited about our company?’, it is that we are actually now making the case [that] institutions can invest in what is still considered a niche market, but that we’re doing it in a scalable way, and that we’re offering them opportunities that we can easily scale-up.

“And I think that’s the only way to address both the climate and nature problem.”

Some of Climate Asset Management’s investments to date

Climate Asset Management said it has rapidly deployed capital raised, with a significant proportion committed to high quality natural capital projects with the potential to improve more than two million hectares of global landscapes. Examples include:

  • a 1,700 hectare regenerative agriculture project transitioning sugar cane production farmland into one of the world’s largest macadamia orchards in Queensland, Australia;
  • an 8,000 hectare sustainable forestry project in New Zealand;
  • over 3,000 hectares of almond, pistachio, walnut and olive farms in Spain and Portugal that will adopt regenerative management practices;
  • a project targeting to restore 900,000 hectares through the introduction of rapid rotational grazing practices with Maasai communities, with high potential for the creation of resilient livelihoods and biodiversity benefits; and
  • a cluster of agroforestry projects that are part of the Restore Africa Programme targeting more than one million hectares, looking to transform degraded land in collaboration with smallholder farmers in Kenya, Uganda and Malawi to improve food security and generate revenues for local communities.

This article was first published in Environmental Finance.

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