The world’s natural resources that help sustain life on earth are making their debut as a distinct asset class with the introduction of a new joint venture asset management firm focused on natural capital.
HSBC Global Asset Management Ltd. and climate change advisory and investment firm Pollination Group Holdings Ltd. are teaming up under the name HSBC Pollination Climate Asset Management, the first major venture to bring natural capital to the mainstream as an asset class, according to the firm.
The new enterprise aims to attract pension funds, sovereign wealth funds, insurers and other institutional investors. It intends to launch a US$1-billion fund in mid-2021, targeting investment in regenerative agriculture, sustainable forestry, water supply and so-called blue carbon, meaning carbon captured by oceans and coastal ecosystems. It also plans to introduce a US$2-billion carbon credit fund at some point in the future.
Read: How ESG factors play into alternative investments
The joint venture aims to broaden the scope of assets for institutional investors that want to invest beyond climate change mitigation and into adaptation, which has been traditionally harder to do, says Sandra Carlisle, head of responsible investment at HSBC GAM.
“One challenge we’ve seen around these areas is, while you can invest . . . , a lot of what’s available is quite small scale, so if you’re seeking to decarbonize at scale, address climate adaptation at scale, often it’s been quite difficult to achieve that. What we really want to do is create scale that will allow significant amounts of capital to be deployed.”
Investing in natural capital could have a twofold return for investors, says Carlisle, noting agriculture and forestry are real assets that can give investors the benefit of diversification and a traditional return and, as the transition to a low-carbon future accelerates, these assets will hold additional value for their carbon-storage potential.
Read:How institutional investors weigh energy transition risks, opportunities
One of the traditional issues with impact investing is the difficulty of measuring that impact. Martijn Wilder, co-founding partner of Pollination, says the joint venture will use a proprietary impact measurement tool that will assess whether proposed investments can achieve what they’re intended to on the ground and generate suitable financial returns. It will identify key performance indicators for the projects and report on them over the life of the project. The firm will also apply a valuation methodology. “This has been done on a smaller scale, but it hasn’t been done on this scale,” he says.
Investors with long-term horizons understand the necessity of protecting and increasing the resilience of nature, adds Carlisle. “They understand the consequences of that are going to intensify the issues around climate change we’re already seeing today.”
Read: Global pension funds still prefer active strategies on climate change investing: survey