How diversifying natural capital can protect portfolios

Allocating to a variety of sustainable natural capital investments, says Nuveen’s Martin Davies, protects against physical and market risk

A globally diversified portfolio is the best way to invest in natural capital assets, but lack of data is still a barrier.

The global decline of nature is intrinsically linked to receding economic value and humanitarian risk, and it is therefore in the best interest of investors and corporates to support mature, as well as new and emerging, solutions built to protect and sustainably manage and restore ecosystems for the sake of their people and long-term returns.

A blend of natural capital assets offers a degree of inflation sensitivity, diversification and enhanced risk-adjusted returns, with lower historical volatility than traditional asset classes such as equities and bonds.

By allocating to a variety of sustainable natural capital management practices, such as installing solar panels on farms to replace fossil fuels with renewable electricity used in irrigation pumping, and regenerative agriculture solutions, for instance, investors have the potential to diversify against physical and market risk factors including weather, crop price volatility and government intervention and regulation.

Read the full comment in ESG Clarity’s July 2022 digital magazine.