Asset Class: Nature – Part III

Asset Class: Nature – Part III

More aspects for investors to consider

The concluding installment of a three-part series on how NCS has emerged to be a new asset class

When investing in the Natural climate solutions (NCS) asset class, several considerations need to be kept in mind, especially given its nascent stage and lack of consistent standards to enable regulations across the board. Governments delving into this sphere to address climate change and biodiversity loss can really help in mitigating many of these regulatory challenges.

The Government of Canada’s Natural Climate Solutions Fund, for example, aims to invest $4 billion over the next ten years, scattered across various micro-programs, such as the 2 billion trees program led by Natural Resources Canada, worth about $3.19 billion, Natural Smart Climate Solutions (NSCS) led by the Environment and Climate Change Canada (ECCC), worth about $631 million, and agricultural climate solutions led by Agriculture and Agri-Food Canada, worth about $185 million.

Measurement and pricing of co-benefits

Co-benefits, intrinsic to the value of NCS credits, are usually difficult to measure or verify. There are several verification agencies, however, such as US-based Verra (through its CCB program) or the Scottish Plan Vivo Foundation who are working to introduce consistent standards, but a consensus still seems to be years away. Until then, investors can consider the following aspects:

  • Identifying most relevant co-benefits and adopting best practices: Prioritising co-benefits that investors and businesses are familiar with; such as geographical markets with first-hand experience, is crucial. Co-benefits most comprehensively addressing the pain points of local governments and communities are the ones that often turn out to be the most enduring.
  • Scrutinizing how exactly projects aim to measure, verify and report co-benefits: Asking for project designs that ensure that projects meet co-benefit verification standards in order to warrant a price premium is crucial. Ideally, Bain & Co. opines, “project developers should demonstrate cases of ex-ante and ex-post assessments of co-benefits for previous projects.”

Trade infrastructure in nascent voluntary carbon markets

Despite much progress, voluntary carbon markets are still maturing. Emerging exchanges are adopting several different principles relating to payments, technology, and risk management. As always, there are a few aspects to keep in mind in this dynamic and complex landscape:

  • Agile participation: Interest in this market is increasingly attracting innovation and support. Investors need to stay on top of proceedings as the market shakes out.
  • Flexible go-to-market strategy: “Make a concerted effort to define the optimal go-to-market strategy by engaging with partners in the ecosystem to ensure that a proper assessment is made and evaluated. This will ensure that returns can be maximized to the best ability and judgment,” according to Bain &Co.
  • Accelerated tool development: Engaging with partners in the ecosystem in order to accelerate the process of pricing signal development and trade infrastructure will be crucial to growing the market. Investing in appropriate partners to carry development forward will be key.

Regulatory risks in a highly fragmented carbon market

This is the biggie! Country regulations and carbon accounting infrastructure need to be developed hand-in-hand with voluntary carbon markets. “To prevent the unsanctioned exportation of national assets,” opines Bain & Co., “some countries will choose to centralize accounting and restrict carbon credits to domestic sales until the proper carbon trading infrastructure is in place.”

  • Taking care of local communities: In the absence of adequate regulation, ensuring projects meet the highest environmental and social standards, and following best practices for community benefit sharing, is crucial. Political risks are minimized considerably if local stakeholders can benefit from the projects directly.

The designing investment that benefits local communities, whilst engaging local leaders involved with management and decision-making will be crucial to success. For funds, a local office driven by local investors to allow credits to be retired domestically is key in this regard. This will help grow local carbon markets.

  • Portfolio diversification: Geographical diversification should ideally spread political risks in the market. Staying abreast of market and political developments offer investors multiple revenue streams allowing for increased flexibility during times of volatility.
  • Blended finance: Bain writes, leveraging “catalytic capital from public or philanthropic capital to increase and de-risk investments for the private sector. Existing NCS funds typically use concessional capital to cover more than 20% of a first-round fund-raising target.”

Moving ahead, the global net-zero imperative will be pushed forward only through initiatives such as NCS. Private financing is finally waking up the economic and end environmental value of nature as an asset class. Pioneering investors need to moderate their risk profile and needs, depending on their degrees of involvement in multiple participation models (refer to Part II).

“If investors are mindful of the supply limitations, quality variance, co-benefits uncertainty, trade infrastructure developments, and regulatory risks, financial and nonfinancial returns beckon.”


(This article is based on an analysis from Bain & Company. It must not be treated as investment advice from Praxis Business School.)

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