How Insurers Are Creatively Investing in A Growing Asset Class: Natural Capital
Insurers, who invest trillions of dollars annually, are seeking to allocate their invested assets in ways that can support sustainability, the energy transition, and even nature itself through natural capital.
Natural capital includes real asset investments such as forests and farms, where insurers seek to protect the land from development while benefitting from the products produced on the land. Often the investments yield multiple sustainability benefits, including producing environmentally friendly products or clean energy.
Discussion questions include:
--Overview: What is natural capital and what is driving investments in it
--Case studies: real life examples of natural capital investments
--What are the risks in investing in natural capital?
--How to mitigate those risks
Panel:
Brian Kernohan, Chief Sustainability Officer, Manulife Investment Management
Jasper Renk, Senior Investment Manager Illiquid Assets Natural Capital, MEAG
Robert P. Hartwig, Clinical Associate Professor of Finance & Insurance, Darla Moore School of Business
Chair: Meg Green, Insurance Insider
The scope of natural capital as an asset class is growing as insurers have begun to consider it in the context of other ecological threats such as climate change, loss of habitat and decreased biodiversity.
Insurers face increasing regulatory and public pressure to manage climate-related risks through both their underwriting and asset management. Climate change risk goes hand-in-hand with a less-discussed crisis: the dramatic loss of nature in our lifetimes, including the worldwide reduction in wetlands, forests, and the biodiversity of plants, insects and animals.
Humanity has already wiped out 83% of wild mammals and half of all plants and severely altered three-quarters of ice-free land and two-thirds of marine environments, according to the World Economic Forum. The forum’s research shows that $44 trillion of economic value generation – over half the world’s total GDP – is moderately or highly dependent on nature.
It’s only natural that interest in the asset class is growing. “Loss of nature is an existential threat, similar on the magnitude to climate change and people, societies and businesses, all depend on nature for raw materials life, supporting and regulating services as well as cultural services,” remarked Brian Kernohan, Chief Sustainability Officer, Manulife Investment Management, pointing out that our dependency on nature, and our awareness of that, is driving investments in natural capital.
The webinar took place two days after the inauguration of President Trump and Robert Hartwig, Clinical Associate Professor of Finance & Insurance, Darla Moore School of Business, reflected on the differences of opinion on environmental matters between the incoming and outgoing administration.
He noted: “it's a good time to be discussing how, for instance, investments in natural capital, as well as insurers investments in general, that involve environmental related risks, how those will be perceived by the new administration and by regulators, and how insurers will perceive a new regulatory environment.”
The experts pointed out that, much like the political landscape, in the States, the industry perception and categorisation of what constitutes natural capital is evolving. When the class emerged around 15-years ago there were theoretical and unproven benefits of natural capital, such as inflation protection and general low correlation to other asset classes. Investors such as MEAG (the investment arm of Munich Re) were tasked with exploring the sector and proving the theory, which has largely been a success.
Jasper Renk, Senior Investment Manager Illiquid Assets Natural Capital, MEAG, explained that initially, investors focused on natural capital classes such as forestry and agriculture and, while these remain the traditional investment areas, new classes are now coming under the microscope.
Renk commented: “A prominent example of secondary biosystem or ecosystem functions that can be financially recognized would obviously be carbon credits. I would say that's a proper standalone market.”
Kernohan noted: “It was only recently with the climate mitigation agenda that you saw the value of carbon and the price of carbon increase enough that allowed us to look at a forestry with optionality for the investor. We could continue to manage a forest for the products that society needs from it, or, depending on the economics, we can now also look at it through the lens of a carbon price to decide if that forest is of value to the investor for the carbon it can produce.”
Other newer areas of interest include biodiversity, soil retaining groundwater, and extraction of critical minerals which, for example can be important for an ongoing electrification away from fossil fuels towards battery and electric motors.
For any of these classes to be a success, investors must be able to value them. Kernohan, explained: “An important discussion for the institutional investor and insurance companies, as they think about investing, is subscribing value to the non-traditional forms.
“If we can’t subscribe value to it, you can't generate the return on the back side of that and therefore attract the capital to invest in, because this is a not a philanthropic vision.”
He continued: “We've subscribed value to carbon and therefore it can be underwritten in and of itself. Biodiversity is much more complex, as are lot of these other aspects of natural capital stock so we need that basic research and information to price it into the investments that we know, philosophically or academically, are possible, but this notion of value is really important.”
As with any investment, the length of the investment is a prime consideration. Hartwig highlighted that, in most cases, any environmental investment is a long-term play. For indirect invest, such as municipal bonds which often have a natural capital angle such as water supply, the terms can be anything from 10-30 years.
Furthermore, the panellists cautioned investors against gambling it all on one category. Renk outlined: “If I put all my eggs into one basket and expose myself to one wood market, that can be an issue, especially for insurers who typically want very stable and, even more importantly, predictable liquidity or distribution profiles in the future. This is tackled, at least in our company, and I would imagine others as well, via diversification and via diversification of asset types.”
Investors must also consider the impact of a changing climate upon natural capital resources. The panellists urged investors to contemplate factors such as geographical selection as the first risk management step against natural risks. For example, if a forest is an investment target examine if climate change will affect the ability to grow wood in future or if the type of trees grown might need to change.
The experts rounded-off the discussion with key takeaways. Hartwig commented: “There is going to be a need in the current political environment to reposition investments in natural capital in a way so that they are viewed as being in a country's strategic interest, that they give you an advantage in terms of economic growth opportunities, that they create geopolitical advantages for your country.
“I think that insurers can be part of that repositioning and help create that narrative, because we're in this country, at any rate, we're kind of behind the curve on that.”
Meanwhile, Jenk urged European investors to: “Play into what the EU has determined as a transition into a sustainable economy. This is also where rare earth, rare minerals for battery production, battery storage all come into play.”
Finally, Kernohan concluded: “Recognizing natural capital and our reliance on nature separate from climate change, really needs to happen in order to put the right focus on this…Many started talking about it because of climate change but we have to separate them. I think people, businesses and societies need to start really thinking about their dependencies and impacts on nature.”