If water always finds a way, as the saying goes, then the same is true for financial ingenuity. A UK fund launched this week aims to generate returns for its pension fund backers from restoring natural resources and getting the companies who benefit to pay. There’s something to this idea, if it can navigate the problems that tend to vex green finance, such as fuzzy definitions and fears of dirty data.
So-called nature positive finance — the preserving and restoring of nature — is the topic du jour in green finance circles. Rebalance Earth, a start-up whose founders hail from wealth and pensions management, has secured £25mn from the £20bn West Yorkshire Pension Fund for its nature-based programme.
The plan is to get, say, a supermarket to mitigate its risk of flooding by paying, like any other maintenance or service fee, for an upstream river maintenance project. Perhaps a cat-food maker will see benefits in boosting North Sea fish stocks by restoring oyster reefs. Pension funds will profit mostly from a spread between the cost of the work and the fees collected. It aims to provide investors with an annual internal rate of return of up to 12 per cent over 15 years. For a pension fund, that’s good.
There is no shortage of ways for investors and companies to help the planet but the best-known are sputtering somewhat. Carbon credit transaction volumes fell by more than a quarter last year, according to Ecosystem Marketplace. Some of that masks a gradual shift to tougher standards more likely to avoid the dreaded perception of mere greenwashing.
Roughly $1tn of sustainable bonds — including green, ocean-related blue, and so-called sustainability-linked — are expected to be sold this year, but the market’s growth has stalled over the past five years. Public finance groups and governments make up about half the borrowing in any year, suggesting companies that might want to take action haven’t found the bond markets an easy route.
The flood and water risks that Rebalance is focusing on are real and increasingly quantifiable. UK train track operator Network Rail in December estimated that over the past three years, 9.3mn minutes of weather-related delays, from heat and flooding through wind and subsidence, cost £370mn. UK academics have previously calculated that some two-fifths of small and medium-sized businesses do not reopen after being flooded.
It’s logical that companies should be more willing to pay to deal with risks that are closer to home. But what about investors? Once a term like “nature positive” goes mainstream, it’s all too easy for vagueness to set in about definitions and actual outcomes. One solution is to root investing in unglamorous but tangible resource husbandry like restoring particular peat lands to preserve water. That may slow the growth of this unusual asset class — but at least it will keep it useful.
