Capital at Risk: Nature through An Investment Lens
Blackrock
2024-08-14Only a portion of natural capital’s value to the economy is priced into markets today. But we expect asset prices will adjust to better reflect both the risks and opportunities linked to natural capital – a trend we are already starting to see.
Valuing natural resources
The economy depends on natural resources. Their value derives not only from their use as direct inputs to production – such as timber for construction – but also for their benefits to society like living trees that help clean the air. Economists use the term “natural capital” to refer to the total value that natural resources provide to the economy and to people.
Ecosystem services grow when better priced
Change in global ecosystem service volumes, 1900-2015
Drivers of asset repricing
The primary driver of asset repricing is increasing physical risks: natural resources are increasingly strained, which pushes up costs for companies that rely on them. Biodiversity loss is reducing nature’s resilience and productivity in many regions, further driving physical risks. In addition to these physical risks, the policy response to natural capital stress is growing, especially in Europe. Technological advances and shifts in consumer and investor preferences can also influence natural capital value in the market.
Identifying risks and opportunities
Fully accounting for natural capital-related risks in investment portfolios depends on overcoming challenges with data and analysis. Right now, there is limited data on how exposed companies are to natural capital risks, but new corporate disclosure standards, data collection tools and models may help in the future. At BlackRock, we are also using new AI tools to help fill the data gap in the near term.
In addition to managing risks, many clients are interested in gaining exposure to natural capital-related opportunities. They include solutions that: 1) use natural capital more efficiently – like precision agriculture; 2) support a circular economy by reducing and recovering waste – like businesses that use waste to create new goods; 3) restore nature – like reforestation; and 4) harness natural capital to generate new products or business models – for example, by using emerging synthetic biology alternatives.
Near-term capital allocation opportunities include thematic strategies and systematic signals, as well as nature- and biodiversity-themed green bonds. In the longer term, we expect private markets to provide a significant opportunity for investing in natural capital solutions.
