Nature: the new real estate asset class

By 6th September 2021September 20th, 2021insights

Today, ‘the market’ is the single-most environmentally destructive force on our planet. Its hunger erodes our Garden of Eden, and its pursuit of profits ultimately undermines our society.

But this can change. In fact, we can – and should – use the market to repair the damage done.

We are entering an era of impact transparency where consumers, customers, investors, staff, and wider society are demanding transparency over corporate impact and behaviour. It promises to be an era where environmental costs change the rules of the game; a game where impact transparency will have far-reaching consequences as investors and consumers start to price environmental impacts into their decisions.

Technology and Big Data make the measurement and valuation of corporate impact a reality. The Impact-Weighted Accounts Initiative (IWAI), from Harvard Business School, revealed the environmental impact of 1,800 companies. Taking these environmental costs into account, 15% of the analysed companies would see their profit more than wiped out by the costs of their environmental damage, while 32% of them would see their net profits reduced by 25% or more. It is a stark warning of how environmental damage can undermine a company’s intrinsic value.[i]

As a result of growing impact transparency, more companies are under pressure to compensate for their environmental impacts and carbon emissions. This makes carbon emission compensation a new and fast-growing market. PRI, a United Nations-supported network of investors that aims to promote sustainable investment, predicts that “technologies to remove carbon from the atmosphere – also known as ‘Negative Emission Technologies’ (NETs) – could create trillion-dollar upside opportunities for investors, as more and more countries, cities and corporations make ambitious plans to become net zero with their carbon emissions.”[ii]

Negative Emission Technologies (NETs) are the next investment frontier, offering a potential trillion-dollar market for investors in which climate change and greenhouse gases become part of the real economy, driven by the demand for carbon removal from the atmosphere. And it’s a market with an expected annual double-digit growth.

In anticipation of tapping into the growing carbon emissions market, the Dutch cooperative bank Rabobank is aiming to become the first ‘Carbon-Bank’. It has set-up a separate division to create a platform for carbon trade and finance carbon emission credits. Its expectation is that more banks will follow, and that carbon-banking will become an established trading sector of the financial sector.

Of all the NET’s being developed to store carbon, the oldest and most efficient technology is nature. Nature, through photosynthesis, takes carbon from our atmosphere and stores it in vegetation. According to research commissioned by PRI, in the near term, natural carbon storage offers investors the greatest opportunities to reap financial gains, principally through actions to halt deforestation and promote reforestation. Within NETs, forest-related nature-based carbon storage could generate US$800 billion in annual revenues by 2050, worth US$1.2 trillion in today’s value terms.”[iii]

That said, the market of nature-based solutions for carbon storage is still in its infancy. As an example, funding for forests amounted to just under USD 22bn since 2010; by contrast the renewable energy sector received more than 100 times the finance commitments in the same period.

Methods of assessing and valuing carbon storage by nature vary, as do trading standards and platforms. Certification can be a powerful tool to lever the promotion of reforestation, preservation of existing nature, and battle deforestation. By recognizing the value of nature and its role in decarbonising our atmosphere, we can create a tradable asset. Ending deforestation and promoting reforestation depends on fundamentally realigning the incentives and larger systemic levers that guide and determine economic value of nature. Government regulations and policies are key in this.

The challenge for nature-based carbon storage solutions is to address the fragmented regulatory landscape that exists across most industrialized nations. For example, emissions and removals from land use, land-use change, and forestry are currently excluded from the official emission trading systems. While it is better organized for non-industrialized countries which are covered in the framework called REDD+, the UN program for Reducing Emissions from Deforestation and forest Degradation, there is still much work to be done.

If industrialized countries can standardise the creation of carbon credits to allow for trade in those assets it would create a new investment market which could facilitate the creation of ‘new nature’ and battling deforestation by valuing existing forests. Sustainably managed ‘climate-smart’ forests would not only contribute to clean air for all of us, but also have a positive material effect on reducing global warming and maintaining a healthy bio-diverse environment. 

By incorporating land use and forestry into national emission-reduction programs and allow for the creation of tradable carbon credits, we can ensure that the actions of forest owners and farmers to secure carbon stored in forests and soils will contribute to achieving the commitments under the Paris Agreement on climate change. A new real estate asset class will be born, called Nature.

[i] How to Measure a Company’s Real Impact, by Ronald Cohen and George Serafeim, Harvard Business Review website, 03 September 2020

[ii] New investor guide to negative emission technologies and land use, RPI press release, 26 October 2020.

[iii] An investor guide to negative emission technologies and the importance of land use, Vivid Economics Limited, October 2020.

Featured image: Nature is born by Matthew Smith on Unsplash

About the Author:
Eduard Elias, founder of Cycas Capital, has over 25 years’ international experience in debt finance and financial structuring.

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