By Gerelyn Terzo, Global AgInvesting Media

Natural capital is capturing an increasing amount of attention in the agriculture industry. Natural capital as an asset class represents forestry, agriculture and conservation assets, as defined by New Forests. While natural capital as an asset class has certainly piqued the interest of institutional investors, there is still plenty of runway for growth. Natural Capital comprises an estimated 4.5 percent of the global economy, a fraction of which is in institutional assets under management currently.

Nevertheless, as BlackRock pointed out, over 50 percent of the world’s GDP, or an estimated USD $58 trillion, is moderately or highly dependent on nature, which introduces both opportunities and risks for investors. With firms like BlackRock having already jumped into the fray with natural capital strategies focused on land use and deforestation, water, and biodiversity, the stars are aligned for institutional demand to increase.

Natural capital introduces diversification to an investment portfolio, potentially offsetting the extreme volatility that is inherent with other asset classes including equities. In addition to a low correlation to other asset classes, natural capital is designed to provide a hedge against inflation coupled with a steady and dependable stream of income on top of any asset value increases.

While there are challenges, natural capital offers a host of unique benefits, not least income streams from climate-related activities surrounding carbon and biodiversity credits, for example. From a social perspective, natural capital also checks the boxes for a sustainable investment and climate change mitigation, owing to its nature positive features and positive impact on rural communities. According to New Forests, institutional investors traditionally allocate anywhere between 1 percent and 5 percent of their portfolios to forestry and/or agriculture amid a wider 15 percent to 25 percent allocation to private real asset and alternative asset categories.

There is also product innovation unfolding with new financial instruments being introduced that represent natural capital value. BlackRock has been a pioneer in this field, as a result of which Trading volumes in these natural capital derivatives have soared, reaching $47 billion monthly by year-end 2024.

Global AgInvesting has lined up a roster of leading industry voices to discuss natural capital as an asset classes from several different vantage points next week, including through the lens of an LP. If you haven’t already done so, be sure and secure your spot at GAI’s upcoming New York event today.

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