Investing in Natural Capital

Dominique Barker: Welcome to the Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape, with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Brandon Lewis: Investments in Timberland and Farmland. They’ve also provided attractive risk adjusted returns and low volatility. And now there’s growing interest in these asset classes from companies who want to put the greenhouse gas mitigation front and centre, in their strategy as they move towards net zero.

Dominique Barker: Hello and welcome to the third episode of our Natural Capital series leading up to COP 15. For the benefit of our listeners. Cop 15 focuses on the sustainable management of biodiversity. Whereas COP 27, which is happening in Sharm el-Sheikh, Egypt in November, centres on climate. Today we welcome Brandon Lewis, director of Sustainability for Manulife Investment Management’s Timberland and Agriculture Businesses. On today’s episode, we’re going to be discussing investments in natural capital that offer positive financial returns and contribute to global sustainability solutions. Good afternoon, Brandon. Thank you so much for joining us on today’s episode of The Sustainability Agenda.

Brandon Lewis: Really happy to be here, Dominique. Thanks for having me.

Dominique Barker: Let’s just set the stage. I always like to start with a general question. Could you please define natural capital for us and how it differs from the definition of nature?

Brandon Lewis: Yeah, so really critical question there. I’ll start actually with the definition of nature first and then get into natural capital. So nature is really just the natural world living non-living. They’re different realms land, water, freshwater, oceans, air. It’s the different realms then everything that lives there. And that’s that biodiversity component. But it’s just one component of nature. That’s nature, natural capital. It’s basically the productive abilities of nature or the way in which it directly or indirectly underpins value to people, to humanity. So our woodland, our freshwater farmland, coastal areas, oceans, essentially all living things are natural capital assets because they provide the services that make life possible. So examples are energy, food, timber or things like clean air and recreational access. So that’s kind of nature and natural capital. But I also want to touch a little bit on what natural capital is not. It’s not just putting a price on nature. I think that’s sometimes what people fear in the natural capital conversation. Natural capital does not mean you can monetise everything in nature and a sense.. Nature is kind of like love. When you start putting a price on it, things can get kind of weird, but you would certainly spend money to protect it or encourage it When you’re on diamond rings or not free, there’s travel to see people or spend time with them or medical bills to take care of them. People in relationships are valuable to us, and so we can’t or shouldn’t try to put a price on them or more than willing to spend money on them. That doesn’t mean they don’t have value. To a certain extent, that value is expressed in our willingness to forgo other things, whether it’s time or money or things like that, to enjoy or benefit from those relationships. And nature is similar. Another way of putting it is that you have to take care of nature in order for it to take care of you. If you don’t, you road its productive capacities, its capital, and you will eventually feel the negative impacts of that decision.

Dominique Barker: So is it fair to say it’s the risk that if it’s gone, the value you forgo, or is that along the right lines of thinking?

Brandon Lewis: I think a lot of valuing nature kind of it works backwards in the sense that you have to think about what would happen if it weren’t there. And that’s challenging, especially when it is. But unfortunately we’re being given more and more opportunities to see what things are like when nature is not there. So I think there’s kind of this weird paradox, yeah.

Dominique Barker: Okay. So you’re on the investment side. You lead the timberlands and agriculture businesses at Manulife Investment Management. Why are investments in natural capital important to investors and what is the business case?

Brandon Lewis: So there’s at least two reasons. First, it’s because nature underpins half the global economy. We’re concerned about financial markets and the real economy that runs them. Then we also need to be concerned about what makes the real economy function. And that’s a lot of things. Nature is one of them and it’s a big one. I think there’s paper from World Economic Forum saying something like 44 trillion worth of economic activity is moderately or highly dependent on nature. So that’s that’s really the first one. It underpins the global economy, or at least half of it, I’d say. The second reason that natural capital investments can be important to investors is because over time, demand for nature’s ecosystem services or the services that nature can provide will increase as they become scarcer. You think about water, which in technical terminology is a provisioning service. So I live in Colorado. Water is scarce here. Many things we need to eat more of, such as nuts and fruit. Things that eat more of them is good for the climate. They’re grown California, at least in our country, water scarce there as well as what happens when things become scarce. Well, markets develop to trade those things and suppliers show up to those markets where there are buyers. In other words, people pay for things and services get monetised. If there’s one thing that investors love, it’s it’s monetisation. I’ve learned so so really there’s this fundamental structural reason, which is that nature underpins half the global economy. And then there’s the secondary reason, which is that as awareness for the need for nature’s services grows. There will be opportunities to buy and sell and trade those opportunities and that can generate return and investors like returns.

Dominique Barker: And thank you for highlighting that World Economic Forum report on the value of nature. We’ll include that in our show notes for listeners, and they can feel free to take a look at that. So for you specifically, where have you seen some of those opportunities for investment in natural capital?

Brandon Lewis: So naturally I see them in Timberland and farmland. Given that’s the sustainability program that I oversee. So investments in Timberland and farmland, they’ve always provided attractive risk adjusted returns and low volatility. And now there’s this growing interest in these asset classes from companies who want to put the greenhouse gas mitigation front centre, their strategy as they move towards net zero and Timberland and  Farmland, both have the ability to sequester carbon dioxide. And so there’s definitely opportunities to invest in natural capital there just as an example. So we recently made an investment that we’re managing in the US state of Maine. That’s about 90,000 acres of forests there that we are managing explicitly for carbon sequestration. The investment thesis centres on the timberlands being used to store carbon. We have the ability to sell those carbon credits as offsets or use those carbon removals to incent for working towards net zero as well. So that’s an example. There’s also opportunities in agriculture. Regenerative agriculture is kind of where those opportunities sit and it’s regenerative agriculture really is, is farming in a way that not only produces healthy food but is also meaningfully contributing to the well-being of those producing it and to that of natural systems like soil and water. So we’re talking about things like incorporating crop residue or reducing tillage or adding cover crops or rotating crops or adding soil elements, practices like that that enable you to not only produce a viable crop or viable product, but you’re also working on what some would really call healing of the land, improving its productive capacity.

Dominique Barker: Great. And a lot of people don’t understand, but it actually increases the yield generally of the land by taking on some of these practices. And so you mentioned carbon as an investment characteristic that you’ve been looking at and others. And I note that when you mentioned about regenerative agriculture and adding value to the land, would you include biodiversity in that? What are some of the investment characteristics other than than carbon you would add to this conversation?

Brandon Lewis: Yeah, it’s a great question, Dominique, because carbon sequestration is kind of the first ecosystem service that many think of. Biodiversity is much more nascent, but I would say that there is a field that’s rapidly developing that I think will be almost a prerequisite for markets, for biodiversity to develop, and that’s natural capital accounting and we can get to that in a few minutes. But I think water markets may exist in some places already. And I think again, as water becomes more scarce, we’ll see them develop even more. Biodiversity is it’s difficult to monetise, but without it we become less resilient, right? There are fewer it’s almost like an investment portfolio, right? The more diversified you are, the more resilient you are to shocks. I mean, you can think about a farm like that or a forest like that or a landscape like that. The more diversity there is, the more you’re kind of not putting all your eggs in one basket and something bad happens, you’re able to kind of bounce back quicker. So can you monetise that? That’s challenging. I think there are probably ways to do that indirectly, but really biodiversity is if you focus on it, that’s kind of a tool for potentially enhancing the long term value of the land because you’re kind of fortifying it against negative shocks and you also maybe enhancing its productive capacity.

Dominique Barker: Okay, great. Thank you for that. So wrapping up, what do you think is holding back nature markets and nature investments more generally?

Brandon Lewis: We don’t value them enough. It’s as simple as that. That doesn’t mean that we’re not putting a price on it and somehow that’s a problem. I think that’s it’s fine for us not to put a price on it, because there absolutely is this component of intrinsic worth might never be able to quantify, but we absolutely have to value it. We need to incorporate it into our financial decision making. We have to allow it to influence our decisions. And Dominic, I said I was going to mention natural capital accounting.

Dominique Barker: Yeah, I was, I was going to ask about that.

Brandon Lewis: Yeah. So. For that to happen, for us to start incorporating nature into our decisions, allowing it to influence our decisions, there needs to be really robust and high integrity methodologies to be able to account for nature and the services that it provides. And that’s natural capital accounting, accounting for nature with balance sheets and income statements in the same way that’s done in financial accounting. It has to become mainstream with the same kinds of standards and conventions and all the things that apply to financial accounting. We need the we have the generally accepted accounting principles. We need that generally accepted nature, accounting principles. I don’t know if GAAP is a catchy acronym, but we need something like that. We’re seeing some of those methodologies for differentiating things in the carbon market, differentiating between carbon credit quality. So there’s already some kind of very initial accounting happening, but we need to see it in a much, much bigger scale.

Dominique Barker: And TNFD will be or the task force on nature related financial disclosure is probably a good step forward. What are your views on TNFD?

Brandon Lewis: Absolutely. It’s it’s essential. We were part of the informal working group that kind of helped set up the mandate for TNFD, and we’re part of also the TNFD Forum. So we are certainly on board with the TNFD. We plan to be piloting it in the next few months Here. The TNFD will set out the same kind of standardisation and structure that the TCFD has provided for climate. The TNFD will do that for nature. So I completely agree with you, Dominique. It’s that that’s an essential piece of the puzzle here.

Dominique Barker: Great. Brandan, thank you so much for explaining this topic to us. It is a little bit turning on its head finance because it’s the value of nature if it’s not there. And so it’s a little bit of a different mindset and COP 15 will be an important event taking place. It was supposed to take place in China. They had to change the location, the physical location to Montreal, which happens to be near where I live. We’ll be keeping an eye on that and hopefully additional information on things like disclosure and a different accounting on natural capital. So thank you for the setup in advance of COP 15 and thank you for joining us today.

Brandon Lewis: You bet. You’re welcome, Dominique. Really pleased to be here. Thanks for having me.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is the sustainability agenda.

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