Article at a glance

• In a bid to uncover how public equity markets address nature and biodiversity loss, new research from Pernille Holtedahl and Iva Koci reveals that nature investing is currently focused more on managing risk than finding new investment opportunities.
• While investors recognise that nature-related risks can impact a company’s cash flow and long-term value, equity markets have yet to fully reflect these risks in company valuations.
• Despite limited public nature-investment opportunities, water management emerges as the clearest investable theme.

Nature and biodiversity loss are high on the agenda of corporates and financial players. But how are investors responding to nature-related risks and opportunities in public equity markets?

Drawing directly from the perspectives of early-adopter investors through a bespoke survey and a series of semi-structured interviews, our research uncovers both the limitations and opportunities of investing in nature.

Nature investing is still primarily about managing risk

Currently, nature investing is more about managing risk than finding new investment opportunities.

Most public equity investors take nature into account from a financial perspective, mainly to protect their portfolios from potential losses. This includes exposure to operational, regulatory or reputational risks.

Nature is viewed less as a strategic source of long-term value creation.

The nature data challenge

So, what is holding nature investing back?

The problem is not simply a lack of reliable data, but the challenge of translating data into information that investors can use to make investment decisions. Data on nature and biodiversity can be hard to measure, leaving investors uncertain about which data are useful and reliable.

Investors also perceive a lack of evidence that positive nature impact translates into financial performance.

Furthermore, our research identifies that public equities seem to offer investors relatively few ways of investing directly in biodiversity restoration or nature itself.

More than half of respondents (55 per cent) indicate they invest in nature “solution providers” – public companies whose activities directly contribute to solving nature and biodiversity challenges. Consensus amongst public equity investors on what qualifies as a nature solution remains limited, however, leading to a broad definition.

Public equity investors primarily invest in how products are made, rather than in what is produced. For example, they invest in beverage producers that have reduced plastic packaging, or clothing brands that recycle fabrics or have improved their supply chain.

Direct investments in nature and biodiversity – such as sustainable agriculture or forestry – are better suited to private markets.

Altogether, these challenges create investment barriers that will remain difficult to address without better risk models, coordinated policy or market interventions.

Previous research from Imperial Business School found that businesses are more likely to act on biodiversity when nature-related interventions deliver clear and measurable financial value, pointing to a similar underlying problem. 

"Investor awareness of nature is running ahead of market action."

Investors see the risk. Markets don’t.

Investors overwhelmingly recognise that nature-related risks can negatively affect a company’s future cash flows and long-term value (financial materiality). Yet they report that these risks are not adequately reflected in current equity prices (market materiality).

This disconnect can be explained by the fact that nature-related exposures are difficult for markets to price because they are often long-term, uncertain and difficult to observe through standard valuation models.

The pricing picture is not the same across all sectors. Nature-related risks are more likely to be incorporated into equity prices in sectors that are directly dependent on natural capital. This includes land-intensive industries, such as agriculture, paper, pulp and timber, and utilities. Nature risks are more immediate and operationally relevant in these sectors, and therefore can have a more direct effect on a company’s cash flows.

Nevertheless, 63 per cent of respondents expect nature-related risks and opportunities to become more fully priced over the coming decade.

Why water stands out

Public nature-investment opportunities are emerging in areas where investment models are well established and available. Water management has emerged as the most highly rated opportunity amongst respondents, with nearly 80 per cent rating it as “very important”, followed by forests and other provisioning industries.

The sector has many characteristics that make investors comfortable. This includes a large number of listed companies, established business models, clearer revenue streams and stronger links to financial value, which help to attract investor attention.

Water-related challenges are also more immediately quantifiable, data-driven and actionable than other nature themes, making them easier to incorporate into existing investment processes.

What does this mean for markets?

Structural and informational barriers currently make it difficult for investors to incorporate nature considerations into public equity investment decisions. This early stage of nature investing is similar to where climate risk integration was in its early years: investors are increasingly aware of the risks, but markets have yet to fully price them in.

Nevertheless, growing awareness, regulatory developments and better measurement frameworks may help nature-related risks and opportunities become more fully incorporated into asset prices over the coming decade.

For now, investor awareness of nature is running ahead of market action.