Nature-Based Solutions Are The Way Forward

FEATURED ARTICLE

We have begun to see an increasing number of companies leveraging the normal functions of nature to address the climate and environmental crisis. These companies have become sound investments for those looking to play the green transition in an SFDR-aligned way. Often value picks, these companies have also served as useful climate hedges in times of distress. In this piece, we explore three sub-themes within the broader nature-based solutions category that we believe have the potential to generate favourable returns for investors in sustainability themed mandates. These are sponge cities, natural water treatment, and blue carbon credits.

Finance is getting increasingly interested in nature for the right reasons. The World Economic Forum (WEF) estimates that 50% of the global economy is dependent on nature and its ability to perform its normal operational functions.[1] As such, environmental risks such as water scarcity, biodiversity loss and climate change have routinely ranked amongst the WEF’s biggest macro risks.

Several investment frameworks have emerged in recent times to define nature-based solutions and specifically identifying nature’s varying abilities to perform climate-tackling functions. These frameworks have been explicit in exploring the link between nature and the climate, soil, water and biodiversity crises. Indeed, the common denominator in all these crises is the loss of natural capital itself – very often the same natural capital that economies and businesses depend on for their very own survival. This includes the fertile soil that grows our food, the clean water we rely on to produce our products – from textiles and garments to concrete – and even our natural ecosystem ‘barriers’ like wetlands, mangroves and salt marshes that buffer us against storms and wildfires and protect our communities.

Strong references like the Dasgupta Report on the Economics of Biodiversity explain how our economies are dependent on nature and its capital.[2] We now know that there is no economy without nature. And as this realisation gains ground in the (sustainable) finance industry, we are seeing greater acknowledgement of the fact that we need to invest in new solutions. We need to construct a new economy that is in line with the natural world.

Sponge cities

For example, sponge cities can help our cities become more sustainable in the long-term. A sponge city is a type of city that does not act like an impermeable system that prohibits water from filtering through the ground, but, more like a sponge, actually absorbing rain water, which is then naturally filtered by the soil and allowed to reach urban aquifers. This allows for the extraction of water from the ground through urban or peri-urban wells. This water can then be easily treated and used for a city’s own water supply. Green infrastructure like this which is synchronised with the water cycle has the potential to address urban flooding risk and prevent polluted water (from excess rainfall) from being discharged into our seas and rivers.

Natural water treatment

Forestry also has the ability to do the work of nature. Consider the job of natural water treatment and utilities that are willing to outsource part of the water treatment to nature. We have seen examples of this in the United States where the Central Arkansas Utility used some of the proceeds of its Municipal Green Bond Facility to acquire a surrounding forest in order to protect the integrity of watersheds. Acquiring surrounding forests not only protects them from urban expansion – and the related pollution – but the forests’ natural filtration features provided to the watershed can go a long way in cleaning the water. The State of New York is an example of a municipality that doubled down on nature, investing $USD 1.5 billion in land acquisition, watershed restoration and payment for ecosystems funding to keep naturally filtered water for its city, instead of investing $USD 4 billion in capex and $USD 200 million per year in opex for a new water treatment plant.[3]

Blue carbon credits

Voluntary carbon markets have been hailed by Mark Carney as a useful tool in fighting climate change. Investors can acquire disaffected lands, restore them to their natural states and harvest carbon credits for keeping them intact. This activity can yield yearly income flows from big industry that is transitioning to Net Zero, creating a source of alternative yield through carbon credits. While this has historically involved forest conservation, blue carbon credits are gaining recognition for their high carbon sequestration potential. Wetlands, mangroves and salt marshes have five times the carbon sequestration capacity than forests have, which illustrates the potential of these restoration investments to become high-yielding assets. In exchange, this natural capital offers water treatment and protection against storms, floods and wildfires for local communities.

The bottom line

The climate and environmental crisis we are currently facing is eroding the natural capital on which our economies are built. Clean air, clean water, healthy wildlife and a regulated climate are all pillars of the natural infrastructure humans have built society on. And the current ecological crisis is threatening its very foundations. The need for new solutions to reinforce these foundations is becoming more apparent and natural solutions hold the promise of collaborating with nature, rather than working against it. We expect investors that use capital to transition us toward more nature-based economies will be rewarded with opportunities and wealth preservation throughout the transition. We believe nature-based solutions can provide not just value appreciation but also a sensible climate hedge in any sustainable themed portfolio.

This Featured Article has been produced by Sustainable Market Strategies. Rize ETF Ltd make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability or suitability of the information contained in this article.

Related ETF

LIFE: Rize Environmental Impact 100 UCITS ETF

LUSA: Rize USA Environmental Impact UCITS ETF

References

[1] Nature4Climate, “THE GLOBAL VALUE OF NATURE”, April 2022. Available at: https://nature4climate.org/the-global-value-of-nature/#:~:text=Research%20by%20the%20World%20Economic,therefore%20exposed%20to%20nature%20loss.

[2] The Dasgupta Review, “The Economics of Biodiversity: The Dasgupta Review”, February 2021. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/962785/The_Economics_of_Biodiversity_The_Dasgupta_Review_Full_Report.pdf

[3] Ecocsytem Marketplace, “Ecosystem Services in the New York City Watershed”, 2006. Available at: https://www.ecosystemmarketplace.com/articles/ecosystem-services-in-the-new-york-city-watershed-1969-12-31-2/