Nature finance frameworks bring clarity but struggle to unlock institutional allocations

Nature finance has seen a recent influx of frameworks aimed at bringing greater clarity and order to the sector.

New disclosure standards and investment frameworks are giving asset owners more ways to assess nature-related risks and opportunities. However, evidence from investor groups and advisers suggests these tools may currently be having a greater impact on reporting, stewardship and risk management than on asset allocation.

Frameworks

In July, the Institutional Investors Group on Climate Change (IIGCC) published its Navigating Nature Investments paper, proposing a common language for describing, comparing and assessing nature investments. The IIGCC said the proposed “translation layer” aimed to tackle the issue of inconsistent terminology and improve visibility of nature-specific risks.

Meanwhile, the International Sustainability Standards Board (ISSB) is developing a proposed IFRS Practice Statement to help corporates disclose financially material nature-related risks and opportunities, drawing on the Taskforce on Nature-related Financial Disclosures (TNFD). A draft is expected in October.

The ISSB’s work has also highlighted the challenge of translating nature into a standardised financial framework.

Taken together, the initiatives suggest nature finance is moving towards a more formal investment architecture. But does increasing guidance create value for asset owners, or simply make an immature market easier to understand?

Peter Walker, who leads IIGCC’s work on nature investments, said its approach was designed to make the market easier to navigate.

“The idea is, it’s supposed to make life easier for investors. It gives them a consistent way of talking about nature investment,” Walker told IPE.

For Walker, mismatched terminology can create issues even where developers have projects and investors are looking to invest.

Andre Ranchin, head of climate and nature at Hymans Robertson, told IPE that while frameworks were useful, it was less clear whether they translated into investment decisions.

“From a reporting perspective, [they are] very helpful. From an asset allocation perspective, it is less clear,” he said.

“The type of analysis that you do for risk management doesn’t necessarily lead you directly to an asset allocation approach; it might lead you more to sort of stewardship or engagement.”

Nature risk and environmental crime

That is also reflected in emerging TNFD guidance. Asset owners and managers are being urged to scrutinise portfolio exposure to environmental crime more closely, including through enhanced due diligence and stewardship escalation.

Speaking to IPE, a Universities Superannuation Scheme (USS) spokesperson said: “We have internally developed screening tools to determine a company’s exposure to nature-related issues, both risks and opportunities, and nature is part of our standardised research template, alongside our other priority areas, climate, people, and governance.”

However, USS also pointed to data limitations. “Nature data is improving but remains a challenge. The wide range of issues makes nature-related data more of a challenge than climate-related disclosures.”

The Climate Policy Initiative (CPI) reached a similar conclusion on the need for consistency in its July review of net-zero and nature-positive finance frameworks. The paper found that definitions and applications still varied across policy commitments, taxonomies and financial frameworks, arguing that greater alignment could support clearer investment signals and more consistent tracking.

However, greater consistency in itself does not remove the barriers facing asset owners that want to allocate to nature.

Vanessa Hodge, partner and sustainability integration lead at Mercer, said the issue comes down to whether investors have the risk appetite to allocate to nature-related investments. “Frameworks will be useful, but I feel it’s early days,” said Hodge.

There are signs that investor demand exists, however.

Research from Mallowstreet, backed by BNP Paribas Asset Management, Foresight Group and Rebalance Earth found that 94% of the 68 UK institutions surveyed, plus six Europe-based investors, “expect to hold an allocation in natural capital in the next five years”. This includes local government pension schemes, 75% of defined contribution (DC) pension funds, 75% of insurers, 58% of defined benefit (DB) pension funds and 50% of charities.

Furthermore, two in five non-investors in natural capital are planning their first capital allocations to the asset class in the next five years, and many existing investors are looking to scale up significantly, with one third of existing investors expecting to allocate more than 3% of assets to natural capital by 2030, the survey noted.

However, questions remain over whether sufficient investments exist at the scale institutions require.

“At the moment, there aren’t enough scalable opportunities in natural capital,” Hodge said.

“At the moment, there aren’t enough scalable opportunities in natural capital”

Vanessa Hodge at Mercer

Ranchin mirrored this view, adding that investors need “attractive opportunities with credible risk-adjusted returns”.

APG spokesperson Robert Bakker said: “As understanding of nature-related risks and opportunities evolves, and more decision-useful, financially material data becomes available, investors can make more informed allocation decisions and assess the risk-return profiles of nature-related opportunities with greater confidence.”

Policy and revenues

Research from the London School of Economics (LSE) Grantham Research Institute has argued that the lack of scalable opportunities raises a wider policy question.

Leo Mercer, policy fellow at the LSE’s Grantham Research Institute, and independent researcher Tom Gegg argued in a recent commentary that private finance remained a relatively minor contributor to UK nature funding. Their analysis found that nature projects were constrained by uncertain demand and prices, long periods of negative cash flow and an unpredictable policy landscape.

Speaking to IPE, Mercer said: “Revenue certainty would be another significant barrier for project developers and this obviously has flow-on effects for the project pipeline.”

He also pointed to scale: “Institutional investors want large deals in the tens of millions, and a single natural capital project in the UK is likely to constitute a few hundred hectares. More aggregation is critical to smoothing these frictions.”

The LSE paper argues that nature markets can contribute to UK restoration, but that their limitations require greater use of other fiscal levers, including repurposing subsidies on marginal agricultural land towards long-term nature restoration.

Mercer said longer-term government contracts could help de-risk projects, while return-seeking public investment could absorb risks that private capital was currently unwilling to accept.

Hodge, however, pushed back against the idea that UK policy was simply lacking, flagging existing government-backed mechanisms, including the Woodland Carbon Code, Peatland Code and England’s Biodiversity Net Gain regime.

For asset owners, frameworks may be improving their ability to understand nature-related risks and opportunities. But the challenge remains turning nature projects into investments offering the scale and the returns institutional investors require.