Net zero and nature positive investing may seem aligned in their goals, yet our analysis reveals that certain net zero investment strategies could inadvertently embed nature risks. Our findings are a first step for investors moving from climate transition plans to integrated planning.
Main findings from assessing different investment tilt strategies focused on greenhouse gas (GHG) emissions exposure relative to broader nature impact exposure are:
- Nature exposure cannot be reasonably mitigated through an approach that seeks to exclude or underweight specific sectors
- Nature and GHG emissions exposures are aligned in the majority of circumstances, but an emissions-only strategy will have more limited benefits for nature
- Nature creates overlapping dependencies across economic sectors that – if nature were to become more priced-in to markets – would undermine traditional diversification strategies
While the market continues to calibrate on the definitions and indicators for nature positivity, investors can take steps to integrate nature into investments by:
- Prioritizing the themes where corporate economic activity has the greatest impact. Leverage the climate transition playbook to identify material sectors and companies for engagement.
- Using the themes of natural resource usage, land use change and waste/pollution generation to screen for risks and monitor improvements. Apply a science-based approach to assess the ambition and execution of improvements against nature positive goals.
- Taking a whole portfolio approach to identify sources of nature impact and allocations to nature solutions. Consider both event and systemic-based risks.
Nature Positive Investing
The focus on sustainable investment, according to the Taskforce on Nature-related Financial Disclosures (TNFD), is evolving from a focus on climate transition plans to integrated planning that considers nature and social objectives managed holistically with climate integrated into nature.
The investment strategy nonetheless faces a tension for investors to manage: how to further the energy transition in line with net zero goals despite many of its catalysts having an impact to nature.
Overall, we believe the opportunity costs of inaction on the energy transition poses greater risks than the marginal increases to nature impact over the short term so long as investors are mindful of the need to monitor, and where possible mitigate, the long-term impact to nature.
There are opportunities to offset specific impacts at a local level and facilitate a more equitable distribution of the benefits from natural capital usage across a value chain.
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Important information on risk
Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Real estate investments are subject to various risks associated with ownership of real estate-related assets, including fluctuations in property values, higher expenses or lower income than expected, potential environmental problems and liability, and risks related to leasing of properties. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. Investments in middle market loans are subject to certain risks such as: credit, limited liquidity, interest rate, currency, prepayment and extension, inflation, and risk of capital loss. Private equity and private debt investments, like alternative investments are not suitable for all investors given they are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales, concentrated investments and may involve complex tax structures and investment strategies. Nuveen, LLC provides investment solutions through its investment specialists. This information does not constitute investment research as defined under MiFID.
