Nature-based solutions: Asset owners 'asking for product' focused on Asia
Asset owners operating in Asia Pacific are becoming increasingly interested in nature-based solutions that target the region, according to industry executives.
While most nature-based solutions managers have typically focused on investment targets in the US and Europe, there is growing demand for solutions that focus on Asia.
“While most of our clients are European based, we are seeing an increase from Australia and the Asia Pacific in general in nature-based solutions,” said Sarah Clawson, global head of investor relations at New Forests, an Australia-based investment manager of nature-based real assets.
“Asian clients are asking for a product focused on Asia.”
Many of them [Asian asset owners] already see the global opportunities for diversification and all the other reasons they invest in offshore funds, she noted.
“Now they want something that will be more local, for instance, in markets such as Indonesia, Vietnam, Thailand, and more broadly investing in Southeast Asia. We are looking at creating a product that caters to this demand,” she told AsianInvestor.
Nature-based solutions refer to actions to protect, sustainably manage, and restore natural or modified ecosystems.
They include various techniques, such as restoring wetlands, planting trees, creating green roofs, and developing urban parks.
DUAL MANDATES
Part of the demand for such solutions arises from sovereign wealth funds and pension funds increasingly being tasked with developing their local economies and social ecosystems along with generating returns.
Examples of entities with such mandates include Indonesia Investment Authority, Malaysia’s Khazanah and pension fund KWAP as well as the Philippines’s newly launched SWF, Maharlika Investment Corp.
“They are being asked to develop local infrastructure, healthcare, sustainability, and natural capital investments are a great way to add to both the environmental goals of the SWFs as well as their local community and social goals,” noted Clawson.
Increasingly, Asian based asset owners are following the same journey as many investors and asset owners in the post-industrial world.
Rob Hall, head of nature investment at Federated Hermes, noted that as confidence grows, “the need for international portfolio diversification diminishes and overtime the risk of investing further away from home outweighs the risk associated with local investment in what had previously been perceived as lightly regulated jurisdictions.”
INVESTMENT ROUTES
Investments in nature-based solutions can be via funds or directly in assets.
“Institutional investors often start with a fund investment when they don’t have access to a deal or don’t know a particular region,” noted Clawson.
“After a 10-15 year holding period, they gain more experience and also learn from their investment manager. Eventually they might even go into direct investments.”
She noted that there is increasing interest among asset owners in co-investments as well.
“Investors are definitely more interested in co-investing but it will take time before they do so. They need to ensure they are structured in a way that allows their internal teams to do due diligence alongside us, among other things,” said Clawson.
It depends on how close asset owners want to be to the assets directly.
"Direct investments could give them the right to sit on the board, or approve the budget etc. In a blind pool fund, … they trust the manager to deploy the capital,” she added.
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LUCRATIVE RETURNS
New Forests’ Tropical Asia Forest Fund 2, which had a first-close of $120 million in 2022, is an institutional fund that includes investors such as Asian Development Bank, the Australian government, David and Lucile Packard Foundation, the Hempel Foundation, and GenZero, a decarbonisation investment platform owned by Temasek.
The fund is targeting a gross nominal return of 14%-18% in US dollar terms, said Clawson.
Direct investments are more popular with more sophisticated global asset owners operating in the region.
A consortium of Dutch pension manager APG, the UK’s Pension Protection Fund (PPF) and Australian superannuation fund UniSuper in October 2023 acquired Forico, one of the largest forestry operators in Australia.
Ben Avery, senior portfolio manager, natural resources, Asia Pacific, at APG said the Dutch pension fund had identified pathways to create value from these environmental assets both in terms of optimising the production of forest products and by managing the natural resources for positive impact.
“This includes initiatives designed to deliver improved carbon sequestration, climate regulation, and biodiversity conservation outcomes,” he told AsianInvestor late last year.
DIVERSIFICATION PLAY
European asset owners, who are more active in nature-based investments, for instance, want these assets for a variety of reasons – diversification, inflation hedging and increasingly climate – related investments.
“In a global [natural capital] portfolio, ideally the asset owner will have some investments in emerging markets, and some in developed markets,” noted Clawson.
"In the developed markets, for instance, there is a breakdown of what will drive growth – some part of it will come from the growth of the biological asset over time.
"You can also receive a cash yield from the timber that can be sold. And there is a cash yield from the carbon credits that can be sold too. An investor may also have other agricultural exposure."
Lucas Cacioli contributed to this story.