Every economy depends on a foundation that rarely shows up on a balance sheet. Forests filter water. Soil grows food. Wetlands prevent floods. Ecosystems regulate climate. These services have enormous economic value, but for most of financial history, we have taken them for granted.

Natural capital is the attempt to correct that. It means treating nature as the productive assets they genuinely are, measuring their value, and managing them accordingly.

The diagram below captures the core problem and the path forward. On the left, the feedback loop we've created: intensive agriculture, deforestation, and chemical reliance driving climate change, biodiversity loss, and soil degradation — all feeding back on each other. Agriculture, forestry, and land-use alone account for 23% of global GHG emissions. On the right, the alternative: a regenerative cycle where improving soil, reducing chemicals, and restoring biodiversity creates compounding benefits. Soil alone, if properly managed, could sequester enough carbon to offset more than four years of global GHG emissions.

Climate change makes this problem worse. Heatwaves, floods, wildfires, droughts, and pest outbreaks are causing more damage to the ecosystems that help regulate our climate. Investing in natural assets now means facing these physical climate risks.

The solution is regenerative and restorative land management: improving soil health, increasing biodiversity, protecting water systems, and reducing chemical inputs. The evidence is growing that this approach doesn't just help the planet, it improves long-term financial returns.

The charts below make the underallocation problem concrete. In a typical institutional portfolio (left), alternatives which include real assets like farmland and timberland represent just 12% of allocation. In the alternatives slice (right) and natural capital assets account for only 2% of the total. Private equity, by contrast, commands 64%. For an asset class that underpins global food, water, and climate systems, this gap between economic importance and capital allocation is striking and increasingly hard to justify.

So why would a mainstream investor care? The financial logic is sharper than many assume. Natural capital assets tend to behave differently from stocks and bonds during market stress. That low correlation makes them useful portfolio diversifiers. They also offer a structural hedge against inflation, since timber and food prices move with the cost of living.

On top of that, regenerative land management opens new revenue streams: carbon credits, biodiversity credits, and water services. Strong environmental outcomes and strong financial returns are not opposites here. They reinforce each other.

Adding natural capital to a portfolio has been shown to improve the Sharpe ratio meaning better return per unit of risk while reducing overall volatility. This isn't just impact investing. It's portfolio construction [1]

Natural Capital's Role as a Risk Mitigant

The table below summarises the role of natural capital as a risk mitigant in portfolio construction.

One of the most compelling and often overlooked arguments for natural capital is how it addresses risks that plague traditional portfolios. The table below maps seven common portfolio risks against the specific ways a well-constructed natural capital allocation can mitigate them [1].

[1]

Climate risk, however, is real. The same land that stores carbon can be devastated by the very forces climate change is intensifying. Due diligence in this space goes well beyond financial modelling, it requires deep assessment of physical climate risks at the site level.

New regulatory frameworks including Article 6 of the Paris Agreement, TCFD, and the newer TNFD are helping standardise these markets and giving institutional investors the language and structure they need to allocate with confidence [1].

We spoke with Phoebe Scott, who works within the carbon investment team at Climate Asset Management, collaborating across natural capital, legal, risk, ESG, and impact functions. Her perspective spans from high-level market structure to the week-to-week realities of getting deals done.

Q Why has natural capital been under-allocated for so long?

The core issue is time. Natural capital can take 5 to 20 years before meaningful monetisation. That demands patient capital — traditionally the domain of pension funds and insurance companies. More recent bodies of research from the World Economic Forum and economists like Partha Dasgupta have helped in shifting thinking, making the economic importance of nature increasingly translatable to a commercial audience. New investment structures are also making the space more accessible than it's ever been.

Q What does your typical week actually look like?

It varies a lot — which is one of the things I enjoy about it. Some days are about early-stage conversations, sizing up potential opportunities. Others are about progressing existing deals toward execution, working through carbon crediting methodologies, or staying on top of where carbon markets are heading. No two weeks look quite the same.

Q How do you think about climate risk as an investor in natural assets?

You can't ignore it — but you also can't let it paralyse you. We assess physical climate risks closely as part as our investment process, we seek to build climate risk resilience in where we can. The goal is to treat climate risk management as a value driver, not just a compliance box.

Q What about emerging markets — are they keeping pace?

It's a mixed picture. Some emerging markets are moving fast in areas like carbon and biodiversity credits, precisely because they host so much natural capital. Corporate adoption of frameworks like TNFD varies — company size and reporting requirements matter. But the bigger challenge in rapidly growing economies is decoupling economic growth from carbon emissions. That's a structural tension that won't resolve quickly.

Phoebe’s advice for early-career investors

Breaking into natural capital

For students and young professionals looking to enter the field, Phoebe's message is direct: the space is too young and too dynamic to wait for a perfect entry point.

1. Be curious and adaptable. Natural capital is evolving fast — no two roles or firms look the same. The ability to learn on the job matters more than having a complete picture before you start.
2. Generalist finance skills transfer well. Investment banking, financial modelling, ESG assessment — these are directly applicable. The sector-specific knowledge can be built once you're in.
3. Seek exposure proactively. Formal education rarely covers natural capital in depth. Build your understanding through extracurriculars, market research, and reaching out to people in the industry.
4. Focus on adding value in the first 6–12 months. Come in ready to contribute — ask questions, engage with technical detail, and show genuine commitment to the field's longer-term challenges.
5. The roles are diverse. Investment, ESG and impact, capital raising — there are multiple ways in. Match your strengths to the entry point, and be flexible about which door you take.

"The collaborative nature of this space is one of its best features. You can always ask questions and access technical expertise. That makes the transition into the field much more rewarding than going it alone." — Phoebe Scott, Climate Asset Management

References

[1] https://climateassetmanagement.com/insight/building-climate-resilience-through-natural-capital/

[2] https://climateassetmanagement.com/insight/opportunities-in-natural-capital/

[3] Global AgInvesting (2019). Ag Sectors to Watch in 2019.

[4] https://www.weforum.org/press/2020/01/half-of-world-s-gdp-moderately-or-highly-dependent-on-nature-says-new-report/.