Investors see natural capital assets such as timberland evolving from a values-driven allocation into a tool for diversification, climate resilience and new revenue streams.
Natural capital is increasingly being framed not simply as an ESG allocation but as a portfolio tool capable of delivering diversification, climate resilience and new sources of environmental return.
That was the message from speakers at Private Markets Profile’s Inside the Deal, where investors and managers discussed how ecosystem assets – from forests to wetlands – are beginning to play a more defined role in institutional portfolios.
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Julius Pursaill, strategic advisor to the Cushon master trust, said the appeal for investors begins with diversification. “Natural capital offers some return drivers that are genuinely diversifying,” he said, noting that assets such as forests can generate revenue streams from multiple environmental markets alongside traditional commercial activity.
For Cushon, the rationale has also been shaped by climate risk. Pursaill said the pension scheme’s climate analysis had evolved from focusing primarily on portfolio decarbonisation to considering resilience under different warming scenarios. Natural capital assets can play a role in that approach because of their link to carbon markets.
“As the carbon price goes up, all other things being equal, other assets in our portfolios fall in value,” he said. A natural capital portfolio capable of generating carbon credits may therefore act as a hedge because it is “positively correlated to the carbon markets”.
Greta Talbot-Jones, director of natural capital at Aviva Investors, said the firm’s carbon removal fund combines traditional forestry economics with emerging environmental markets. These include carbon credits, biodiversity markets and other ecosystem services that can be monetised alongside timber production.
L-R Julius Pursaill and Greta Talbot-Jones
“In addition to the accumulation of value in land and forestry stock, we’re looking at the environmental attributes that come from the natural world,” she said, pointing to reforestation, mangrove restoration and biodiversity projects as part of the opportunity set.
The UK is emerging as a potential growth market. Talbot-Jones cited an ONS estimate that ecosystem services provided by the natural environment contribute around £41 billion annually to the economy. However, scaling investment in areas such as flood mitigation still depends on developing reliable revenue models and identifying who ultimately pays for those services.
“The supply side has been defined – the need for these projects is clear,” she said. “The challenge at the moment is the revenue model and the offtake structure”.
Inside the deal: Timberland
Timberland offers an established example of how natural capital strategies can function in institutional portfolios.
Aleksi Ehtee, head of timberland at the Church Commissioners for England, said the asset class has historically been used for diversification, income and inflation protection. Timberland currently accounts for around 3% of its £11 billion portfolio.
Over time, however, the strategy has evolved from a purely defensive allocation into a broader return driver.
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“We started investing in timberland in 2011, and it was really a diversification play,” Ehtee said. “It’s evolved from that to target more of a return-driver role while still providing diversification and yield”.
Part of that shift reflects the growing range of revenue streams available from land assets. In addition to timber harvesting, investors are increasingly exploring land-use optimisation strategies such as solar development agreements, conservation easements and environmental mitigation credits.
Steven King, senior vice president at forestry investment manager RMS, said institutional demand for the asset class has grown steadily as investors seek diversification from traditional markets. Timberland returns are supported by a simple long-term driver: global demand for wood products.
L-R Aleksi Ehtee and Steven King
“If you chart GDP growth globally with wood consumption, you see a strong correlation,” he said.
Institutional investors typically approach the asset class with long investment horizons. While many fund structures run for 10–12 years, King said most pension plan clients intend to hold timberland allocations for decades.
Sustainability considerations are also central. Both managers and investors emphasised the importance of forest certification, climate risk modelling and biodiversity protection when assessing investments.
Taken together, the discussions highlighted how natural capital is evolving within institutional portfolios. While emerging ecosystem service markets are still developing, established strategies such as timberland suggest how environmental assets can move beyond thematic allocations and become structural components of long-term investment portfolios.