Marvin OnumonuUK pension funds are now treating natural capital like a mainstream asset, with some aiming for returns as high as 20%, according to research from Pensions for Purpose.
The research, commissioned by The Palladium Group, found most pension funds are targeting internal rates of return between 8-10% from forestry and sustainable agriculture.
Higher returns are being sought by more experienced investors in emerging markets due to faster biological growth and lower land costs.
Pension funds pointed to low correlation with equities and bonds and positive links to inflation as main reasons for investing.
More experienced investors were found to be blending developed and emerging market exposures to improve risk-adjusted returns.
Most pension funds investing in natural capital have only started in the past two years, often with small allocations under private markets.
Additionally, the research found that capability and confidence, not returns or risk appetite, are the main barriers to wider adoption.
Pension funds reported limited internal expertise, lack of broad track records outside forestry, and the technical challenge of assessing environmental and financial performance as key constraints.
Liquidity was also a concern, though some investors said long-term assets match their liabilities.
Bruna Bauer, head of impact lens at Pensions for Purpose, said: “Nature has become not just something to manage risk around, but increasingly something to actually invest in.
“Our research shows pension funds with experience in natural capital are developing greater confidence in its financial characteristics.
“As familiarity increases, funds are expanding across sectors and geographies, while maintaining a disciplined approach to returns.”
Martin Belcher, director of impact, climate, environment and natural capital at The Palladium Group, said: “There is a growing body of expertise in nature and biodiversity-focused investing across the pensions sector.
“The emerging insights captured in this report offer practical strategies for supporting pension funds in launching or levelling up their natural capital investment strategies.
“There is still much to do to deliver investment and impact at the required scale.”
Belcher added: “We look forward to working with Pensions for Purpose in some of the areas and opportunities highlighted in the research findings, such as facilitating peer-to-peer knowledge exchange, external expert-led capacity building and collaborative learning initiatives, which support the scaling of investment and enhance impact outcomes in this space.”
