What Actually IS Natural Capital?

Realizing the full value of the forest – for both financial and ecosystem service objectives

I recently had the pleasure of attending the Canopy conference in Portland, more than a decade since my last appearance at the event. It was refreshing, and to be honest – not at all what I expected. I remembered the event to be very pitch-heavy, and informational sessions to be centered around the latest in timber prices and housing starts statistics. Though important background setting for me to learn about the asset class in my earlier days of forest investment, it kind of left me wondering – is this it?  

I’m happy to see that the country where the timberland asset class was born, and the fundamentals hold truer than ever – that no, it’s not it. Timberland is so much more than timber and the discussions both on and off the stage reflected this. 

I am grateful to have had the opportunity to speak among esteemed colleagues on the topic of Navigating Opportunity and Complexity in Natural Capital Investing, which though was the title of our panel – it could have been the title of the conference. 

In this week’s article, I want to dig into the topic of natural capital with reflections from this highly contemporary event. 

What is Natural Capital, Really? 

To frame my take on what Natural Capital is, and to build it into the discussion on how forest investment fits – I thought I’d start with asking google. Here are some of the definitions that came up: 

European Investment Bank: The value of everything that comes from nature — soil, air, water and all living creatures. EIB goes further to note that there are some resources (or capital) in nature that we need to use to survive and that enable the production of more resources. (EIB) 

Wikipedia: The world’s stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of these underpin our economy and society and thus make human life possible. (Wiki) 

Convention on Biological Diversity: the world’s stocks of natural assets which include geology, soil, air, water and all living things. (CBD) 

Okay, I’m noting some repetition, no need to go further. I found it interesting that there was controversy in discussions over whether or not timberland had a place in natural capital investing and if it had staying power. My take being, don’t we need forests for timber AND water, soil, climate, culture, food, medicines and, and, and… Forests and timberland have always been natural capital, it’s just that the investment sector is starting to realize the values beyond the commodities that nature supplies and is undergoing a rebranding and some adjustments to reflect this. 

Contemporary Discussions in Forestry Natural Capital Investing

As mentioned, it wasn’t just the panel I was on that addressed natural capital topics. Though perhaps not named as such explicitly, these are some of the themes discussed, apart from timber, that can fold into a natural capital strategy. 

Wildfires 

Wildfires were discussed at length at the conference. From a natural capital perspective, wildfires stemming from climate change and past forest management decisions are both damaging the timber commodity and ecosystem services – such as clean air, and the hydrological cycle.  

Climate 

Investment solutions offering climate benefits beyond the status quo timber optimization are becoming more mainstream – such as improved forest management approaches that extend rotation age in production forests and the restoration of native tree species in degraded forest ecosystems. 

Biodiversity 

Investment solutions offering biodiversity benefits beyond the status quo timber optimization are emerging. Though complex and nuanced depending on the context – valuing forests for more than a single species crop, but as a rich source of genetic variability, habitat and structural diversity is gaining momentum.   

Indigenous Stewardship 

Partnerships with Indigenous peoples who have both the land availability and the traditional ecological knowledge to manage for a healthy forest that delivers many economic and societal values are increasingly being sought after. 

Secondary Markets 

Other than traditional wood markets like timber and pulp, other forest products are rising in popularity that also address other ecosystem services. For example – bioenergy, biochar and sustainable aviation fuels are nature-based climate solutions, while also being a waste product of harvesting for traditional timber markets. These markets allow for more financial and environmental value to be realized from the forest. 

Does Timberland have Staying Power within Natural Capital Investing

  This was one of the questions we as a panel were asked to discuss, and there were mixed sentiments. Some believe that timberland as an asset class should remain as-is – Where investors engage in the first place because of the strong investment fundamentals the asset class delivers, based on the foundation of sustainable forest management principles. Others, like me, advocated for the natural capital model – from the position that timberland is too singularly focused on one objective. When we look at some of the topical elements described above, as well as the conjoining definitions of natural capital that values everything coming from nature, we can begin to value the forest and not just the trees. 

I believe this is an evolving space, and a spectrum. Some asset managers will remain focused on the timber-maximization model, while others will increasingly find ways to quantify the full value of the forest. Ultimately, different investors approach forest investment for different objectives, so I do believe there is a place for both. The important thing is not to undermine the principles of sustainable forest management – and that is a definition for another day! 

Is it Time to Shift your Timberland Strategy to a Natural Capital Strategy? 

If you are considering transitioning your timberland strategy to a natural capital strategy, you need to make sure it is not just a case of semantics or window dressing. It requires that alongside your financial objectives, driven by traditional wood markets – that you address the other values of the forests you invest into.   

If you are a TIMO and wondering what is the best way for your organization to make this shift in a credible way, reach out and we can talk about how to build a winning natural capital strategy that has staying power.  

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