The push to finance climate change has introduced a whole new host of asset class definitions. Among the more promising is natural capital, which is underpinned by the building blocks of land, yield and environmental credits.
I suppose it makes sense that a legacy is only really thought about postmortem, when friends and contemporaries mull over how you’ll be remembered.
Espousing the benefits of diversification, Markowitz argued for adding assets that not only offered superior or strong risk-adjusted return themselves, but that also had low correlation to other assets in the portfolio.His ‘eggs in one basket’ warning shook up long-standing investment trends, leading a surge in stock ownership at the time.
As a standalone asset class, natural capital looks compelling. Even if we just consider the agricultural component, the long-term capital appreciation of large-scale farming land in Australia is around 5 per cent. Long-term operating income yield generally sits between 4 and 5 per cent. Beyond the traditional agriculture returns from capital appreciation and operating income, of course, comes the “natural capital” element itself. In the push to finance climate change and global sustainability, the active management of agricultural properties opens the door to a world of new opportunities in biodiversity, reef and carbon credits.
Having outlined why natural capital stacks up by Markowitz’s standards and the call option on sustainability, the final hurdle is finding where exactly does it fit within an asset class. That is, what basket should investors put this egg? It’s a question particularly relevant for regulated trustees. So, what are the choices?
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