Nature as an uncorrelated asset: A new frontier for diversification
Amid market volatility, nature offers something rare: true diversification. As macroeconomic uncertainty persists and climate-linked risks escalate, institutional investors are looking for new ways to balance their portfolios. Nature-based assets are emerging as a compelling opportunity - offering not only climate and biodiversity benefits, but also return profiles distinct from traditional markets.
“Nature” as an investment
Investors may still be getting acquainted with the idea of nature as an asset class or form of capital but it is not new. Nature has always been a foundational form of capital, but we’ve only recently begun to recognize and value it that way.
Natural capital encompasses all the Earth’s natural resources - air, water, soil, living organisms and underlying geology. This natural capital provides the foundation for the “ecosystem services” that we use in our everyday lives. More obvious ecosystem services include things like food, water, fuel and building materials, but less visible ones include climate regulation, pollination and defence against natural disasters. These are all enabled by nature - forests, insects and peatlands to name a few. As Sir Dasgupta puts it: “... our economies are embedded within nature, not external to it”.
In fact, more than half of the global GDP (US$44 trillion of economic value generation) is moderately or highly dependent on nature and its services. Natural capital itself represents an estimated 4.5% of global GDP as of late 2024.
Yet natural capital remains underinvested. Only 0.2% of institutional assets under management globally are estimated to be allocated to this space. Natural capital investments are physical, place-based and tied to real-life value creation, based on fundamentals such as:
Ecological outcomes (e.g., biodiversity gains, water quality improvements)
Policy signals (e.g., regulatory frameworks, market access, ESG standards)
Long-term ecosystem service value (e.g., carbon sequestration, pollination, flood mitigation)
Nature and its uncorrelated characteristic
Natural capital investments are gaining recognition for both their financial and environmental advantages. They offer an inflation hedge, portfolio diversification and stable long-term returns which are particularly valuable during periods of economic volatility when traditional asset classes typically underperform.
Beyond returns, natural capital investments deliver measurable environmental benefits, from carbon sequestration to emissions reduction and sustainable land use. As demand for natural resources grows and biodiversity loss occurs at unprecedented rates, natural capital is emerging as a robust solution aligned with global sustainability goals.
Evidence in practice
Evidence from global markets shows the competitiveness and resilience of natural capital investments. Timberland and farmland in the U.S. have generated annual returns of approximately 9.2% and 10.9%, respectively, since 1992. Supported by demographic trends and relatively inelastic demand, these assets have performed strongly through different economic cycles. During the four quarters ending Q2 2022, when U.S. inflation reached 8.6%, the NCREIF Timberland and Farmland indexes returned 12% and 10%, outperforming U.S. equities and bonds at -15% and -10%.
The same type of stability in returns is also evident in instruments like biodiversity credits. NSW biodiversity (ecosystem) credits, which are associated with one of the oldest tradeable biodiversity markets in the world, have delivered average returns of ~12% per annum over the past two years. Skjander’s analysis shows that the performance of NSW biodiversity (ecosystem) credits has been uncorrelated with the ASX 100 over the last four years.
Investing in nature is an opportunity
There are still challenges ahead. As a relatively nascent asset class, natural capital carries risk around returns and liquidity. Investment opportunities are still limited, with few listed equities or fixed income vehicles directly linked to environmental solutions.
But momentum is clear and building. Public demand is driving the transition from being an “output” economy to an “impact” economy with increased transparency, accountability, and ESG commitment expected from organisations and policymakers. As a response, regulatory frameworks are evolving with over 500 organisations now committed to voluntary TNFD reporting, and many states exploring the implementation of the Gross Ecosystem Product (GEP) measure to track ecosystem value.
In late 2024, the inaugural Global Nature Positive Summit in Sydney, Australia, discussed policies such as a “Nature Capital Buffer” which involves banks securing and maintaining natural capital in proportion to their environmentally risk-weighted assets.
Why act now?
According to the Global Biodiversity Framework (the “Paris Agreement for nature”) closing the nature-related funding gap requires both private and public funding of at least $200 billion annually. For investors this is a significant opportunity to secure high-quality assets early on, shape market standards and contribute meaningfully to meeting global sustainability targets.
This isn’t about trading nature as a commodity. It’s about recognising its foundational role in global stability and positioning capital to protect and enhance that value.
There are already some early entrants in the nature market:
Norway’s Government Pension Fund Global - the world’s largest sovereign wealth fund, with $1.6 trillion AUM - has placed 96% of its portfolio under natural capital risk assessment.
Climate Asset Management has raised more than $1 billion to invest in natural capital projects such as regenerative agriculture.
Skjander is Australia’s first biodiversity credit fund, exploring opportunities in biodiversity markets locally and globally
And more nature-related investment options - ranging from carbon credits, biodiversity credits, biofuels and renewable energy leases - continue to emerge.
References
World Economic Forum. (2021). The Economics of Biodiversity: The Dasgupta Review Headline Messages. https://assets.publishing.service.gov.uk/media/60182857d3bf7f70c2afe5bb/Dasgupta_Review_-_Headline_Messages.pdf.
World Economic Forum. (2020). Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy. https://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf.
Environmental Finance. (2024). Natural Capital Will Become a Fundamental Component of Investors‘ Portfolios. https://www.environmental-finance.com/content/analysis/natural-capital-will-become-a-fundamental-component-of-investors-portfolios.html.
Environmental Finance. (2024). Making the Case for Investment Allocations to Natural Capital. https://www.environmental-finance.com/content/market-insight/making-the-case-for-investment-allocations-to-natural-capital.html.
Nuveen Capital. (2023). Why Natural Capital Now? https://www.bvai.de/fileadmin/Themenschwerpunkte/Real_Assets/Leitfaeden_Whitepapers_Studien_Surveys/Why_natural_capital_now.pdf.
Environmental Finance. (2024). Comment: Can Natural Capital Become Its Own Asset Class? https://www.environmental-finance.com/content/analysis/comment-can-natural-capital-become-its-own-asset-class.html.
World Economic Foru. (2025). Is Natural Capital the Key to Resilience and Stability? https://www.weforum.org/stories/2025/06/natural-capital-economic-resilience-global-stability.
Reuters. (2024). Climate Asset Management Has Raised More than $1 Billion, CEO Says. https://www.reuters.com/sustainability/sustainable-finance-reporting/climate-asset-management-has-raised-more-than-1-billion-ceo-says-2024-09-20/.
Reuters. (2025). Why Valuing Nature and People Is Just as Important as Financials. https://www.reuters.com/sustainability/sustainable-finance-reporting/why-valuing-nature-people-is-just-important-financials-2025-03-19/.
Environmental Finance. (2024). The Evolution of the Natural Capital Asset Class. https://www.environmental-finance.com/content/analysis/the-evolution-of-the-natural-capital-asset-class.html#Note1.
The Australian. (2024). Heavy Cost of Nature Crisis Can Be Solved. https://www.theaustralian.com.au/business/the-time-has-come-for-treasury-apra-and-the-banks-to-take-a-serious-look-at-natural-capital-buffers/news-story/0f8f1bab00f7213e849b266fbc1bcc26.
Convention on Biological Diversity. (2021). Natural Capital. https://www.cbd.int/business/projects/natcap.shtml.
