Due diligence for nature investment

We all want better environmental outcomes until it’s time to write the cheque. At that point, the conversation becomes much more operational. Will this project actually improve biodiversity? Will the carbon estimates stand up to scrutiny? Who is delivering the work? Have they done it before? What happens if things don’t go according to plan?

This is not scepticism, but good investment practice. When you make a significant purchase you always do some form of due diligence. Investing in nature is no different.

The challenge is that many of us are still learning how to conduct due diligence in nature. Traditional investments have well-established frameworks. Some of us know how to read balance sheets, some are great at comparing real estate options and despite telcos attempts at obfuscation, we are all getting pretty good at comparing phone plans. We know what questions to ask and where the gotchas are hidden. In the natural capital sector, those conventions are still emerging, which makes it difficult for investors to distinguish between projects that have genuinely remarkable impacts from those that just sound amazing.

The due diligence process for any purchase is similar—what’s the trade-off between risk and return. For things that we are familiar with, the potential return/value is usually obvious (capital growth in real estate or huge data in a phone plan). In this case our due diligence is focused on the risk (what if the capital gains tax discount gets removed? What if the phone coverage is limited to city centres only?). Investment into nature has the same requirement to assess risk—will the project get delivered, what if there is a drought/flood/bushfire? But it has the added constraint that the potential return/value is rarely obvious – what is this project going to deliver (in terms that mean something to me)?

What is the return/value of investing in nature?

To help quantify the return/value of investing in nature, we have spent a lot of time quantifying natural capital outcomes (20+ measures) that cover carbon sequestration, biodiversity, threatened species, water quality, social and First Nations outcomes. We map those impacts to national and international reporting frameworks to make sure that the return/value are presented in a transferable language.

A fundamental characteristic of having a credible demonstration of potential return/value is to use the highest integrity quantification methods we can find, which for us means government approved or endorsed approaches or research institution based approaches. We think that private environmental credit or accounting schemes are fundamentally risky by design—when the fox is in charge of the hen house it is hard to guarantee no conflict of interest.

What is the risk of investing in nature

The risks of Nature-based Solutions outcomes not getting delivered is pretty straight forward and is similar to just about any long-term project:

• Who is delivering the project?
• What is their track record?
• Legal implications (who owns what and who has responsibility to make good when things don’t work out)?
• What happens in the event of a drought/flood/fire—are the outcomes eliminated or delayed?
• Is there an exit if things change (what if my interest in the project outcomes changes over the life of the project)?

Those of us seeking to grow investment into nature have a responsibility to provide clear, transparent information using a consistent language that quantifies the return, reduces transaction costs and allows potential investors to efficiently conduct their due diligence.