Your investment in Rebalance Earth, a boutique fund manager focused on natural capital, is unique. Why did you make that investment?
Last year we began updating our investment strategy, which resulted in a 5% allocation to alternatives across public and private markets.
Our alternatives mandate aims to provide the long-term, risk-adjusted and uncorrelated returns you would expect from a portfolio of alternatives. But it also prioritises our investment beliefs around climate solutions, sustainable cities and innovation, with a focus on regional and UK opportunities.
We have therefore been analysing many opportunities from venture, tech and life sciences through to residential, infrastructure and natural capital assets. Within natural capital, we are particularly interested in nature-based solutions and Rebalance Earth’s focus on nature as infrastructure struck a real chord with us. It combines uncorrelated long-term returns, innovation and a strategy targeting climate action, solutions and resilient cities, communities and companies.
Given the expertise and experience of the founders at Rebalance Earth, the scalable market opportunity and our strategic alignment, we explored the potential for direct investment in the company.
How long did it take to complete this investment?
We first spoke to Rebalance Earth back in 2023. As with all our private market transactions, we carry out in-depth analysis and financial, operational and legal due diligence alongside as wide an array of meetings with industry experts and potential stakeholders as possible – which, inevitably takes time.
Were there any stumbling blocks along the way?
There were certainly no major stumbling blocks or disagreements. We kept a regular, open dialogue throughout. We had strong long-term alignment from the start, which I believe was essential and prevented any major stumbling blocks.
The investment specifically focuses on five problem areas within the ecosystem. Why they are important?
The key ecosystem problems many UK businesses face are flooding, drought, water quality, biodiversity and carbon. Flooding is a huge problem in the UK, costing businesses on average £82,000 a year and is only going in one direction.
Yet despite this, we also remain at risk of drought due to our built environment and degraded soils. Our rivers and coastlines are polluted and our biodiversity is depleted. Since 1970 we have lost 76% of our freshwater species and 69% of our wildlife. And we need to drawdown a huge amount of CO2 from the atmosphere to limit climate change.
There are many other ecosystem problems, but we believe these five present the largest risk for UK businesses and importantly present the greatest incentive for businesses and investors to contribute towards nature-based solutions.
Are some of these five problems more important than others?
They are all important. And it’s essential we work to solve all these issues, and many others, and not just in the UK. That said, flooding presents the clear and present danger for the greatest number of businesses in the UK.
The Environment Agency estimates that 185,000 commercial properties are at risk of flooding, as well as 1.85 million homes and 5 million people. That’s a huge problem and a material risk that we urgently need to address.
Why is natural capital as an investment theme so important?
Very simply, nature underpins everything. It’s the air we breathe, the water we drink and the food we eat, but it is also the global economy that our pensions rely upon.
Natural capital is critical in providing food, health and protection for human capital together with the natural resources and protection for produced capital, with all three forms of capital key to the global economy.
The issue is that we are depleting one form of capital, which in my mind makes the whole thing unsustainable. This is largely due to not paying for nature’s ecosystem services adequately and not valuing natural capital correctly.
Closing the finature nance gap is arguably one of the key challenges of our time – estimated globally at around $150bn to $440bn per year. Regulations, markets and businesses are rapidly changing, and we see nature-based solutions as having a huge role to play addressing climate mitigation, adaptation and resilience, and therefore we see the whole sector as an incredible opportunity.
You have also said that natural capital is a business-critical infrastructure investment. What do you mean by that?
We have meaningful investments in business-critical infrastructure across our public and private markets portfolios, which provide us with long-term, stable cashflows, diversification and inflation protection.
We see green infrastructure and grey infrastructure as providing essential services to society and businesses. Nature can serve as green infrastructure by proving cost effective and sustainable solutions for water management, disaster risk reduction and climate regulation, often outperforming grey infrastructure on cost and outcomes.
And in return, we believe green infrastructure can provide those long-term, stable, inflation-linked cashflows that institutional investors are looking for.
Where exactly does this investment fit into your investment beliefs?
As part of our overarching investment strategy statement, we have identified three sustainable development goal themes as being of particular focus: climate action and solutions; sustainable cities and communities; and economic growth and innovation.
We are looking to integrate these themes into our reporting and asset allocation process across the whole West Yorkshire Pension Fund portfolio over time, subject to improvements in methodology and data collection.
But more immediately, we have expanded our alternatives mandate allocation to 5% of the fund, across public and private markets, to focus on opportunities addressing these key themes, and in particular across natural capital, infrastructure, living sectors, such as affordable housing, and venture growth with a strong emphasis on UK, regional and local place-based investments.
Whilst this won’t always be the case, this partnership with Rebalance Earth fits across all three of our belief themes, with our direct equity investment in a UK early-stage company supporting ‘UK growth’ and Rebalance Earth’s mission to use innovative, nature-based solutions to enable more resilient cities and communities whilst actively improving nature and the climate.
So how much will be allocated in total to this investment?
We have allocated 5% of the total fund to alternatives within the strategic asset allocation. But decisions on tactical allocation and single-line investments are dynamic and fluid.
We have invested a relatively small amount of direct equity into Rebalance Earth – relative, that is, to our £20bn of total assets – and we will be hoping to commit more as a cornerstone investor to their initial Darwin fund, once launched subject to due diligence, alongside other investments in natural capital and beyond.
Will you be looking to increase this?
Potentially, yes, as a limited partner in the Darwin fund, subject to further analysis and due diligence.
Do you have any further innovative investments like this in the pipeline?
Yes, we are discussing other direct and co-invest opportunities that are similarly aligned with our beliefs, vision and long-term risk-return objectives across natural capital, infrastructure, real estate and venture growth in the UK.
Do you think other big asset owners may follow your example?
That’s for other asset owners to decide. We are fortunate to be of the right size, to have the strategy which emphasises UK alternative opportunities and importantly to have the in-house capabilities to carry out such direct investments with senior leadership and committee support.
We would like to do more and we are open to joint ventures with other similarly aligned large asset owners.
Does this place West Yorkshire Pension Fund as a pioneer within ESG investment?
The LGPS as a whole should be proud of its role in this space, due to its size, influence and commitment to ESG, responsible investment and net-zero pledges. We are proud to be part of that network and are keen to lead and share our knowledge and experience where we can.
As an engaged asset owner, with significant size and influence, West Yorkshire Pension Fund has long recognised the importance of the ESG characteristics of individual companies.
We are proud signatories of the Stewardship Code, have published our Task Force on Climate-Related Financial Disclosures report and have mapped our carbon emissions for the past five years.
But importantly, we recognise that we and the companies we invest in need to do more, and will do more to ensure our pensioners have a world worth living in.
WEST YORKSHIRE PENSION FUND AND NATURAL CAPITAL
In September the West Yorkshire Pension Fund, which is part of the £60bn-plus Northern LGPS pool alongside the local authority pension schemes of Greater Manchester and Merseyside, made what is viewed as a pioneering investment in Rebalance Earth, the UK’s first boutique fund manager entirely focused on nature as an investable asset class.
Rebalance Earth finances nature as infrastructure, which provides climate adaptation and resilience for companies, communities and cities across the UK. Rebalance Earth’s strategy is to make a clear business case for companies to pay for nature restoration in their local areas.
This approach not only benefits the environment but also increases companies’ operational resilience through nature-as-a-service contracts. These contracts function as long-term o take agreements, generating stable cashflows that offer attractive risk-adjusted returns for investors.
During the next decade, Rebalance Earth aims to mobilise more than £10bn towards restoring nature across the UK.
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