The £24.4 billion ($29 billion; €27 billion) British public pension scheme Nest could allocate as much as 5 percent of its AUM to natural capital, which would represent £1.2 billion.
The defined contribution pension scheme is currently engaged in market warming with numerous fund managers about how it could deploy capital in the asset class, alongside its partner Cushon, which is a £1.7 billion pension.
Nest has been slowly adding private assets to its portfolio since 2019, and has awarded mandates to investment managers CBRE, LPPI and Octopus.
Nest investment policy analyst Jess Menelon, who is leading the market warming exercise, said an allocation has not yet been set for natural capital but the pension has set 5 percent allocation for its other private market assets.
“So for us to make it worthwhile, I’m not sure we’ll look at anything that’s less than 2 percent allocation,” Menelon told Agri Investor.
“Any asset class we’re going into or any fund manager that we would hire, we need a fund that is evergreen, open ended and that is scalable with our gross. We also don’t pay performance fees. Being honest with that and upfront does filter initial managers out and leaves others to get a bit more creative,” she added.
The pension is looking at forestry as the first natural capital asset it could invest into, with Menelon adding that agriculture is also being considered but any investment here would be on a longer timeframe.
Regarding how soon Nest could deploy funds into natural capital, Menelon said it will be at least 12 months before the pension makes any commitments.
Nest chief investment officer Mark Fawcett said in a statement: “Forestry’s historical risk and return profile may make a compelling argument for a strategic allocation. Any investment should only grow in value as greater importance is placed on natural capital and the carbon removal and offsetting industry develops.
“One challenge we’re conscious of is making investments at scale in this space – we’ll need to explore with managers how much money they can actually put to work in timberland on an annual basis, and how much it will cost.
“Fund managers are starting to realize DC pension saving is the future in the UK. We’ve already invested into asset classes previously thought out-of-reach, such as private equity, and we’re excited to hear about the new opportunities we could offer our membership.”