Investing in Nature: How Natural Capital Delivers Strong, Stable Returns

Some of the most exciting to emerge in recent years have been so-called natural capital investments.

Natural capital—which includes farmlands, timberlands, and other environmental investments—has the ability to not only produce strong, risk-reward profiles for a portfolio, but also the ability to do good. And with many natural capital investments finally getting the attention of Wall Street, their values are on the rise.

Historically, economic and societal models have focused on the exploitation of nature to drive output. As conservation efforts and environmental regulations/attitudes have changed, a shift has occurred between simply exploiting nature for the benefit of mankind to working with it. This is where natural capital investment was born.

Essentially, natural capital investing can be thought of as a “collection of natural resources with value both to the economy and to society.” This goes beyond traditional resources like oil or copper in the ground, but also takes into account things like geology, biodiversity, water, soil, etc. It turns out that many of these broader concepts can provide significant benefits to society. Ecosystems can provide water filtration, pollination, as well as cultural significance. Those benefits can add significant value to the economy.

For example, an untouched or efficiently managed ecosystem can provide protection against extreme weather. This works its way down into the economic benefits of a city or town, fewer losses for insurance firms, less resource waste due to rebuilding, etc.

All of this translates to some big bucks too. According to BlackRock, more than half of the world’s gross domestic product (GDP)—worth a staggering $58 trillion—is moderately or highly dependent on nature. ¹

For investors, there are plenty of reasons to care about natural capital and land stewardship in their portfolios. The biggest? High steady returns for less risk.

It turns out that managing land that generates economic value via products and managing the ecosystems can provide some steady returns for a portfolio. Traditional natural capital investments from a portfolio point of view focus on owning timberlands and farmland.

These asset classes are unique in that they can be managed to produce a product—logs and various crops—while still providing environmental benefits. This is derived from how they produce their returns. For example, aside from harvesting logs, many timberland owners often make additional revenue streams by renting leases for recreational activities like hunting or fishing, selling carbon credits, and conservation easements. Farmland owners have increasingly worked with the environment to grow crops in appropriate regions, a focus on lower pesticide use, and the increase in organic/natural farming techniques add value to the crops produced.

Moreover, both farmland and timberland produce inflation-resistant products. This provides a natural bump to cash flows during periods of high inflation and prices.

These factors have allowed timberland and farmland to generate positive returns across different economic environments over the long haul. Timberland investments provided average total annualized real returns—in excess of inflation—of roughly 7% between 1991 and 2022. Over the same period, total real returns for farmland investments have averaged 8%. ²

The best part is that timberland and farmland have done so with less risk than many traditional investments like stocks or bonds. When looking at Sharpe ratios over the last 25 years, asset manager John Hancock found that farmland and timberland had Sharpe ratios of 1.47 and 0.91, respectively. When combined at a 50/50 ratio, the Sharpe ratio clocks in at 1.30, which is a very good risk/return reward. This chart from the asset manager highlights their appeal on risk.

Source: John Hancock

In addition, natural capital investments add a level of diversification to a portfolio that is sadly being missed. Timberland and farmland returns have maintained an average correlation of approximately 0.77 with each other over the past 20 years. Looking at correlations with other asset classes, both farmland and timberland have had negative correlations with the broader market.

All of these factors in tow create an interesting effect on a portfolio. Investors can create a more efficient and steadier return profile by adding natural capital to their portfolios. Looking at the efficient frontier—which is the possible optimized combinations of asset class allocations within a given portfolio—the inclusion of a 50/50 split for timberland and farmland improves the portfolio’s return by a few basis points while improving the risk-adjusted return performance by over 68%.

Perhaps the best piece is set to come. Currently, only a portion of natural capital’s value to the economy is priced into markets. But that could be changing. Natural capital accounting seeks to quantify some of the additional benefits such as water filtration and other environmental benefits. This could significantly increase the value of land/natural capital investment.

Given the benefits, such as inflation-protected returns, diversification, low risk, and strong growth potential, there is a strong case for natural capital in a model portfolio. Ultimately, farmland, timberland, and ecosystem investing can provide serious wins for investors over the long haul. In John Hancock’s study, around 7% of a portfolio in natural capital can produce the best results.

Getting that exposure is becoming easier. High-net-worth individuals and other accredited investors can invest directly in natural capital funds, timberland, and farmland holdings. Here, advisors can add them to the appropriate weighting and call it a day.

For the rest of us, it may take some individual digging. There are some REITs that focus on timberland and farmland holdings. For investors, buying these names offers strong dividends and potential capital gains based on the selling of farm products and logs. Natural capital improvements could also provide additional upside. There are a few broad timber ETFs as well. However, farmland still hasn’t caught on with Wall Street to be in an exchange traded package.

These stocks were selected based on their ownership of timberland or farmland. They are sorted by their one-year total return, which ranges from -13% to 14%. They have market capitalization between $380M and $21B. They are currently yielding between 2.2% and 5.2%.

These funds were selected based on their exposure to timberlands and forest products firms. They are sorted by their one-year total return, which ranges from -1.6% to -0.1%. They have assets under management between $55M and $176M and have expenses between 0.41% and 0.82%. They are currently yielding between 0.9% and 3.1%.

In the end, natural capital is quickly becoming one of the best alternative investments for steady returns. Moving beyond simply exploiting the land to working with it is paying tremendous benefits for portfolios. Offering high returns and diversification, timberland and farmland can be wonderful additions to a model portfolio. While getting exposure may be a bit difficult, doing so is worthwhile.

Natural capital has the ability to provide non-correlated steady returns for a portfolio. In the end, adding timberland, farmland, and other natural investments can pay off for investors of any size.

¹ BlackRock (January 2025). Our approach to engagement on natural capital

¹ John Hancock (April 2024). Expanding the efficient frontier with natural capital investments