Rob Gardner is CEO and co-founder of Rebalance Earth
For years, nature’s value has been ignored. Relevant to stewardship teams, but not to asset pricing. That position is becoming untenable.
Across the UK and globally, climate and nature-driven water shocks are no longer episodic environmental events.
They are causing business disruptions, infrastructure failures and supply chain disruptions. Their financial impacts are immediate, compounding and system wide.
According to LSEG, the UK has the highest share of its population and GDP exposed to flooding in all of Europe.
It is a stark indicator of how deeply the country’s economic performance depends on functioning ecosystems. Yet disclosure data from CDP shows that most financial institutions still underestimate their exposure to water risk, even though water is the first point where climate and nature collide.
Scottish Widows’ modelling points in the same direction, showing that water related physical risks, flooding, drought and water quality, can materially erode equity and credit metrics across multiple sectors.
Nature is not a thematic add on. It is business-critical infrastructure, and as we continue to degrade it, it becomes the most fragile infrastructure we have.
Systemic risks
Investors have become adept at understanding climate risk. Physical climate modelling, transition pathways and carbon scenarios are now familiar components of strategic asset allocation and portfolio construction.
Nature risk has not undergone the same evolution, yet, along with physical climate risk, it is already impacting financial outcomes.
Flooding, drought, and water contamination are no longer episodic shocks. They are structural forces that affect operational resilience, regional productivity, sovereign stability and therefore long-term returns for asset owners.
In the UK, these dynamics are stark. Repeated flooding drives asset impairment, business interruption and insurance repricing.
Whilst drought and soil loss reduce agricultural output and increase volatility in food supply chains. Water quality failures trigger fines, remediation costs and production stoppages.
These impacts materialise quickly, often simultaneously and continuously with real financial consequences.
Nature as infrastructure
Healthy ecosystems perform the same (if not better) essential economic functions as engineered infrastructure.
Wetlands store water, peatlands regulate flow, rivers buffer and filter water, soils retain moisture and support productivity, woodlands’ slow runoff, reefs protect coastlines.
When engineered solutions perform these roles, they appear on balance sheets. When natural ecosystems do the same, they do not, and that no longer makes sense.
This oversight creates a structural valuation error. If ecosystem functions remain invisible to asset registers and risk models, their decline becomes an unpriced liability.
Investors end up underwriting hidden risks, including higher insurance payouts, emergency capex and supply chain volatility.
Meanwhile, capital continues to flow into grey infrastructure, even though nature-based solutions provide greater resilience at lower lifetime costs. (thankfully, this is beginning to change).
The outcome is a misallocation of capital, an underestimation of physical climate and nature risk, which flows into financial risk and impaired asset values.
Costs vs returns
When natural infrastructure fails, the impacts cascade across portfolios. Insurance markets absorb rising claims and narrow coverage.
Property values shift as flood classifications change. Manufacturing output drops when the water supply or quality is compromised. Soil degradation weakens agricultural yields and raises operating costs.
None of this is theoretical. It is already happening and already affecting returns.
The inverse is also true. Where ecosystems are restored, resilience improves. Lower flood peaks reduce losses and protect local economies. Improved water quality strengthens operational continuity. Healthy soils store carbon, retain moisture and underpin agricultural stability. Reefs and wetlands buffer coasts and reduce storm damage.
These outcomes lower volatility, protect cashflows and strengthen long-term value. They are measurable, verifiable and therefore investible.
Pricing ecosystem services
A quiet but significant shift is underway. Ecosystem services that were once considered unquantifiable are now generating contracted revenues.
Flood risk reduction agreements with manufacturers, infrastructure operators and insurers are increasing.
Water quality improvement payments under Ofwat’s AMP8 framework are accelerating the use of nature-based solutions for water treatment and natural flood management.
Mandatory Biodiversity Net Gain is driving demand for on-site and off-site nature restoration, as well as a rapidly expanding market for BNG units.
Coastal resilience services, including oyster reef restoration, are also turning natural habitats into functioning protective infrastructure. Coastal resilience services, including oyster reef restoration, are transforming natural habitats into protective infrastructure.
These mechanisms turn resilience into predictable, long-dated cashflows. They behave more like infrastructure.
For long-term investors, the implications are clear. Allocating even a small portion of capital to nature-based resilience can help hedge the climate and nature-driven volatility affecting the rest of the portfolio.
When nature breaks, infrastructure pays and consumers pay. When nature works, it protects the assets, infrastructures and communities it serves.
Practical path
The question is not whether investors should consider investing in nature. It is how quickly they can integrate it into their portfolios.
TNFD reporting enables investors to understand a company’s dependencies on water, soil, biodiversity, and coastal stability.
None of this requires a reinvention of investment frameworks. It requires acknowledging that nature is already part of the financial system and that ignoring it distorts risk, valuation, and therefore strategic asset allocation.
The task now is to recognise the risks, update investment belief, engage asset managers and companies on their climate and nature risks and invest in nature.
COP30 has shown that adaptation to physical climate and nature-related risks has moved from a peripheral concern to a core risk and return issue.
In the UK, water, (too much, too little, too dirty) has been the first point of exposure. Investors already own nature risk.
The only choice is whether to invest in resilience. When nature functions, economies function. When it fails, investors pay. Nature failure has a cost. Nature’s resilience has a return.
