Nest and Cushon have invited fund managers to share views on ways in which the two pension schemes can invest in natural capital, with an initial focus on forestry, with a market warming exercise already underway.

Announcing the exercise, Nest and Cushon highlighted Forestry as an “up-and-coming asset class”, noting that many institutional investors are exploring whether this sort of strategy could improve both their risk-adjusted returns and their environmental impact.

They also suggested that forestry has become more attractive to investors given the current turbulence in financial markets, having shown negative or low correlation to equity and bond indices, while payments for ecosystem services are not directly linked to market forces.

However, the two pension schemes also noted that while historically strong returns have been available, this is dependent on the way the asset class has been accessed and the investment strategy pursued.

In light of this, Nest and Cushon are inviting managers to discuss the best ways to implement, from both return and cost perspectives as well as environmental, social and governance (ESG) considerations.

In particular, the pension schemes are looking to discuss how they could directly invest in forestry around the world, not through commodity funds, highlighting investment risk, the impact on biodiversity, and how costs would fit within each scheme's own existing charge structures as key considerations.

Both investors also said that they want to select fund managers that share their values and will carefully scrutinise each investment opportunity, avoiding markets where timber is a cause of deforestation.

Nest and Cushon said that they may also consider launching a formal procurement process depending on the responses.

Nest chief investment officer, Mark Fawcett, stated: “Nest is building a diversified portfolio for the benefit of our members and believe this could be a rewarding investment opportunity - we’ve never accepted that any type of investment should be out of reach for our members.

“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.

“We’ve started our market warming and I’d encourage fund managers with experience investing in forestry to get in touch, outlining how schemes like Nest and Cushon could enter the market.

"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 realise 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.”

Adding to this, Cushon scheme strategist, Julius Pursaill, stated: “Both Cushon and Nest believe that climate change represents a material threat to members' future returns.

"Every Paris aligned pathway requires a significant increase in sequestration capacity. Natural capital-based carbon sequestration is key to limiting future temperature rises.

“Australian "Supers" [the equivalent of UK master trusts] have already delivered value for members via joint investment mandates.

"Where asset classes are difficult to access because they are illiquid, joint mandates can deliver the benefits of both lower costs and better diversified portfolios from outset. Cushon wants to bring those benefits to the members of UK master trusts.

“This requires a wide conversation. UK pension providers have an opportunity to deliver sustainable investments for members thanks to natural capital – in both an environmental and financial sense.

"We want to hear from fund managers about how best to invest in forestry, how best to manage risks for our members, and mitigate biodiversity and forestry management risks.”

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