Natural Asset Companies (NACs): A New Type of ESG Investment

The New York Stock Exchange (NYSE) is launching a new type of asset class that could transform the way investors value nature.

Called natural asset companies (NACs), these securities will be listed and traded on the NYSE, just like traditional stocks. And the wait won't be long: The exchange plans to list these entities starting later this fall. The launch comes just as companies and governments are preparing to make substantial commitments to combating climate change at the next U.N. global climate meeting in November.

Here's the skinny on this new investment class geared toward ESG (environmental, social and governance) investors.

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What Are NACs?

Natural asset companies assign value to the services provided by nature (such as storing carbon in a forest), rather than to the extraction of natural resources (such as logging).

NACs will hold the rights to "ecosystem services," or the benefits people receive from nature, such as food, pollination, tourism, or clean water; such global benefits are valued at an estimated $125 trillion annually.

Each NAC will issue an IPO tied to a specific tangible asset, such as a rainforest, a marine ecosystem or farmland. The proceeds will be used to manage the property to enhance ecosystem services – or in the case of farmland, to convert it to sustainable, "regenerative" agriculture. (Regenerative ag actually builds soil, stores carbon, and increases biodiversity.)

How Are They Valued?

The NYSE is working with, and has a minority stake in, the Intrinsic Exchange Group (IEG). The IEG has several years of experience tackling challenges to the NAC model, such as how natural value should be measured, monitored and translated into financial value.

The IEG, with the help of the Inter-American Development Bank (IDB), has developed an accounting framework based on projects conducted throughout Latin America. The NYSE will license the IEG's accounting framework.

"We believe it is absolutely critical to provide investors in Natural Asset Companies with relevant, reliable and understandable information on the flows of the ecosystem services they produce and their stocks of natural capital assets," Robert Herz, former chairman of the Financial Accounting Standards Board (FASB), says in a statement.

Bottom Line

One of the biggest challenges to addressing climate change has been a lack of funding for conservation, biodiversity, and other climate strategies tied to natural value. If natural asset companies are scalable and earn the confidence of investors and stakeholders, they could help ramp up investments in climate solutions.

More comprehensive climate policy in the U.S. and abroad also could make NACs attractive long-term investments. Not to mention, they provide another way investors can diversify their portfolios.

Investors interested in ESG should keep an eye out for natural asset companies in the next few months. You might just be able to help keep a forest standing as you feather your nest.