Natural capital is increasingly being treated as a mainstream asset by UK pension funds, with schemes targeting returns of up to 20 per cent from forestry and sustainable agriculture allocations, according to research from Pensions for Purpose.

The report, Biodiversity & Natural Capital: where pension funds are and what comes next?, found that most schemes investing in the asset class were targeting internal rates of return (IRR) of 8-10 per cent, with more experienced investors seeking returns of up to 20 per cent in emerging markets (EMs).

According to the findings, the majority of pension funds excluded potential revenues from carbon markets when underwriting returns, instead relying on cash flows from timber, crops, and long-term land appreciation.

Forestry and agriculture currently dominate early allocations, reflecting established track records and relatively predictable revenue profiles.

Investors cited low correlation with equities and bonds, along with positive links to inflation, as the primary drivers of interest.

Higher return targets in EMs were attributed to faster biological growth rates and lower land costs, rather than to greater risk tolerance.

More experienced investors were blending developed market (DM) and EM exposure to improve risk-adjusted returns.

Meanwhile, the research indicated that most pension funds with exposure to natural capital had made initial allocations in the past two years, typically as small positions in private-market portfolios.

In many cases, these were structured as sub-allocations within infrastructure or private equity mandates rather than as standalone asset classes.

However, schemes with longer track records were diversifying across sectors and geographies, expanding into EMs and newer subsectors where climate conditions and growth rates may support enhanced returns.

In addition, several were combining DM and EM strategies to reduce concentration risk and smooth cashflow timing, signalling a more portfolio-driven approach.

Despite growing market interest, the report found that capability and confidence remained the main barriers to wider adoption.

Indeed, pension funds highlighted limited internal expertise, inconsistent track records outside forestry, and the technical complexity of assessing both environmental and financial performance as key constraints.

Liquidity concerns were also mentioned, particularly among defined benefit schemes, although some investors viewed long-duration assets as aligned with liability profiles.

Overall, the research suggested that growth in natural capital investing was now constrained less by demand than by execution challenges, as capital remained concentrated in a narrow range of assets and geographies, raising concerns about potential crowding.

Therefore, the report argued that more institutional-grade investment structures, aggregation vehicles and proven case studies would be required before allocations could scale meaningfully.

Pensions for Purpose head of impact lens, Bruna Bauer, said that nature was increasingly being treated as an investable opportunity rather than solely a risk-management issue.

“Our research shows pension funds with experience in natural capital are developing greater confidence in its financial characteristics,” she stated.

“As familiarity increases, funds are expanding across sectors and geographies, while maintaining a disciplined approach to returns.”

The Palladium Group director of impact, climate, environment and natural capital, Martin Belcher, added that there was a growing body of expertise in nature- and biodiversity-focused investing across the pensions sector.

However, he stressed that further work was needed to deliver investment and impact at scale.

This article was first published on our sister website, Pensions Age.

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