Institutional appetite for natural capital assets such as farmland, forestry and ecosystem services has grown considerably over the past decade. Forest Trends and The Nature Conservancy estimate that private investment in nature rose from USD 2.8 billion in 2016 to around USD 14 billion in 2025. Much of this demand is due to the sector’s reputation for providing stable income and inflation protection as well as its low correlation with equities and bonds.
However, the risks and returns of natural capital allocations can vary widely depending on the assets and management practices chosen. This article examines how investor objectives shape the allocation, what farmland, timberland and nature-based strategies can each offer, and the factors that separate stronger management practices from weaker ones.
Defining what the allocation should deliver
Natural capital refers to the stock of renewable and non-renewable natural resources, including land, water, soil, forests and living organisms. The World Economic Forum estimates that around half of global economic output is moderately or highly dependent on these resources. Numerous different investments typically involve direct ownership of an asset, with forests and farms being the most common examples.
In our work with institutional clients, we find that investors often come to the sector with very different goals. Some are looking for stable cash flows to match long-term liabilities or for capital preservation and inflation protection, whereas others are more interested in environmental outcomes, such as carbon offsetting. These objectives can lead to very different investment choices, each with its own blend of risk, return, and liquidity. For that reason, natural capital investing tends to work best when the objective is settled before the asset is chosen.
Timberland and forestry
Timberland is the most mature natural capital market, with a well-established range of open-ended and closed-ended vehicles. Returns typically come from biological growth, timber prices, and land values. These can be supplemented by recreational and grazing leases, conservation easements, and, increasingly, carbon credits. Core timberland strategies typically target net returns of 6–7% with cash yields of 2–3%. We have found that value-added timberland strategies can boost returns, but they also require more active management and include exposure to other parts of the supply chain, such as sawmills.
Long-term demand remains supportive, and the World Bank estimates that demand for timber could quadruple by 2050 as populations grow and more timber is used in energy-efficient construction. However, current valuations can be difficult to assess; the NCREIF Timberland Index has grown at a compound annual rate of 6.8% since 2021, but US transaction volumes fell to around 940,000 acres in 2025, well below the 10-year average of roughly 2.8 million acres. This combination of rising appraised values and thin trading can make it harder for those who are new to natural capital investing to judge what constitutes a fair price.
Farmland
Farmland funds have become more prominent post-2010, as ever-lower government bond rates have increased demand for real assets that can deliver stable long-term income. Returns in this area are driven mainly by commodity prices, production costs and land values. At the same time, food’s large weighting in consumer price indices provides the asset with a strong link to inflation.
Naturally, asset selection can have a considerable impact on returns. According to the NCREIF Farmland Index, annual cropland returned 3.5% in 2025, while permanent cropland lost 5.4% over the same period. In the farmland projects we have assessed, we frequently find that the choice of operating model, including the level of backward or forward integration, can have a similar effect, as it determines how much of the farm’s operational risk and value addition opportunities the investor takes on. At the lower end of the risk spectrum, buy-to-lease strategies enable investors to limit direct exposure to commodity prices and harvest volumes. Conversely, owner-operator models can offer higher returns when managed correctly but also carry greater risk.
A growing number of the farmland investors we work with are also looking at how sustainable farming practices can further boost returns, and in our experience, farmland managed with regenerative practices can deliver an income premium of 2–3% above standard benchmarks. Carbon credits may provide an additional source of revenue as methods for measuring soil carbon improve and third-party verification becomes more established, but, for now, credit generation from farmland is much more limited than from other natural capital investment options.
Nature-based solutions and ecosystem services
Nature-based solutions focus on protecting and restoring ecosystems primarily through reforestation, avoided deforestation (REDD+), mangrove restoration and agroforestry. Unlike farmland and timberland, many of the benefits these projects provide, such as flood protection, cleaner water and habitat for wildlife, do not produce anything that can easily be sold. Revenue therefore tends to come from less direct sources such as carbon and biodiversity credits, government subsidies, lower insurance premiums and tourism.
Expected returns vary widely, and a 2021 Finance Earth survey cited by the European Investment Bank (EIB) found that only five of the 200 projects reviewed targeted returns, and those ranged from 2% to 12%.
Carbon credits provide the most developed revenue stream for these projects, but their quality can vary considerably. Most nature-based credits issued to date have come from avoidance projects, with REDD+ accounting for more than 70% of nature-based credits. The difficulty of proving additionality has weakened confidence in many of these projects. As a result, buyers are paying considerably more for credits that actively remove carbon from the atmosphere. Ecosystem Marketplace reports that removal credits commanded a 381% price premium over reduction credits in 2024.
Standards for credit quality are gradually improving. In February 2026, the Integrity Council for the Voluntary Carbon Market (ICVCM) approved a growing list of methodologies under its Core Carbon Principles, including reforestation and improved forest management methodologies. Even so, returns that depend heavily on carbon pricing remain uncertain, since prices are shaped by policy changes, shifts in supply and demand, and the lack of global consensus on how credits should be applied.
Naturally, owning projects directly offers investors greater transparency over how credits are generated. It also allows them to decide how additionality, permanence, leakage and co-benefits such as biodiversity and community development are addressed, all of which can influence the price a credit commands. However, the EIB notes that land acquisition is often the largest upfront cost in privately financed projects, and that long lead times mean few private developers have the resources to take projects forward alone.
Investors that prefer not to own projects directly can access the sector through natural capital investment funds. Most of these vehicles are closed-ended, pooling capital from several investors to spread risk across a portfolio of projects and regions. By investing in this way, investors can limit their exposure to the failure of any single project while at the same time sharing the high upfront costs of land acquisition and project development. Funds can also provide access to projects that would otherwise be too small for institutional capital.
What this means for natural capital investing
Ultimately, natural capital does not offer a single risk and return profile, and the most suitable allocation will depend largely on what an investor needs it to deliver. Investors seeking stable income and inflation protection are likely to find core timberland and buy-to-lease farmland strategies the closest fit, given their established track records and more predictable cash flows. Those with a greater tolerance for risk may look to value-added timberland, owner-operator farmland, or vertically integrated platforms for higher returns. Investors focused on environmental outcomes, meanwhile, are more likely to be drawn to nature-based solutions, where returns are less certain but the scope for measurable impact is greater.
Regardless of which avenue is chosen, the quality of management is likely to have as much influence on long-term performance as the vehicle itself. The most successful managers we have worked with combine careful asset selection with disciplined pricing, particularly in markets with limited transactions. In any natural capital project, the best management practices are often the ones that support productivity and resilience over time. As a result, the investors that are most likely to benefit from the sector’s growth will be those who set out clear objectives, identify a strategy and investment vehicle to match, and develop a clear understanding of how their assets are managed.
At Farrelly Mitchell, our agribusiness investment specialists provide strategic, technical, and commercial expertise to help investors, asset managers, and agribusiness owners make informed decisions and achieve sustainable growth. Whether you are an institutional investor building a natural capital allocation, a fund manager assessing farmland or forestry assets, or a policymaker seeking to attract private capital into your natural capital projects, our consultants can deliver targeted and tailored solutions grounded in deep industry knowledge and experience. With a proven track record across the agrifood value chain, we can combine local market insights with global best practices to address complex challenges and capitalise on emerging opportunities. Contact our experts today to discuss how we can support your natural capital investment strategy.
