Improving efficiency in traditional stock-bond portfolios through diversification may be limited because the average correlation across securities can be high. In contrast, the lack of correlation across diverse natural capital investment strategies offers great potential for efficiency improvements via portfolio design.
Diversifying a natural capital portfolio can help investors reduce risks associated with timberland and farmland, such as weather, operating strategy and crop type. But the asset class can also address more common portfolio risks such as policy and geopolitical dynamics through diversification.
Geographic and political risks can be an opportunity
Investing across geographies can offer investors a way to diversify geopolitical and policy risks. Geopolitical risks linked to diplomatic or military conflict can result in trade restrictions between countries. Recent examples include sanctions against Russian exports after the invasion of Ukraine in 2022 and China’s restrictions on specific Australian imports in 2020. Diplomatic tensions between major nations can influence and disrupt global commodity trade flows.
A recent example of geopolitical risk impacting farmland is the ongoing diplomatic tension between the U.S. and China. U.S. exports of soy beans to China have decreased as a result of trade restrictions, China’s efforts to diversify sources of agricultural imports, and the availability of alternative, price-competitive supplies.
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