Post date 13 Apr 2026 (original LinkedIn date)
Original LinkedIn version· 1,534 words
‘Waterfront‘ by Simple Minds, released in 1983 on the album Sparkle in the Rain
Crank up the volume, let the driving base line get the juices flowing! Today’s lyrical link is tenuous at best, but the message still important. A few weeks ago, prompted by Robert Gardner , I picked up Mark Spitznagel’s Safe Haven: Investing for Financial Storms. It stopped me in my tracks. Not because it introduced an entirely new idea, but because it articulated with unusual precision something I’ve been circling around for decades in my own thinking about investing in general, but now more specifically about nature and portfolios.
The distinction is simple, but important. Diversification is not the same thing as protection.
Blending a risky asset with cash, or with an uncorrelated return stream, may reduce volatility. But it usually does so by giving up return. That may still be worth doing, so the question is then whether the improvement in compound wealth over time justifies the arithmetic cost of getting there.
That question matters because investment returns are path-dependent. Long-term investors do not earn the arithmetic average return. Rather they earn the geometric one. What matters is not simply expected return, but the sequence of gains and losses through time. And most critically variance (the rain in my lyrical link) imposes a drag on compounding. Severe drawdowns do disproportionate damage. For pension funds with obligations stretching across decades, that is not a technical detail. It is the central problem.
Spitznagel’s critique of modern portfolio theory starts here. Diversification can dilute risk, but it does not necessarily solve the problem of ruin. In stressed markets, when protection is most needed, correlations often rise and the benefits of diversification prove less reliable than they appeared in normal times. That was plain enough in 2008. It was visible again in 2022.
So the more interesting question is not whether an asset improves a Sharpe ratio in average conditions. It is whether it preserves compounding in the presence of non-linear shocks. That is where I think the conversation about nature needs to move. Most of the “nature as an asset class” discussion has been framed in diversification language, but I think it’s time to move it on a notch (or three!). Nature-based solutions can offer attractive returns. They may have relatively low correlation to traditional asset classes. They may improve portfolio construction at the margin. All of that may be true. But it is not, to my mind, the most important point.
The more important question is whether nature-based resilience can act as a reducer of downside risk in the assets investors already own. That is a different proposition. To make the distinction clearly, it helps to separate three ideas that are often blurred together.
A diversifier is an asset whose returns are not closely correlated with the rest of the portfolio in normal conditions
A hedge is a financial instrument that rises in value when another asset falls, ideally with explicit convexity in crisis states.
A causal risk reducer is different again. It does not offset the loss after the fact. It reduces the probability or severity of the loss occurring in the first place.
This is where I think properly structured nature investment sits in a wider portfolio context.
Consider a UK local authority pension fund with meaningful exposure to UK equities and sterling credit. Those holdings include firms whose enterprise value is exposed to flooding, drought, water stress, supply chain disruption, degraded water quality, and wider ecosystem failure. These risks are not well described by a smooth average drag on returns. They are episodic, fat-tailed, and often highly local. When they materialise, they can destroy value abruptly.
Now consider investing in restoration that reduces those underlying physical risks. Restored floodplains attenuate peak flows. Healthy soils improve infiltration and baseflow regulation. Functioning catchments reduce the severity of certain shocks before they reach the balance sheets of companies and infrastructure owners downstream.
In that case, the investor is not buying a derivative that pays out when listed assets sell off. The investor is helping change the probability distribution of losses affecting the underlying economy. Probability mass is being removed from the left tail of the assets already held. And that is why I think the standard diversification framing is too weak. The mechanism here is not correlation; it is causation.
That matters because correlation is notoriously unreliable in stressed conditions. The historical relationship between asset classes in calm periods tells you very little about how they will behave in disorderly ones. But a restored catchment holds water whether markets are calm or panicked. A wetland does not stop functioning because correlations have gone to one. This, to me, is the deeper significance of nature-based resilience in portfolios.
It is not merely an additional return stream. It is a form of physically grounded downside risk management. That does not make it identical to a classic tail hedge, and it is important not to overstate the analogy. A restored floodplain does not have the explosive convexity of a deep out-of-the-money put. It does not suddenly produce a hockey-stick payoff in the year of crisis. In that narrow sense, Spitznagel would be right to say it is not insurance in the pure derivatives sense.
But long-horizon asset owners are not hedge funds. They cannot hold highly convex, negative-carry tail hedges at meaningful scale year after year without severe performance drag. What they may be able to hold is something different. A permanently installed reduction in certain physical downside risks, with a positive expected return of its own. And that is where the argument becomes especially interesting.
In Spitznagel’s stylised framework, insurance imposes an arithmetic cost in exchange for a geometric benefit. You accept some bleed in ordinary times in order to avoid catastrophic damage in bad ones. That trade can be worthwhile because preserving compound growth matters more than preserving average-state comfort.
But nature-based solutions, if structured properly, need not resemble a zero-return insurance instrument. If they are financed as business-critical infrastructure, with contracted payments for ecosystem services from beneficiaries whose operations depend on resilience, then they may carry positive standalone returns. In that case, the arithmetic cost of protection could be low, zero, or potentially even positive in net portfolio terms.
Pause for a second and consider how that is a remarkable possibility. The “insurance” benefit would not appear as a large payoff inside the restoration asset during crisis years. It would appear instead in the improved resilience of the equity, credit, infrastructure, and real asset exposures already sitting elsewhere in the portfolio. Fewer severe drawdowns. Less permanent impairment. Better long-run compounding. And unlike a put option, the asset does not expire.
A restored wetland, floodplain, peatland, or catchment is not a wasting instrument. It is not something that needs to be rolled every quarter at uncertain cost. It is an enduring intervention in the physical system itself. For investors with very long liabilities, or effectively perpetual pools of capital, that durability matters.
This is one reason I think nature belongs in a different category from the one it is usually assigned. It should not be thought of only as a source of impact, or only as a diversifying alternative return stream. In some cases, it may be better understood as a causal reducer of downside risk embedded within the real economy. That framing also helps explain why contractual architecture matters so much.
At Rebalance Earth, when we talk about Nature as a Service, we are not only talking about a funding mechanism. We are talking about the structure through which resilience becomes cashflow, and through which physical risk reduction becomes investable.
The logic runs from risk to restoration to revenue. Identify where critical assets and economic activity are exposed. Understand which ecological functions are failing. Restore the natural infrastructure that reduces those risks. Contract with the beneficiaries of that resilience. Create a durable cashflow linked to business-critical outcomes. In that structure, the investment case is not separable from the insurance logic. The two are part of the same architecture.
The result is not a perfect hedge. It is something slower, steadier, and perhaps more realistic for the needs of large long-term asset owners. A sea wall is not an option contract. But for the owner of an exposed coastline, it may matter more. I think the same is true of nature-based resilience.
The real question for investors is not simply how to lower volatility on a spreadsheet. It is how to preserve compounding in a world where physical shocks are becoming more frequent, more severe, and less diversifiable. Viewed that way, nature is not just another allocation. Properly structured, it may be one of the few assets capable of reducing downside risk in the system that the rest of the portfolio depends on.
References
Mark Spitznagel, Safe Haven: Investing for Financial Storms (2021
J. L. Kelly Jr., “A New Interpretation of Information Rate” (1956).
Sebastien Page and Roberto Panariello, “When Diversification Fails” Financial Analysts Journal (2018).
TNFD, recommendations and guidance,
World Economic Forum, Nature Risk Rising (2020).
Environment Agency/UK flood resilience materials citing that around 185,000 businesses in England and Wales are in areas at flood risk.