UNDER THE BONNET – KILTER RURAL AND MAKING NATURE-POSITIVE INVESTMENTS
Increasingly, and rapidly, financial institutions will need to respond to nature-related financial risks and opportunities; akin to the precedent set by climate change. Kilter Rural was established in 2004 to deliver profit with impact: investing at scale in natural capital assets of farmland, water, and ecosystems. Kilter Rural operates natural capital positive funds across water, farmlands, and ecosystem funds and has $310 million in funds under management. RIAA spoke to Kilter Rural’s CEO, Cullen Gunn about making nature-positive investments.
Tell us about the natural capital investment model and the investment philosophy behind it. Why is Kilter Rural balancing agricultural production with ecosystem protection?
Kilter Rural founders have worked at the intersection of environmental protection and sustainable food production since the early 1990s. Given current natural capital degradation trends, and the outlook for increasing food calories to feed a growing world population, the case for a new sustainable approach to food production is stronger than it’s ever been. In addition, the impact of rapid on-set climate change and loss of biodiversity must not just ‘be considered’ but resolved.
Kilter Rural has extended experience in this collaboration space. Back in 2004, when we sourced our first natural capital mandate, there was no blueprint for completing scaled farmland, water and ecosystem regeneration. Scaled greenfield development had occurred, but not scaled regeneration of existing natural capital compromised irrigation regions. Kilter is the only asset manager in Australia successfully operating for 18 years to deliver investments that build value and deliver returns through the rehabilitation and regeneration of natural capital.
Can you explain Kilter Rural’s approach in the Murray Darling Basin Balanced Water Fund?
The Murray-Darling Basin Balanced Water Fund was established to demonstrate a new model for achieving enhanced water security for irrigators, while delivering benefits to rural communities through the restoration of important local wetlands. This is achieved through the counter-cyclical allocation of water. When water is abundant and agricultural demand is lower, more water will be made available to local wetlands. When water is scarce and agricultural demand is higher, more water will be made available to irrigation. This approach optimises agricultural and environmental outcomes by reinstating the natural wetting and drying cycles of the Basin.
The Fund is a partnership between The Nature Conservancy, the Murray Darling Wetlands Working Group and Kilter Rural, and is certified by RIAA.
Can you tell us about Kilter Rural’s approach to water investments? What sustainable methods are used in the Murray-Darling Basin Balanced Water Fund to deliver financial returns to investors, and how do these donations create positive outcomes for the environment and communities?
Fresh water is extremely scarce. Many countries, including Australia, are struggling to manage and allocate water resources to support the growing needs of people and nature. The Murray-Darling Basin is one of the world’s largest and most productive river basins, accounting for $19 billion of agricultural output and providing one-third of Australia’s food supply. The Basin also harbours some of Australia’s most important natural assets, supporting a diverse array of animals, plants and ecosystems of national and international significance. This includes 35 endangered bird species and 16 endangered mammal species.
This is why The Nature Conservancy Australia, Murray Darling Wetlands Working Group and Kilter Rural have established the Murray-Darling Basin Balanced Water Fund. Water markets are an increasingly important method for addressing global water shortages. They can be an effective tool designed to balance water allocation between human use and nature’s needs.
The Fund invests in permanent water rights with the dual purpose of restoring important wetlands and securing water for agriculture. Up to 60% of the water entitlements is placed in leases with farmers to support irrigation production, leaving up to 40% available for donation to the environment. Levels of environmental water donation vary from year to year depending on supply availability. When it’s very dry only 10% of the available water is donated to the environment, with 90% available for farmers, while when it is very wet up to 40% is available for environmental use. This approach mirrors the boom and bust nature of much of the Basin’s wetlands.
Can you outline how Kilter Rural measures the impact of its funds, to ensure that its ‘guaranteed conservation outcomes’ are met?
Since its inception in 2015 to June 2022, the Fund has donated over 8,000ML of water for the environmental and cultural watering outcomes. The Fund also collaborates with Commonwealth and state environmental watering managers to increase the scope of activities. Each year Kilter donates the designated volume of water to The Nature Conservancy and the Wetlands Working Group which undertake watering events in line with an annual environmental watering plan. The watering plan is developed each April in response to government water availability projections.
To date there has been 44 watering events across 38 wetlands, directly inundating 2,300ha of wetland/floodplains, delivering improved biodiversity outcomes over 10,000ha and supporting 17 threatened species. In 2022 the Fund donated 4,000ML for the environment and in 2023 another 5,000ML donation is planned. These donations represent two of the largest ever private environmental water donations in Australian history.
After each environmental watering season, The Nature Conservancy produces an annual report on the environmental outcomes delivered for the year. This report is made available to investors each September. Kilter Rural provide the fund management, operations, revenue generation and financial reports.
What are some of the key challenges to scaling up nature-positive investments? How are Kilter Rural and others meeting these challenges?
One of the key challenges for nature-positive investments is delivering responsible returns to investors. Under Kilter Rural management the Fund has delivered an annualised return of 13.93%, making it one of the most innovative and important funds in the world in marrying financial and environmental outcomes.
Finding frameworks that can scientifically, robustly and repeatedly support monitoring and evaluation, with an appropriate level of independence, is vital. Capital allocators seeking natural capital positive investments absolutely require accountability and transparency of reporting. While The Nature Conservancy delivers environmental monitoring and reporting under the balanced water fund, Kilter utilises the Accounting for Nature (AFN) Framework in its other Fund initiatives for farmland. Developed initially by Australia’s Wentworth Group of Concerned Scientists, Accounting for Nature is recognised as one of the most advanced, cost-effective and repeatable science-based frameworks for measuring environmental conditions in the world.
What are your key calls to action for RIAA members about shifting more capital to be nature-positive?
Long-term collaborations between capital allocators and those with a demonstrable track record of execution are key to resolving the impacts of climate change and the protection of natural capital. These issues are beyond the scope of governments and short-term political maneuvering. Capital allocators and asset managers together can drive scaled positive change.
Society has recognised the importance of capital markets being an efficient allocator of scarce resources to combat climate change and environmental degradation of natural capital ecosystems. The opportunity for long-term patient capital to be deployed in lowly correlated nature positive investments, while also gaining the dual benefits of economic returns and positive social and environmental outcomes is significant and offers an enormous opportunity to generate returns with lower risk in a balanced portfolio construct.