Global finance is facing two demographic challenges. The first is the great wealth transfer now underway. Over the next quarter-century, $124trn will move from baby boomers to millennials and Gen Z. In 2025 alone, heirs inherited a record $297.8bn.
This is set to be the largest wealth transfer in history, and along with it comes a shift in investment mindset because younger investors are increasingly approaching capital allocation differently. Some 99% of Gen Z and 97% of millennials express interest in sustainable investing. Within this, two-thirds of Gen Z wealth holders have already allocated over 20% of their portfolios to sustainable and impact-focused investments. This isn’t purely sentiment-driven allocations either. Lived experiences, including multiple financial crises since the turn of the century, have pushed forth a reorientation toward long-term value creation over the short-term returns favoured by their boomer predecessors.
The second challenge stems from longevity risk driven by a rising global life expectancy. Living to 90 is no longer unusual, and each additional year of life adds around 3% to defined benefit pension scheme obligations. Whilst funding ratios have somewhat improved in recent years – due in large part to the growth of assets within defined benefit pension plans – from their previous bleak outlook of a 4%-5% per year widening of the funding gap, underlying structural issues in traditional pension strategies continue to leave them exposed. Bonds, long the cornerstone of liability matching, are struggling to keep pace with ultra-long-duration obligations, particularly in a more volatile environment.
Demographic realities mean that significant challenges to sustainability obligations continue to persist. The scale of the issue is stark; in the eurozone the pension savings gap for younger generations averages around €350bn annually. Looking ahead, the WEF warned in their 2025 Global Risks Report that the pensions crisis will “start to bite” over the next decade, even despite recent improvements.
These trends are usually discussed in isolation. In reality, they are converging on the same problem: a need for assets that deliver stability, durability, and resilience.
And there is an answer to both: natural capital.
Natural capital is not a new asset, however, over the past decade its prominence has steadily risen across a range of institutional investment strategies. In the UK, for example, pension funds are increasingly treating it as a mainstream allocation, with many schemes pursuing forestry and agriculture investments, citing low correlation with equities and bonds and positive links to inflation as motivating factors. Meanwhile, over half of UK family offices already invest in natural capital strategies as of 2025. Some 59% of these UK offices are likely to increase their natural capital allocation over the next three years.
For many investors, the flexibility of the asset class is a protection against external market shocks, offering a hedge against volatility. Timberland offers a clear example of how this works in practice. In contrast to highly mercurial public markets, timberland operates outside short-term flow dynamics. Its value is rooted in physical growth as well as the long-term demand for timber, offering a hedge against inflation and volatility while maintaining steady income and flexible cash generation.
It also provides diversification benefits. Timberland has historically shown low or negative correlation with traditional asset classes like stocks and bonds due to its long-term demand and illiquidity, helping to stabilise portfolios during periods of market stress or downturn.
Across various natural capital assets, managers can flexibly adjust harvest timing to better align cash flows with liability needs, offering the ability to defer revenue during periods of market stress. For family offices, this supports capital preservation and future planning. For pension funds, this provides alignment with 20-50 year time horizons.
Added to this, as sustainability disclosure reaches implementation stages across Europe, natural capital is able to deliver measurable sustainability credentials. This goes beyond simple ‘impact investing’ strategy. It is a source of resilience, offering an important risk management strategy, longevity and growth.
With sustainability comes additional benefits. Timberland, for example, offers the opportunity to generate adjacent income from projects such as conservation easements and renewable energy leases. Managed forests deliver meaningful and measurable environmental benefits as they sequester and store carbon, while also protecting and enhancing biodiversity. These attributes provide option value to investors as markets for these ecosystem services emerge, while simultaneously meeting investment reporting regulations.
Natural capital cannot solve either of these challenges alone but integrating it into a wider allocation strategy can provide the longevity, sturdiness, and regeneration needed in the coming decades. In an era of market volatility, biological assets may represent the most enduring form of value creation.
