‘A shifting baseline has distorted our perception of all life on Earth’ – Sir David Attenborough (2020)
In ecology, shifting baseline syndrome describes a quiet kind of loss. Each generation inherits a diminished environment and treats it as normal. Fish stocks fall. Birdsong thins. Rivers lose life. The degraded state becomes the reference point. Institutional investment is at risk of repeating the same mistake.
Portfolio risk models are calibrated on recent history. But recent history is not neutral. It already encodes climate change, biodiversity loss and degraded water systems. Apparent stability is often the later stage of deterioration, not its absence. When the reference point is compromised, the model can report normality while risk accumulates underneath.
Sir David Attenborough turns 100 on 8th May. His lifetime is a useful measure of the scale of environmental change now sitting inside financial assumptions. Monitored wildlife populations have fallen by an average of 73% since 1970. Landscapes that once stored water now amplify floods and drought. Rivers and wetlands that once moderated volatility have been drained, channelled or polluted. The environmental baseline embedded in many financial models no longer exists.
For CIOs, this is not a sustainability debate. It is a portfolio construction problem:
- Norges Bank Investment Management has calculated that physical climate risk could reduce the value of its US equity holdings by 19% under a current policy scenario and has warned that the impact on long-term portfolios may be severely underestimated.
- Goldman Sachs Asset Management has found that one in five revenues across listed world equities are highly or very dependent on water.
- LSEG data shows the UK has the highest GDP exposure to flooding in Europe. These risks are already inside diversified portfolios. They are largely unmeasured.
The instinct is to ask for more data: better disclosure, sharper metrics, improved company reporting. Better data matters, and the rapid growth of the Taskforce on Nature-related Financial Disclosures is welcome. But data alone cannot fix a framing error. If the baseline is wrong, greater precision only makes the wrong answer look more convincing.
Many risk models still measure exposure against a world of more stable weather, healthier ecosystems and lower physical risk than investors can reasonably expect.
Correlation models are particularly vulnerable because they are backwards looking. A portfolio holding water-stressed infrastructure, flood-prone real estate and climate-sensitive supply chains may look diversified in historical data.
In practice, it shares one underlying exposure: too much water, too little water, or water too dirty to use.
This is where natural capital moves from impact theme to strategic allocation. Asset owners are beginning to treat sustainable forestry, regenerative agriculture, habitat restoration, wetlands and catchment-scale projects as part of real asset, infrastructure and private markets thinking.
The point is not to own greener assets. It is the own assets that reduce and mitigate risks, degrading everything else.
Natural capital plays two roles in a long-term portfolio.
- The first is return: Ecosystem services are increasingly being converted into contracted cash flows: biodiversity credits, carbon credits, water-quality outcomes, natural flood management and payments for ecosystem services. These revenues can behave like infrastructure income, with identifiable counterparties, measurable outcomes and long duration.
- The second is resilience: The Dasgupta Review concluded that biodiversity plays the same role in natural capital as diversity does in financial portfolios: it reduces variability in yield. Restored ecosystems also reduce physical risk. Wetlands slow water. Peatlands regulate hydrology. Regenerative land management improves soil health and drought resistance.
These allocations are not simply low-correlation diversifiers. They are reflexive. Their value is tied to the same environmental pressures eroding the rest of the portfolio, and their activity rebuilds the systems those portfolios depend on.
Policy is starting to reinforce the repricing. The EU Nature Restoration Law, rising attention to water resilience, and the spread of nature-related disclosure frameworks are pushing investors to recognise nature as an economic foundation rather than an externality.
Catchment-scale projects increasingly deliver flood and drought mitigation, water quality, biodiversity, and carbon outcomes, and these outcomes are contracted with utilities, infrastructure owners, and corporates.
For asset managers, the task is clear. Re-examine the baseline inside risk models. Stress-test portfolios against further degradation of water, land and ecosystem services. Look for hidden concentrations where apparently unrelated assets share exposure to the same physical system.
Attenborough’s century documents what a shifting baseline looks like in practice. Each generation inherits a diminished world and treats it as normal. The task for asset managers is not simply to model that deterioration more accurately. It is to recognise that capital allocated to restoring natural systems is also capital that stabilises the baseline on which everything else depends.
Those who understand this first will be better positioned when the repricing arrives. And it will arrive.
