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We need a well designed market to stimulate private investment in nature recovery

This post is by Guy Thompson, group director of environmental futures at Wessex Water and managing director of EnTrade, a Wessex Water business.

Despite promises of new and better national policy architecture for protecting and improving our environment, the signs in recent weeks are not looking good.

Implementation of the Agriculture and Environment Acts is drifting. There have been calls from across the political spectrum to postpone the move to a new Environmental Land Management (ELM) payment system for farmers based on public funding for public goods. And the consultation on Environment Act targets has been extended, following widespread criticism of its scope and ambition. With the cost of living crisis starting to bite, the government’s COP26 zeal for environmental leadership seems to have dissipated.

The biggest problem is lack of direction, including ongoing uncertainty around public funding, no clarity about the role of private investment and no clear pathway to much needed regulatory reform.

Geopolitical events and their economic consequences are not a sufficient excuse to hold back.  A new economic model for farming and our countryside is necessary so farmers and landowners can invest in solutions for a nature positive future alongside food production.

There is a major gap in funding for nature recovery
The government has a progressive 25 year environment plan but there is no strategy to finance its delivery. Professor Dasgupta made it clear in his review for the Treasury last year that we are not properly valuing the economic services nature provides.  A report commissioned by the Green Finance Institute last October revealed that a minimum of £44 billion is required for the UK to meet nature-related outcomes in the next ten years.  The scale of this challenge to restore nature within a generation is substantially beyond the resources available from public and philanthropic funding alone.

A system that values environmental services from nature and creates a broad based willingness to pay for them is needed.  But ELM should be the backstop for this, not the sole driver of nature recovery financing on the ground, and private incentives should be used to complement it.

Access to capital isn’t the problem
Forward thinking companies know they need to do more for nature.  The pandemic has accelerated investment in businesses that look beyond short term shareholder returns. And, globally, companies are increasingly aware of the impact that climate and nature related financial disclosures will have on their access to capital.

The UK is well positioned to harness the power of markets and private investment in nature-based solutions.  As recent shifts towards funds associated with environmental, social and governance (ESG) issues show, access to capital is not the problem.  What is lacking is scale, certainty and liquidity in the returns associated with nature-related investments.

Private finance targets set in the last spending review (£500 million a year by 2027 and £1 billion a year by 2030) are a start.  But there is a striking disconnect between these targets and the £5 billion+ that ought to be invested each year to close the gap in what’s needed.

Markets for nature are needed to mobilise private capital
Well designed markets mobilise private capital efficiently by reducing transaction costs and enabling scale.  Around the world, such environmental markets have mobilised billions of pounds of private finance for environmental improvement, particularly in renewable energy, energy efficiency and air quality.

Here in the UK, there is a growing list of potential private sources of investment. Yet there are many barriers.  I sit on a Regional CBI Council and it is notable how all the sectors represented around the table are persuaded of the business case to act.  But the environment is still seen as a regulatory headwind, with an absence of industry standards, uncertain supply chains and complex and prescriptive regulation, rather than a positive tailwind for investment, innovation and growth.

A robust regulatory framework would increase market confidence
The Financing Nature Recovery coalition has set out the framework for scaling up markets for nature-based environmental services, such as water quality improvement, flood mitigation and biodiversity to bridge the public funding gap for nature recovery.

Its new report, developed over 18 months through a collaborative effort involving 300 UK experts from over 50 farming, land management, business and environmental organisations, makes recommendations on three critical issues for the market:

– Design
This includes new drivers for investment in nature recovery, reform of existing regulation to remove barriers to private investment and new institutional arrangements to regulate and provide independent market oversight.

– Governance
To establish rigorous standards for measuring and accrediting the environmental services that nature-based solutions provide, and improve data to ensure private investment delivers environmental improvements.

– Operation
To provide market infrastructure for efficient trade in environmental services, and mechanisms for local market delivery that benefit local businesses and communities.

Securing the trust and confidence of the public, landowners and investors is paramount. Creating these conditions requires co-ordinated action and it is in everyone’s interests to speed up implementation.  With high integrity environmental markets, farmers and landowners will have the right incentives to integrate nature with agriculture and other land uses.  And local communities will benefit from new forms of employment and other social and economic advantages that will follow.

But, as with any market, it needs proper governance and oversight.  For the good of all of us, businesses and communities, it is time for governments across the UK to take action to usher in a new era of nature recovery, fuelled by the power of ethical private investment, so we can truly be the first generation to leave the environment in a better state.

Guy Thompson is a member of the Advisory Board of the Broadway Initiative, a founding member of the Financing Nature Recovery coalition, of which Green Alliance is also a participant.

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Green Alliance is a charity and independent think tank focused on ambitious leadership and increased political support for environmental solutions in the UK. This blog provides space for commentary and analysis around environmental politics and policy issues as they affect the UK. The views of external contributors do not necessarily represent those of Green Alliance.

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