Investing in nature: How can the UK close the £56bn nature finance gap within a decade?

Government and philanthropic finance will not reach the levels needed for the UK to deliver its commitments to restore nature, a major new report is warning. So, how can private capital be unlocked at scale and funnelled into the natural environment?

Investing in nature: How can the UK close the £56bn nature finance gap within a decade?

Pictured: Wye Valley, Peak District. The UK Government recently confirmed support for five landscape project, including one in this Valley.

Published today, the ‘Financing Nature Recovery UK’ report has been designed to act as a roadmap for making the UK a thriving market for nature-based investment from the private sector. While public and philanthropic finance has a role to play in nature finance, the report outlines how private finance is also a necessity – not an option.

A preliminary report from the GFI last October highlighted how planned public spending on nature conservation and restoration in the UK for 2022-2032 is up to £97bn short of the levels needed to deliver commitments made by the UK Government and devolved governments.

The headline commitment is to leave nature in a better state for the next generation, which is not being delivered. Last month, the UK Government’s post-Brexit environmental watchdog published its first report, warning of a “worrying and persistent environmental decline” that is likely to continue in the absence of “purposeful and coherent” government action.  Back in 2019, the ‘State of Nature’ report confirmed that 41% of British species have been in decline since 1970, with decline “continuing unabated”.

Even in the best-case scenario, the GFI would put the funding gap at £44bn. Its central estimate is £56bn. With this in mind, the new report outlines how changes from governments could unlock at least £5.6bn of private finance for nature each year this decade.

Today’s report, co-authored includes input from more than 300 individual experts and 50 groups with expertise in the fields of finance and nature. The Financing Nature Recovery UK initiative is led by the GFI, Finance Earth and the Broadway Initiative.

Organisations endorsing the new report include the Confederation of British Industry (CBI), the Country Land and Business Association (CLA), Water UK, the National Farmers Union (NFU), Federated Hermes, National Trust, WWF, RSPB, Green Alliance, The Nature Conservancy and Pollination.

Three-pronged policy recommendations

It bears noting that the Government’s current target is to unlock at least £500m of private finance annually for nature restoration by 2027. This is less than one-tenth of what the GFI has estimated is likely to be necessary

Today’s report outlines why there have been, historically, “significant barriers” to private investment in nature in the UK – with many of these challenges persisting into the 2020s and many investors still believing that the risks of investment at scale outweigh the returns

The report recommends that policymakers take a three-pronged approach to stimulate markets, covering market design, governance and operation.

On design, the report argues that “misaligned and complex environmental regulation” is deterring investors from making decisions on large-scale projects. Setting ambitious and science-based nature targets, it states, would be an ideal first step to providing more clarity.

The UK Government’s Department of Food, the Environment and Rural Affairs (Defra) floated new legally binding nature targets back in March after first promising them in August 2020 – but many green groups and industry bodies deemed them unambitious and ambiguous. Finalised targets are set to come into effect in autumn, and only time will tell how Defra chooses to update its proposals.

Targets should be underpinned by an economy-wide mechanism to address the impacts on nature from all economic activities, the report argues, setting out how existing schemes have undervalued nature conservation and restoration, thus enabling organisations to externalise environmental harm and preventing landowners from generating a fair income for using land for nature. Such a mechanism was recommended to the UK Government in the landmark Dasgupta Review in February 2021.

The ‘market design’ pillar of the new report also recommends that new institutional arrangements are made to regulate and provide independent market oversight.

Moving on to governance, the report outlines how it is currently difficult to measure the benefits provided by nature-based solutions due to a lack of credible baseline data at a local level and the absence of standardised frameworks for measuring projects’ impacts.

The report envisions the creation of standards which are “rigorous, transparent” and “both precautionary and proportionate”, so that positive impacts are not over-stated and the potential proliferation of greenwashing is avoided. It proposes accreditation for projects on the basis of carbon sequestration, habitat creation or preservation, reducing water pollution and mitigating flood risk.

Without quantification of the likely environmental benefits, the report states, investors have been reluctant to express demand for creating or investing in projects. Standardised quantification could make project development less complex and, therefore, more rapid, the report argues. The baseline for good measurement is, of course, strong and local data being available in the first instance.

The third and final pillar, market operation, provides recommendations for creating the right market infrastructure for the “efficient” trade of environmental services. It calls on the UK Government to set clear market rules on market participation and pricing which cover a range of environmental services. Potentially, this could be modelled on the UK’s renewable energy generation market – specifically, the offshore wind market. Policymakers looking for a more nature-based starting point may wish to look at Australia’s mechanisms for improving water quality, for example, the report states.

Under this pillar, the report recommends the creation of market registries for nature services, enabling the growth of the market to be accurately tracked and the double-counting of benefits avoided. It also recommends that a standardised taxonomy of credits is applied here, based on the standards and accreditations recommended in ‘market governance’.

The report acknowledges that, while many investors will wish to trade online and invest in projects from a distance, local delivery on the ground is crucial to delivering quality projects that also deliver benefits for people and the economy.

“Aside from the global challenge of climate change, the environment is inherently place-based,” the report states.

It recommends that partners within an area are supported by the government to set phased delivery targets for landscape-scale local projects, in alignment with national goals but while also respecting context-based local needs. Mechanisms will then be needed to integrate public and private finance to deliver on these targets, with financing provided not only for the original set-up of projects, but the upskilling needed in the community and the ongoing support of the projects.

Late last month, Defra confirmed which five landscape-scale recovery programmes across England it will be supporting along with Natural England and local stakeholders in the first instance, as part of its plans to create a Nature Recovery network of connected sites. The projects collectively cover 100,000 hectares. The new report emphasises the importance of getting these programmes right and paving the way for other similar initiatives.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie