Environmental Audit Committee
Oral evidence: The role of natural capital in the green economy, HC 280
Wednesday 28 February 2024
Ordered by the House of Commons to be published on 28 February 2024.
Members present: Philip Dunne (Chair); Barry Gardiner; Chris Grayling; Clive Lewis; Caroline Lucas; Jerome Mayhew; Cat Smith; Claudia Webbe.
Questions 97 - 185
Witnesses
I: Andy Howard, Global Head of Sustainable Investment, Schroders; Gordon Bennett, Managing Director, Utility Markets, Intercontinental Exchange; and Helen Avery, Director of Nature Programmes and GFI Hive, Green Finance Institute.
II: Oliver Lewis CBE, Founder, Joe’s Blooms; Ana Haurie, CEO, Respira; and Jonathan Shopley, Managing Director of External Affairs, Climate Impact Partners.
Written evidence from witnesses:
Witnesses: Andy Howard, Gordon Bennett and Helen Avery.
[Jerome Mayhew took the Chair]
Q97 Chair: This is the second formal evidence session of the Environmental Audit Committee inquiry into the role of natural capital in the green economy. Today we are going to hear from investment organisation innovators and the Green Finance Institute.
Welcome to the first panel. I would like you to take it in turns to briefly introduce yourselves. I am going from my side left to right, starting with Helen Avery.
Helen Avery: Thank you very much for inviting me. I am Director of Nature Programmes at the Green Finance Institute. We work across two approaches to how we mobilise private sector capital into nature. The first is around the short-term nature market, so we work on supply and demand in enabling policy in the UK and we also work on the broader transition to an economy that values and invests in nature. We host the Taskforce on Nature-related Financial Disclosures secretariat and also the UK National Consultation Group.
Andy Howard: I am the Global Head of Sustainable Investment at Schroders. We are a global asset manager, managing portfolios for our clients in a range of asset classes in different parts of the world, both public and private. Nature is an important part of how we think about sustainability at a firm, both in terms of how we can invest directly into natural capital nature-based solutions but also how we think about managing risk and identifying opportunities across the public market, equity, credit, portfolios that we manage across the firm.
Gordon Bennett: Good afternoon. I work for ICE. We are the largest energy and environmental marketplace in the world and the owner of the New York Stock Exchange.
Q98 Chair: Interesting. I am going to kick off by trying to explore how the UK can use its role in the world’s financial markets to develop an effective and influential model for nature finance. The starter question is going to be for all of you, but I am going to, for no particular reason, start with Gordon.
Where we are now, is the UK currently well-placed to lead the global market for natural capital trade?
Gordon Bennett: Yes, I believe so, for several reasons. I think that from a net zero perspective natural capital is clearly an important part of solving for net zero, particularly around carbon sinks. The UK has a good policy record in supporting markets for net zero with things such as the Low Carbon Contracts Company and also the unilateral, including the carbon price support mechanism. When carbon prices were too low post the financial crisis unilateral intervention helped the UK get coal out of the merit order in electricity.
Importantly, the UK has shown to be a fantastic steward of financial markets. The bedrock there is the historical policy support is there and if you are thinking about net zero from a markets’ point of view and from an economics point of view you need to know two things: the price of energy and the price of carbon. At ICE all our energy and carbon markets are risk managed within the UK, so we are definitely at the centre of financial markets.
Q99 Chair: If I understand your answer correctly we have the building blocks in place and we have the credibility, but do we yet have the scale? What is the scale of the market in the UK for nature?
Gordon Bennett: I think the scale for nature in the market internationally is small. I would not describe it as a market. “Market” means lots of things to different people, but if I am thinking about it in terms of the financial market it really does not exist at any scale today.
Q100 Chair: Does it exist anywhere in the world?
Gordon Bennett: Not really, no.
Q101 Chair: The same question to you, Andy, on the ability of the UK to play a leading role in this sector.
Andy Howard: Without repeating too many of the same points, the point I would make in starting is that this is a market that will need to grow very significantly. To echo some of those points, by our calculations if you look at the value of natural capital assets, if that was a discrete asset class of its own, it would be about 0.2% of the value of the assets managed by the asset management industry globally at most. It is very small and will need to become significantly bigger.
In terms of where we stand I would say the UK is well placed for all the reasons Gordon mentions. We have expertise, we have a supportive policy environment, we have an internationally well-respected policy framework and policy voice to lend but it is an industry where the growth lies ahead of us more than it lies behind us, and there are building blocks that need to be built on.
Q102 Chair: Helen, do you have anything further to add on that initial question?
Helen Avery: Yes, just some things we could do. We are in a good position, but it is early days. We have quite a long arc until we get to the point where it is green finance and pension funds can invest. That is a long arc but along that journey we can lead by encouraging firms to disclose on nature-related impacts and dependencies through TNFD. We can adopt taxonomy.
We are developing a step further than the EU taxonomy by looking at nature at the moment under LNAS, which is a programme under the taxonomy. Nature-positive pathways is something we can lead on, and I think that is in the works with WWF and that is something the UK will lead on. To get us to a system where we can invest would be incredible.
On the nature market side we are up there with the US and Australia on some of these nature markets. We have biodiversity net gain and that is groundbreaking, so that needs to be successful. We have very high integrity voluntary carbon markets as well, but there are some challenges with that, which is stopping the supply. Mainly, we have a huge appetite from investors, but we do not have corporate demand and the push on corporates.
Q103 Chair: Andy, developing on that, as an investor, the representative of an investor body, which is why you are on this panel, we have seen that the bedding is in place. We have the right reputation, and we are in the right place. What, historically, has prevented you from investing further in this sector? You reference that it is 0.2% of all investments, so it is de minimis at the moment. Give us a flavour of what has held you back, and then, if you can, develop that into quick wins that you think policymakers could take to accelerate the development of the market.
Andy Howard: I will frame this in the context of as an asset manager. The portfolios that we manage are for our clients, rather than decisions made laterally, but looking in that context I think there is a scale challenge in terms of how we scale the size of many of the projects that we are describing and how we scale the size of the market as a whole.
Liquidity and scale are important—there is a chicken and egg situation there, I realise, in how you get to that point. Stepping back for a moment, fundamentally we need to put a value on nature that ensures that the value of assets or projects that restore or protect nature are valued commensurate or more commensurately with the social planetary value that they create.
There is a gap between those two things that is ultimately going to be critical to establishing a clear financial and investment incentive for more investment into this field. There is demand, and there is certainly interest from many of our clients and indeed from across Schroders, but ultimately identifying ways to make the economics of those projects more compelling than they are in many cases is going to be critical to bringing in more capital going forward.
Chair: I am going to allow an intervention from Chris Grayling.
Q104 Chris Grayling: A quick question and a declaration that I am an unpaid UK-based trustee of the African Wildlife Foundation. There is one thing that we have discussed that I would be interested to get your view on—and you mentioned the issue of scale—can you envisage a situation where the only real way to secure investment is to package projects together into more of a single unit portfolio into which people can buy? Particularly within the UK, any available projects are very small relatively for a big financial investment institution. Does one need to package these together into a broader basket of products?
Andy Howard: I can envisage that being part of the solution. I think ultimately you still have the challenge in that context of how you ensure that there is oversight of the underlying project that is appropriate. One of the challenges here is that we are not ultimately talking about financial instruments. It is not like packaging together bonds or other financial securities in the same way. It is certainly not like that in the sense of pieces of paper.
There is ultimately a question of ensuring that the assets that we are talking about are being properly overseen and monitored. Scale can help with that. Putting things together can help with that to some degree, but it does not entirely solve all those problems.
Q105 Chair: Gordon, you create the market, or you oversee the market. Can you expand on this idea of being able to invest at some scale? Is that an opportunity for you? Is that something that you can help with?
Gordon Bennett: It is certainly an area that we are investing a lot of time and capital in. The challenge is that from where I sit there is not a lot of demand, and you cannot have a market without demand. If you think about the markets that do work today from a carbon market perspective it is those that are mandated, so the polluter is mandated to pay and outside of government mandates there are not any markets at scale for externalities.
Q106 Chair: What impact has the Government’s policy decision on biodiversity net gain for significant developments had on the creation of that demand? Do you anticipate that developing in the near term?
Gordon Bennett: I do not have enough proximity to biodiversity net gain in terms of creating a financial market. That seems far away. If you were trying to create some sort of demand with a government mandate one idea would be to take a percentage of the UK ETS and allow polluters to meet part of their obligation with buying a positive externality, being a carbon sink of nature. That would crystallise some sort of demand.
People are looking for a safety/air cover in terms of buying carbon credits, so if the Government can endorse a particular standard and give buyers safety that potentially stimulates some voluntary buying as well.
Q107 Chair: Having a common version of the truth would be very helpful in developing the market.
Gordon Bennett: Yes, some Government support on saying what is acceptable. Ultimately quality is subjective, and the market solves for that. You can solve for that through price. Anecdotally, people are waiting on the sidelines because there is a lot of negative publicity around carbon credits in general. That is just carbon. Clearly, nature does far more than just sequester and store carbon.
Chair: The challenge of course is that whereas CO2 measurement is a definite thing, biodiversity net gain is much more amorphous, therefore harder to quantify and unitise.
Q108 Barry Gardiner: I want to focus on what may be the perceived inadequacies of the current economic model, how we can capture the value of natural capital and move more into a natural wealth accounting framework.
First, Mr Bennett, congratulations on being the sustainable business leader of the year in 2022, who is it in 2023 and 2024?
Gordon Bennett: I do not know. It was not me, though.
Barry Gardiner: Maybe we should speak to him next time, Chair.
Caroline Lucas: Or her.
Q109 Barry Gardiner: Or her, absolutely. Can I ask you about GDP as an appropriate lens from which to view natural capital? What are the inadequacies of looking at economic activity rather than wealth in trying to capture this shift from the current to a nature-positive outlook?
Gordon Bennett: I will not talk specifically to GDP, but effectively the challenge is that we do not use externalities in our current economic model enough. I like to use a quote from Michael Greenstone, who is the Milton Friedman Distinguished Professor in Economics at the University of Chicago. He says, “Currently the atmosphere is free. It doesn’t take an advanced degree in economics to figure out the things that people get for free, they use an awful lot of it”, so externalities are an economic theory. We operate markets that price externalities, so they are kind of there. They are just not being used.
To go back to my earlier point around this, outside of government mandates externalities are not used at scale, so people are not—
Q110 Barry Gardiner: You say they are not used. Surely, the problem is that they are being utilised, they are being abused and they are not being counted within the economic model. It is not that they are not being used. It is that we leave them out of our cost-benefit analysis when we conduct our examination of things, isn’t it?
We are relying on them precisely as the free and gratis benefit that nature provides. It is for public good and, you are right, it gets used extensively, but it does not get factored into our economy so when it degrades we are not taking that degradation into account.
Gordon Bennett: Yes. Nature produces all these positive externalities that it does not get rewarded for today, but if you basically recognise your negative externality, pollution, as a financial liability then you offset that financial liability by buying a nature asset, so you solve for both things. You solve for the root cause of climate risk, which is not paying to use the atmosphere. We built society on the assumption that the atmosphere is infinite. It is not. It is finite at set temperature targets, and you can use economics to solve for the allocation of scarce resources. I think this is your point around accounting. Recognise the financial liability of the negative, the pollution; incentivise the purchase of positives, like nature or other carbon reductions and removals.
Q111 Barry Gardiner: The difficulty of course—as the Chair alluded to—is getting a unitary framework to do that or a metric with which to do that. The ONS has done some groundbreaking work recently on that. I take it you are aware of what they have been doing in that sphere, so can you explain to us how that might help to create the sort of markets that we do need to see? I agree with you that these markets do not exist to any extent at the moment, and it is only by government regulation that they exist at all, in effect.
Gordon Bennett: I am not aware of the work of the ONS.
Q112 Barry Gardiner: Ms Avery, are you aware of this?
Helen Avery: Are you referring to the GII and the NII, the net inclusive income and the gross inclusive income?
Barry Gardiner: It was the March 2022 update on New Beyond GDP measures.
Helen Avery: Yes. I think it is vital. For example at the moment agriculture is less than 1% of GDP and it is 71% of our land, so if we keep looking to GDP we are not going to end up protecting some of the things that we need to do for resilience.
Q113 Barry Gardiner: Half of the world’s GDP is dependent on nature. US$58 trillion was the calculation, so highly dependent and dependent.
Helen Avery: Yes, 99% is dependent on natural capital. We are publishing a report in April that shows UK GDP impact from nature-related risk with Bank of England data so that is something to put on your radar. I can talk about that more.
It is important. I would say we have a strong natural capital account. It is highly regarded and that helps guide our policy, as you know. With the net inclusive income and the GII that goes some way. A lot of countries will supplement their GDP by having another indicator. For example, Bhutan has its Gross National Happiness and Scotland has its National Performance Framework, which includes the environment and society. Does that naturally lead to markets? I think it leads to policy changes that can ultimately lead to compliance markets that can then create the demand that can create markets.
Q114 Barry Gardiner: You talked about economic risk earlier and, yes, there is the economic risk from pollution, whether it is the economic risk that is going to be borne by our health service, whether it is days off work because of pollution—all these downsides that are not accounted for very often in the way we look at this. How can business models be designed to account for the value of that natural capital and understand that that loss to nature, to our natural wealth, is an economic risk that crystallises out, but it just crystallises out elsewhere? It crystallises out in the health service, in clean-up of pollution, relying on public services to do the dirty work. How do we integrate what is essentially the private capture of those externalities with the public good so that they can work together to enhance and become a nature-positive model? Solutions from anywhere would be helpful.
Helen Avery: The Taskforce for Nature-related Financial Disclosures, which the UK Government have put millions into, has launched and that is a disclosure framework that asks companies to report on their impacts and dependencies. Once they start to report on what their impacts are and their dependencies they can start to understand what the material risk is. Until that is mandated—and I speak with a markets hat on, not with my TNFD-affiliation hat on—that is going to be hard to do. The economic risk and the financial stability is not being captured because we cannot get under the supply chain of where those assets are located and their risk at present.
Q115 Barry Gardiner: If this Committee were to put forward a report to Government, which of course it will, and were it to make some recommendations in that report, as far as you are concerned, one of them ought to be that we ask that the TNFD should be mandatory?
Helen Avery: Yes.
Chris Grayling: Can I come in just very quickly on that?
Barry Gardiner: I wanted to hear what Mr Howard and Mr Bennett had to say, but please, Chris.
Q116 Chris Grayling: Just to say I absolutely get that, but does investor pressure mean they are going to do it anyway?
Barry Gardiner: They have not yet.
Andy Howard: I am going to pick up a little bit on the points made previously around the economics and how we think about that connection. On Gordon’s point about how we connect an economic view of the world, that is incredibly important from a policy perspective, to understand where the disconnects are between the policy framework that we have in place and where there are societal or planetary costs or benefits that are not being accounted for in our current model, our current framing and the objective, if you like, of a lot of policy. Ultimately the question becomes what the mechanisms are that can close that gap? Transparency is critical. Without that information it becomes very difficult to do anything very much, but it is probably not sufficient in isolation to drive change on the scale that we ultimately need to see it driven.
Conventionally, if you think about other areas where similar challenges exist—whether that is around tobacco, alcoholism or other areas—you typically end up with one of possibly three approaches, or a combination thereof. One of them in this case is a standard cost imposition, which may be duties on cigarettes or alcohol, one of which may be consumer pressure, for example as consumers become more aware or as they have more information making different decisions about what sorts of products they want to buy. We see that in some areas as well, or, finally, in terms of markets, here an example would be something like carbon markets where emitting carbon into the atmosphere is an externality that historically was free. It is no longer free in many industries.
Putting a price on that, which in economic principles is a more efficient way of doing it, creates a better economic efficiency. It is also a slower process in many ways than the first two things. Ultimately, it is figuring out what that relationship is. An economic view established that does not ultimately lead to a change that causes that economic view to become a financial view is less helpful. It is establishing that bridge from an economic disconnect to a financial or an investment impact.
Q117 Barry Gardiner: Indeed, but we can keep on talking about an old model that says, yes, there is a price that the public pays because of pollution and let us just call it pollution for now, and that price then has to be paid, offset in some way, or you can move to a model that says in our preparation, in our evaluation of any project right at the start, all of these things must be brought together.
You cannot do it without a metric. You cannot do it without the transparency, but it is changing the model from one of pollute and then pay—and the trouble at the moment is you pollute, and you do not pay—but changing that model to one that says if you have the sort of model of natural wealth accounting that I think the ONS is trying to work its way towards then you start from a different place, don’t you?
Andy Howard: I think you do, but equally it is the pay bit as you say that has historically been the challenge. If you can establish a picture or a belief that that pay will be there, there will be a penalty. I do not just mean a penalty in the form of a cheque, but a penalty in broad terms for polluting activities. Using the same broad term, then you make the decision earlier on of how you design this or operate in a way that creates less pollution in the first place, because it is in everyone’s self-interest.
You move from a policing situation to one where the incentives are aligned from the beginning of the process, and all the things that you are describing are an important part of how you get to that point. It is ultimately about creating those incentives to become aligned. At the moment if you only have an insufficient side on one half it does not quite work.
Q118 Barry Gardiner: Indeed. The private sector model, which in effect captures the natural assets, the natural capital, which were previously regarded as externalities, must then be aligned with the public good model. At the moment there is not a mechanism for doing that. What I am asking you is how do we get there? Again, any takers please.
Gordon Bennett: I think I agree with what you are saying. We effectively cash account. I know this is about nature and we are talking about climate, but we basically cash account for climate risk. We incur the cost at some point down the line and we pay for it, whether that is in cleaning something up or extra costs and healthcare. We are not pricing it.
I am an accountant by training and if you are thinking about a set of accounts, before cash accounting how did investors take a look at a company and invest? But that is what we are doing with climate risk. It is that existential threat. I struggle to reconcile how you can look at this existential threat and cash account for it. You should at least be accrual accounting and, ideally, you would be marking to market. It is about pricing risk.
When it comes down to sustainability we have this concept of double materiality, which is financial risk and something else that we cannot put a number on, but the thing is with negative externality of pollution you can put a number on it and take it out of this other double materiality.
Q119 Barry Gardiner: When we built bridges, right, we did not know what journeys and what we were going to save and what the social benefit was going to be, but we factored a straw figure into the accounting to determine the capital project of building the bridge, and the journeys it would shorten and the trade that it would increase, we could not judge it. We did not have the transparency, just as we do not have it for the natural assets. We did not have that transparency, we did not have that metric, but we did it and then we refined it over time. Is that not what we should be doing here?
Chair: Very brief answers, please.
Helen Avery: We cannot price the risk unless we are measuring it and at the moment, unless we have TNFD, we are not going to be able to know what the risk on people’s books is, of companies.
To the honourable Member’s question on the financial sector, I am not with the financial sector, but we work with them on TNFD. If we look at TCFD disclosures they are not all that. They have had pressure from financial institutions. Unless it is mandated—and the UK has mandated TCFD—the chances are that, no, it is not going to be enough pressure.
Chair: Thank you very much. I know it is an interesting topic, but we do have to move on. Clive Lewis.
Q120 Clive Lewis: I want to talk about motivation, and what motivates natural capital investment. Starting with Andy, what do you think motivates natural capital investments? You can list them in terms of the priority, if that helps, but what are the main motivations for natural capital investments?
Andy Howard: Besides the asset there are different types of investors in natural capital investments. I am going to put the public sector or the multinational development banks slightly to one side from this question, although they are an important part of the picture. You have more mission-driven investors, or purpose-led investors, who will look at this from the perspective of how they deploy capital into areas that will deliver an environmental benefit.
Typically, they are looking at this from the perspective that they have a certain amount of capital to deploy and what is the best bang they can get for their buck. It is not necessarily in terms of purely how they put a value on this, but if they have a certain amount of money to spend how do they achieve the most impact from that. There will typically be a return expectation in the investment return sense of the word, but it may be lower than people would look for elsewhere.
The bigger pools of capital I think are those investors who are seeking to invest in a sustainable and a responsible way who recognise that nature loss is an important societal challenge, are looking at this either through the perspective of a responsibility as large asset owners to play a role in that, or who are looking at it through the perspective that the discussions such as the one we are having here today will ultimately lead nature to become an increasingly important financial risk or financial opportunity for the value of assets.
That second pool is a sizeable pool of people who are interested but who ultimately need to see that there is an economic return. They have a responsibility to their beneficiaries to ultimately deliver an economic return from the investments that they are making.
I think the motivations are in many cases a desire to play a positive contribution. In a larger number of cases it is a conviction that managing assets sustainably, managing assets in a way that is commensurate with both the world that we would like to move to, but also equally importantly the way the policy environment and social pressures are likely to change the value of the assets that people have invested in, is an important part.
Ultimately, to be clear, one theme that runs through all those things is a desire to generate a return. That is the one thing that unites most investors, the belief that there is a return from investing in those assets.
Helen Avery: I am not an investor but what we see is they are looking for standards and confidence that what they are going to invest in is not going to be in The Guardian the following week as being bad. It is the deal size, which is one of the challenges that we have had in the UK market, and we have talked about some of the aggregation models that we need to bring them up to a size that can work for investors, and it is the return size.
We have had a couple of deals just in the UK with 6% returns. Triodos Bank made some loans to the Wye and Natural Flood Management and also to Trees for Life. That was a bond that was also 6%. UK Infrastructure Bank has made a bridge loan to Highlands Rewilding. That came in at about 13% but they are too high for these projects. These projects need more like 2% to 3%. One of the challenges that we have now is that we have a disconnect between what investors need for their fiduciary duty and what these projects can provide. Again the missing link in that is the demand driver. The more demand that we have for buying these credits the higher the price will go.
Q121 Clive Lewis: Does the fiduciary duty need to change, potentially?
Andy Howard: I do not think it does particularly. You can look at this in one of two ways. You can look at this through the lens of changing the duty that institutional investors have towards their beneficiaries, or you can look at it through one of the other levers that we can pull to make the investments fundamentally more attractive.
There is no resistance for the most part that I am aware of for people having a fundamental or a philosophical lack of resistance to investment. It is a belief that ultimately establishing or generating a return from the investments that they are making is important.
It has changed a bit over the last 18 months or so. In a lower interest rate environment generating 6%, 8%, 10% returns were reasonably attractive for the risk profile that you were taking on. That has changed a bit as interest rates have moved. As I say, demand for carbon credits has not followed the path that we anticipated 12 or 18 months ago.
That is a relatively short timeframe in the scheme of things, but it does indicate that the attractiveness of those projects is sensitive to the changes that can happen and play out over a relatively short period of time. I do think that how we create ways to make those projects fundamentally more attractive is more useful than thinking about how we change the objective of those investors to push them to invest.
Q122 Clive Lewis: There are some economists now who would say that what we are beginning to see in terms of food prices, in terms of commodity markets and so on is we are beginning to see the systemic nature of climate collapse. In terms of coffee prices, food prices, I know for example it is impossible to buy futures for cocoa at the moment, or very difficult, because the global market for cocoa is struggling from, in part, climatic issues. That is what the climate crisis looks like.
These are in turn driving the foundations of economic shocks and that has an impact on inflation, and that has an impact on central banks and interest rates, which then make things less attractive and more difficult. You can see the cycle that we are now trapped in. I think people at home will be listening to this and thinking, “Well, we are in the third decade of the 21st century. We have known this has been happening for almost 50 years now, maybe more”. We seem to be trapped in a death cycle, a death spin. We know it is getting worse and yet still at the same time the market is not attractive enough for investors to do what they need to do. Something is not working, and it is getting worse, so how do we short circuit that?
Helen Avery: I can talk about the work that we are doing currently with Oxford and Reading Universities and UNEP-WCMC and the National Institute of Economic and Social Research with the Bank of England data. We have developed the first of its kind, although I gather the US is shortly behind, a national Nature-related Risk Inventory. It looks at the likelihood of the highest impact and ecological challenges that we have and the likelihood of that impact on the economy. This was released today.
In the top right-hand corner the biggest risk we have is health decline, AMR, and zoonotic diseases. Also high up there is tipping points. I could go on, but I will not because we are keeping it short. The point is every country needs to know what their nature-related risks are, and then to my point on the disclosures we need to understand if our companies are exposed to these risks. Then we can back it out to what is the impact on GDP if we even think GDP is the right measure and then back it out into financial stability.
To your point, we absolutely must know where we stand at the moment, and we are not capturing it.
Q123 Clive Lewis: I guess then the question is—and I know you have said that most companies still need to have their primary concern, or those companies or organisations investing in this need to have a financial return—given the threat to businesses posed by the degradation of nature, given the existential threat of climate and ecological collapse, is the return enough? I understand it is not the only metric, as you have said, but it is still the priority. Is that acceptable at this stage of where we can see the science heading?
Andy Howard: I think this goes back to the broader question of how we think about economic growth and the fact that economic growth for decades has been built increasingly on depleting resources, however you define resources, which are becoming more and more depleted as a result. Therefore, it is putting more and more pressure on the nature of growth.
I do think the solution to the problem, if you think about this in terms of you have an externality—this is the tragedy of the commons problem, effectively—and in that scenario, a broad-based intervention that establishes first transparency about what those costs are and then the mechanisms to ensure that those costs are recognised in the way that capital is deployed, in the way that business decisions are made, and in the way that companies succeed or fail, is going to be important. This is not unique to nature. There are lots of areas where similar challenges exist. It is just an area that has become increasingly acute and clear over the last few years in particular.
Gordon Bennett: To the point earlier on about that, you need to get on with it and try something because the cost of doing nothing is far higher. Again, I have lots of proximity to carbon and cap and trade. It is not like cap and trade was a success from the off. It is continually being recalibrated. You are not going to get the right answer and you are going to have to continually recalibrate, but you must start somewhere.
This whole discussion around quality—quality is subjective at the end of the day—let willing buyers and sellers figure out what they want to buy and sell from each other, and quality can change over time. What people want to buy changes over time. There is nothing wrong with that, but the key is to start.
Q124 Caroline Lucas: I want to go back to the issue of transparency, which all of you have said in different ways is important. I want to ask Helen whether she thinks that transactions of natural capital investment should be publicly registered so that they are there for everyone to see.
Helen Avery: Yes. We have quite good transparency in our carbon markets at the moment, so Woodland Carbon Code and the Peatland Code register on the UK Land Carbon Registry and there is a UK Carbon Price Index that can give an aggregate of the price and there are quite a lot of data around where the projects are and to a lesser extent who is buying them. One of the challenges is that we do not know who is buying them.
I do not know if you are familiar with Wilder Carbon Standard, but they have gone a step further and created their own registry where they disclose who the buyers are. BNG is very new, biodiversity net gain. There is an issue with lack of transparency. We do not have a register for onsite gains at the moment, which is going to be a challenge because it creates an uneven playing field and also it is not clear how the transactions are—some farmers are being offered £900 where it is more like £20,000 to £40,000 for a unit, so we do need to start saying what the average price is.
The biggest challenges are that people do not want to disclose the price they are paying and that is fine. We can have an aggregate price disclosure on registries, but buyers are pushing back about wanting to remain anonymous and I think there is a case to be made that we want this market to develop. If we are saying who the sellers are let us say who the buyers are.
Q125 Caroline Lucas: Andy first. Do you agree with what Helen just said?
Andy Howard: Broadly. I think the importance of having price transparency in the market that you want to develop is critical.
Q126 Caroline Lucas: Knowing who the buyers are too?
Andy Howard: Yes, you should. The practicalities given the way things work can be tricky, but the more transparency you can create to establish confidence in a market is going to be important. It is also important that we recognise in much the same way we find in voluntary carbon markets it is not as though a tonne of carbon has the same price in every situation in which that carbon is sequestered. Different types of credits have different types of price. We understand that.
We have now established several industries to track different types of prices based on different types of characteristics. Price transparency is important in establishing therefore what a fair price is. That is what creates confidence in the market. That is what creates therefore the willingness to invest behind it.
Q127 Caroline Lucas: Anything to add, Gordon? Also on the issue of not only who is paying for what but what the outcomes for nature are, to the extent that we know that too.
Gordon Bennett: Generally I agree. Certainly, from a carbon perspective, it is one of the most transparent markets there is in terms of who owns the credit.
Caroline Lucas: It is a low bar, though.
Gordon Bennett: Well, you can basically see 75% of the credits—you know who owns them and who has retired them. I would say that is quite a high number compared with other markets.
Caroline Lucas: That is what I mean. The bar is low because the rest is pretty opaque.
Gordon Bennett: I do not know if you need to know who the buyers and sellers are of everything. Price transparency is the key component in terms of reducing the risk of adverse selection. Anyone can look at the UKA price on ICE today and know the spread will be 20 pence. Effectively £37 is the value.
If you do not have price transparency what is value? That would certainly prohibit people participating, not knowing where the price is. In carbon and nature markets we are trying to create a primary market, a bit like an IPO process for an equity or debt market where the primary transaction is conducted in the open and people can see it.
Clearly, the liquidity event is important in creating the price transparency, but the pre-IPO roadshow process allows buyer and seller to interact and do due diligence. It brings far more transparency to what you are buying and the quality of it.
Q128 Caroline Lucas: Good, so all three of you are in favour of public registering, which is great. We will put that in our report.
Going back the other way around, so starting with Gordon, do investments in natural capital expire? Is an asset leased for a certain discrete period or is it owned permanently? How do you factor that into markets?
Gordon Bennett: That is a good question. I suppose this goes to the question around permanence and it depends on what type of investment you are making in natural capital. Again going back to carbon there are different types of methodologies. One is avoided deforestation, and one is afforestation, but the permanence is rather subjective as well. Nature sometimes gets accused of not being permanent because of fire risk and so forth. Clearly trees burn down but the oldest forest is over a million years old, so that is fairly permanent. Permanence is a challenge.
Helen Avery: In the Woodland Carbon Code, 30 to 100 years is what we ask people to maintain that land for and peatland as well. On NFM, natural flood management, it can be about 100 years, definitely 10 years, and on biodiversity net gain it is 30 years. This is as close as we can get. It is quite hard for farmers especially to commit to that length of term of contract and there is always a way to add on at the end.
What we have and is scientifically backed is that we need that length of time, but the challenge is that the monitoring and evaluation over that period is costly and needs to be factored into the price. Not only that, if we think in 30 years how much the climate is going to change, some of these sites for BNG are going to maybe not hit their target, so we need assurance and also extra payment so that they are managing their climate risk as well as their nature-related risk.
I am not a scientist, but I am comfortable that the scientists are comfortable in the UK with what we have for permanence, or as close to permanence.
Q129 Caroline Lucas: I will ask a different question to Andy: when you were last before the Committee in March of last year, I asked you about Schroders’s position as one of Drax’s biggest shareholders and whether you would be calling them out to improve their disclosure on forest-related risk.
Have you continued to push for higher levels of transparency from Drax in particular? You will know that since we had that exchange last year, Ofgem has opened an investigation into whether Drax has breached its sustainability criteria and recently the NAO has also said that it does not think there is enough information for Government to be confident that it is demonstrating that sustainability standards are met. Can you say whether you have that confidence?
Chris Grayling: Have you seen today’s BBC exposé as well?
Caroline Lucas: I have indeed.
Andy Howard: Yes. Hopefully you received the follow-up response that we provided.
Caroline Lucas: We did, thank you.
Andy Howard: I am happy to follow up. I can confirm certainly that we continue to speak to Drax very frequently as well as several other parties and groups around Drax to get that broader understanding of the topic. I can continue to say we take those questions and those topics extremely seriously. We remain shareholders in Drax at this point but, as you say, I would be happy to follow up that area with you more specifically. I will not try to comment on today’s news too quickly, but I am happy to follow up with you in more detail if you would like.
Q130 Caroline Lucas: You did indeed follow up in writing, for which we are grateful. In that follow-up, you stated you recognised that deforestation and conversion pose significant risks to the value of your investments. You said that where you see no meaningful progress, you will escalate your concerns. The obvious question is whether the NAO findings, the ongoing Ofgem investigation into Drax’s compliance and the threat to Enviva, Drax’s biggest wood pallet supplier—on the verge of bankruptcy—all together automatically flash up a red light on the dashboard.
Andy Howard: Without trying to summarise, what I can assure you is there are a lot of discussions both internally and with other groups outside of Schroders on this particular topic. Let me frame it this way. If the question is whether this has been escalated, it absolutely has been escalated and remains escalated in terms of our attention within Schroders.
Q131 Caroline Lucas: When was it escalated?
Andy Howard: Looking at this has been a huge focus within the firm. It is an important investment for a number of investment teams and a number of portfolios that we manage within Schroders. We look at it and have done for some time—
Q132 Caroline Lucas: I suppose it slightly worries me that we had a similar conversation almost exactly a year ago now and you were also looking at it and it was an area of concern. We now have the NAO. We have Ofgem. We have the Government themselves. What will it take for you to do more than discuss it and escalate it?
Andy Howard: Yes. You can assert from that that, therefore, we continue to believe that we are comfortable with how the company takes itself forward, the role that the company plays and how it conducts itself. As I said, it would be more complete for me to follow up. A lot of people with specific knowledge are involved in a lot of different conversations. I am happy to follow up on that.
Caroline Lucas: I would love you do that in writing. That would be perfect. Thank you.
Chair: Lovely. Thank you very much. Chris Grayling.
Chris Grayling: On the other side of the spectrum, I share the same concerns about Drax.
Barry Gardiner: And so did John Kerry two days ago at the meeting that we had with him.
Q133 Chris Grayling: That concern is growing. Can we move on to standards before we finish off? First, Helen, as a general point of principle, is it sensible for the UK to seek to align itself with international standards on this to try to help develop the investment opportunities?
Helen Avery: So that I can understand the question, are we talking about CSRD and ISSB?
Chris Grayling: The key standards, to my mind. Fundamentally, commonly accepted metrics will underpin any successfully developed market. There are two stages. If you are going to do the equivalent of IPOing a nature project for investors to invest in, you need the standards and metrics to judge whether this is bona fide enough to invest in and, secondly, over a period of time, you need the metrics to track the progress to judge whether it does what it says on the tin.
Helen Avery: There are two things here. Looking at nature markets, we have the codes, and they are helpful, and we have standards that align with international standards. We are aligned there.
Some of the other standards, for example, the CSRD, the reporting standards for the EU, have been expanded to include nature in addition to ESG, which we want to align with. That said, 80% of UK publicly listed companies report in CSRD and so we are already aligned because our companies operate there.
TNFD is aligned with ISSB. It has the same wording. It works with CSRD. It is aligned with GRI. That is aligned.
I do not have anything else beyond that on the standards front.
Chair: You have not used a few letters of the alphabet.
Helen Avery: Sorry. I will follow up with a breakdown with the actual words.
Q134 Chris Grayling: If you look at the investment potential for investors to put money into projects off the back of TNFD reporting, for example, at the moment it seems we do not have a common approach internationally to judge whether a project is investible. That is what I mean by the metrics.
The City of London is one of the world’s big financial centres and one of the world’s most highly regarded financial centres. Could we and should we in the UK say, “All right, this is what we will do. These are the standards and the metrics we will set. We will make sure we tie into TNFD frameworks and so forth. This is how London will judge the viability or otherwise of investments, the bona fide nature or otherwise of investments”, to try to create a common approach that at the moment does not exist?
Helen Avery: This is the UK green taxonomy, which I believe is possibly up for consultation at the moment or is shortly up for consultation.
Yes, we absolutely need a UK green taxonomy. There is a lot of discussion around the interoperability of the UK green taxonomy. It is pleasing to me—and I am biased because we lead the advisory group on it—that the taxonomy in the UK has gone a step further to look at sustainable agriculture and fisheries and agriculture, which has not happened in the EU taxonomy. We can be a leader globally to say to the other 50 countries that have their own taxonomies, “This is how you might follow us in looking at nature and not just climate”.
Q135 Chris Grayling: Andy, is that a sensible way forward? Some of the big City institutions, even the Stock Exchange, could say, “This is how we will create credible nature markets with a gold standard attached to them”.
Andy Howard: I want to try to distinguish between a couple of topics that are linked. They are all closely linked topics. From our perspective and from the perspective of a large part of the investment industry, when you invest in other publicly listed companies—and indeed at times privately listed companies—understanding nature risks, nature impacts and nature exposures is certainly an important part for us of how we assess those companies, the way we identify risk and the way we look for opportunity.
TNFD and better disclosure standards become particularly critical there because, at the moment, we do it on incomplete and often inconsistent information. We do it but it could be done a lot better. That in turn can inform both which companies we are more likely to invest in as well as where we engage with companies.
Similarly linked but slightly different is how you create a common basis to measure the outputs and the outcomes that the different types of nature-based investments would deliver. In a carbon context, you pay a price for a tonne of carbon. You can look at different types of projects and say, “The price of a tonne of carbon captured here is this much and a tonne of carbon captured over there is that much”. You assess and different people will make different judgments about which they consider to be the higher quality and what they are willing to pay in different asset classes.
You will have discrete prices from different sorts of projects. The benefit of carbon is it is reasonably straightforward. The challenge of nature is that if you say it quickly “nature positive” sounds a bit like “zero carbon” but it is trickier to get consistency around it. Establishing common frameworks and consistency around measuring that, which will not be perfect, crude as it might be, would be valuable. It may be a case of not thinking necessarily about nature as a general mass or a general topic but breaking it down into different ecosystem services that nature does for us, like capturing carbon, limiting flood risk or providing recreational services, which are manifold, and defining them so that they can be more explicitly separated.
Q136 Chris Grayling: Given that at the moment nobody has found a single way to do this, is it an opportunity for the UK?
Andy Howard: I agree.
Gordon Bennett: Yes, I agree there is definitely an opportunity for the UK for many of the reasons I said before. I struggle a little bit around nature because, as Mr Mayhew referred to, how do you measure it? There is not even a consensus around measuring a tonne of carbon. When you start to talk about biodiversity credits, I personally struggle to consume that.
On ecosystem services, we looked in the US at natural asset companies. From memory, there is something like 37 different ecosystem services. To be able to standardise that seems quite a challenge. If carbon is a good proxy for nature—and that is a question rather than a statement—then there is a real opportunity for the UK to be the global centre for raising finance in carbon assets, which is perhaps not being grabbed at the moment.
Chair: I will bring that to a close because we are running out of time.
Q137 Philip Dunne: Quickly, picking you up on that, Gordon, what barriers would prevent the UK taking a lead in this market?
Gordon Bennett: Specifically, we currently work with a few friction points at an advocacy level. One is the legal treatment of a carbon credit. A Law Commission consultation has come out and focuses on digital assets but seems to have a look-through for carbon credits. Defining a carbon credit as intangible property is key.
Also, the VAT treatment of carbon credits creates some tax friction, which needs to be solved for. Again, we advocate for this.
The last thing is the regulation of it. It is an exam question. What goes wrong if you regulate it like a carbon allowance? A carbon allowance is a financial instrument. Those are some of the most liquid markets in the world, which has not stopped people accessing them. The exam question for carbon credits from a financial regulation point of view is whether you can treat them the same as allowances. Then you transact somewhere with a high entry bar in terms of quality and market infrastructure. Those are three specific points.
Q138 Philip Dunne: Finally, briefly if I may, you have been referring to the complexity and the difficulty of standardising metrics across the different elements of the ecosystems. Are there any rules of thumb at the moment as to how landowners, investors and brokers share the benefits when they enter into these transactions?
Helen Avery: Please interrupt if I do not answer your question correctly. In the UK, there is a common understanding that we look for soil health improvement, biodiversity uplift, net carbon reduction, water quality improvement and then natural flood management or holding the water. I am not sure of the scientific term for that. This is agreed by everyone. The corporate sector understands the five priority things they need to do. Farmers know how to measure it. We have the tools to measure it.
However, the Government has not specifically said that this is what they want us to focus on as a country, which holds some people back because companies feel they cannot go to farmers and say, “This is what I want from you”, and farmers feel like, “I will not waste my money on baselining for this if the Government will not tell me what they need”. I do not know if that answers your question.
Chair: Okay, thank you very much. That brings panel one to a close. Thank you very much to Andy Howard, global head of sustainable investment at Schroders; Gordon Bennett, managing director, Utility Markets at Intercontinental Exchange; and also to Helen Avery, director of nature programmes at GFI, the Green Finance Institute.
Witnesses: Oliver Lewis, Ana Haurie and Jonathan Shopley.
[Philip Dunne took the Chair]
Q139 Chair: Welcome back to the Environmental Audit Committee for our second panel of our second oral session into natural capital. I am pleased to welcome Jonathan Shopley from Climate Impact Partners, Ana Haurie, Chief Executive of Respira, and Oliver Lewis, Founder of Joe’s Blooms. Welcome.
This session is keen to draw out some of the innovations going on within the sector, in particular where the UK has the opportunity to lead in the development of these markets.
I will ask a general question to start with, following on from what we discussed with the previous panel, about the extent to which natural capital might be used as an opportunity for corporates to give them a licence to pollute. Is that consideration fair or unfair? Jonathan, perhaps you might like to answer.
Jonathan Shopley: Yes. I bring experience that we have had in the carbon markets, particularly in the voluntary carbon market. It is often said that the process of offsetting lets corporates off the hook. That has not been our experience and it has certainly not been what the research has offered up. Generally, markets for environmental instruments give corporates an opportunity to compensate or contribute to the repair of impacts that they cannot avoid. I will stop there.
Q140 Chair: Ana, your company invests globally. To what extent do your corporate clients invest in natural capital out of guilt or out of necessity?
Ana Haurie: To follow on from Jonathan’s comment, it is completely the opposite on this whole issue around greenwashing, particularly when corporates use carbon credits. I know that the definition of greenwashing goes much further than that. In the context of using carbon credits, it is not a licence to pollute. It is the contrary.
All the companies at least that we work with have serious decarbonisation pathways in place and they use carbon credits to compensate for the unavoidable emissions along that pathway. The research shows that companies that use carbon credits as part of their decarbonisation pathways decarbonise at twice the rate of companies that do not, so I think the research is now showing completely the opposite.
Also, to put this in context, 83% or 84% of companies do not even have a net zero target or pathway in place. Are we blowing this all out of proportion? Rather than focusing on companies that use carbon credits and actually do something, we should focus on the 87% that do nothing.
Q141 Chair: That is a fair challenge. Could you characterise for us the nature of your investors and the transactions that they do, to put it into context for us?
Ana Haurie: Yes. The projects that we work with and that we support are primarily in the global south. They are nature-based projects, a combination of forest conservation projects, removals projects, mangrove restoration, and reforestation and so on. That is primarily who we work with. We work with developers by entering into long-term offtake agreements with them. We guarantee to buy current and future issuances of carbon credits that have been generated by those projects.
We also work with corporates that, as I said, look to use carbon credits as part of their decarbonisation pathways. They have credible net zero strategies in place. These are typically quite large corporations across the spectrum, in the utilities sector, energy and gas, consumer goods, aviation and so on.
Q142 Chair: At present, are most of your clients subject to TNFD voluntary disclosures or do they not operate within a financial disclosure and regulatory regime where that is required?
Ana Haurie: The corporates that we work with make disclosures on TNFD, as we see increasingly in the UK, or common disclosure projects or CDP. It is such a potpourri of acronyms there. Again, those corporates that use carbon credits also make the relevant disclosures.
To build on what the previous panel said, we strongly believe that disclosure and transparency are key and required.
Q143 Chair: Thank you. Oliver, you operate at a mandatory level. Could you characterise for us the role that your company plays?
Oliver Lewis: Certainly, Chair. Joe’s Blooms is a new company that was founded three years ago. Its objective is to support small developers in complying with the new BNG requirements. To that end, we provide a range of tools, material and other means of support to encourage small developers to not only fully comply with the BNG process but also to embark on best practice at every single stage.
Q144 Chair: How far are you along that journey? BNG is emerging at the moment.
Oliver Lewis: Correct. BNG became mandatory for large sites earlier this month. It will become mandatory for smaller sites on 2 April. The Government have over the course of the last three years iterated the biodiversity net gain metric. The final version was released at the end of last year and so now is a clear basis for people to measure biodiversity and biodiversity gain. That is now a clear and robust system and subject to no further major alterations. The sector can have confidence in it and can use it as a bedrock to build upon.
Q145 Chair: Can you say that with confidence at this stage or is it too early to assess whether it is sufficient and complete?
Oliver Lewis: A robust process over the last three years has released multiple versions of the biodiversity metric. It is worth stating that the Government have made clear their intention is for the metric to be reviewed at periodic moments and to be updated.
In the process over the last three years, the ongoing consultation and engagement with both the sector and also interested groups on how to improve the metric we have seen has been positive. That ranges from not just improving the ecological outcomes and the means of assessment but also accessibility and making sure that all elements of the construction sector can meaningfully engage with it.
Q146 Chair: Does it link into the voluntary natural capital sector? Do you see that the standards being developed for biodiversity net gain can read across into the voluntary market? Will it provide a baseline of standards and metrics?
Oliver Lewis: Certainly. We focus exclusively on BNG and mandatory BNG from that perspective. I want to caveat my following remarks with that.
However, with BNG you have not just a standardised metric but also a robust and fairly comprehensive set of approaches as well that have been set out in Government guidance. With the caveat again that this is refined and improved over time, and we learn from best practice, I hope that you have a standardised approach to best practice that is adopted in other parts of the sector because we can all benefit from learning lessons from different approaches.
Q147 Chair: Jonathan, do you see biodiversity net gain mandatory requirements as providing a helpful underpinning to the development of this asset class, if I can call it that, in the UK?
Jonathan Shopley: Again, picking up on some of the conversation you had before, the missing piece in both carbon markets and biodiversity markets is demand. It is essential. In the UK, we have done well to create opportunities for supply with the woodland carbon code, the peatlands code and the salt marsh code that is coming up. These create instruments of real quality and an opportunity to direct finance to these areas, but we have not tied it tightly enough to a compliance need.
I will leave it to you to talk about the ETS perhaps, but the voluntary carbon market, which has been touched on quite a bit, evolved in a vacuum left by the failure of the Kyoto green development mechanism to take root. That market has carried the can, waiting for Governments around the world and Governments domestically to create clear demand signals. I do not know whether you feel that there is a strong enough demand signal in the sector that you serve.
Oliver Lewis: If I can come in, a promising sign is that BNG is now a mandatory requirement or will be from 2 April, which does create a strong demand. It will be a powerful incentive for people to want to move into the nascent market.
I point out that it is important to make sure that all the different players in this new field have the support that they need. Local planning authorities primarily among those will be key players in making sure the obligations are discharged correctly at the validation stage and also in helping to make sure that offsites can enter the market promptly to ensure there is not the reverse problem: not enough supply to meet demand as the statutory regime kicks in.
Q148 Chair: Are any other countries in the world set up anything like this?
Jonathan Shopley: I am aware that the United States has a $10 billion biodiversity offset market, but it is not traded. It is not visible. Banks of projects are set up and, if you are creating a new factory or development, you are given a financial tag and told to fund a preapproved project to that level of investment.
Q149 Chair: Are those state by state? Do they have their own rules and regulations?
Jonathan Shopley: They are state by state and they use a federal framework that that works within.
Q150 Chair: But is that mandatory?
Jonathan Shopley: It is mandatory, in the sense that planning permission or permission to develop is conditional on making that investment. Here in the UK we are heading down that path and looking at planning as the main mechanism to generate the market.
Q151 Chair: That is what biodiversity net gain requires, or will do from 2 April?
Oliver Lewis: Correct. You must secure BNG and reach a standard that says the local planning authority is satisfied that you have complied with the statutory obligations before your development may commence.
Chair: Thank you. Caroline had a quick follow-up.
Q152 Caroline Lucas: Quickly, on monitoring and enforcement, I have a question for Ana because I know that in September 2022 Respira and Drax signed a memorandum of understanding to secure up to 2 million tonnes of CO2 removal certificates in what Drax called “the world’s biggest carbon removals deal”. Given that as an example, how will you guarantee the sustainability of those removals at Drax? In particular, that question is timelier now that the NAO has said the UK cannot guarantee the sustainability of biomass. How can you as a private company guarantee that when the Government say they cannot?
Ana Haurie: Yes. The MOU we entered into with Drax is for BECCS credits in the US from plants that it will build out there. The point of this is that we will work with it while it develops the relevant verification methodologies, which were not in place at the time. This is an emerging area. Only when we are comfortable that the methodology and the rigour stands up to scrutiny will we then follow through with that contract.
Drax does take sustainability seriously and at the moment we are comfortable working with it.
Q153 Caroline Lucas: You have done your due diligence, and you think there is no problem?
Ana Haurie: We have done our due diligence. We have been out to the US to visit the plants. We are quite comfortable with the process as it evolves at the moment, yes.
Q154 Chris Grayling: I will add, Caroline, that I share many of your anxieties. As you heard earlier, I am not convinced at all now by the biomass argument, just so that you are aware that that issue is growing.
We are dealing with different dimensions of what happens here ranging from a small wetland created by a small developer as part of its requirement to provide biodiversity net gain to, at the other extreme, theoretically a huge reforestation project underpinned by a mining company trying to offset its impact on nature. Having a coherent and credible set of metrics for investors and, indeed, markets to use to judge the quality or otherwise of a project is extremely important.
What role can technology play in doing that? Do any of you have experience of using technology to start to track the effectiveness of projects linked to the nature capital markets, voluntary or BNG or whatever?
Oliver Lewis: If I jump in there, that technology absolutely has a pivotal role to play in helping to facilitate engagement with and compliance with these new obligations. For our part, we look at how one can effectively engage with the metric and make sure that it is being filled in correctly and also highlighting best practice in the approach to BNG.
Technology also has a role as well in other elements such as monitoring, enforcement and making sure that the policy is effectively implemented.
I will flag that it is important to know both where technology can bring benefits but also where possibly it can go too far. It is vital to remember that, certainly from a BNG perspective, the discharge of duties requires somebody to be there to implement the policy correctly and to make sure the data going into the metric is accurate. The Government have created a sensible system, in my view, of having for small developers a competent person requirement and then for larger an ecologist requirement. To my mind, that approach is balanced and sensible.
Q155 Chris Grayling: What technology will end up at the core of this, in your view? Examples of technologies out there use soil samples to assess the scale and mix of biodiversity in an area before and after. What, in your judgment, will be the most likely area of technology at the heart of this?
Oliver Lewis: I believe the importance of the metric, as has been set out here, is transparency and consistency. Making sure that the data that is entered is robust and coherent is a vital first step. If you do not get that correct, you will have systemic issues going forward.
Technology can benefit other interesting parts of the system and the approach. You referred to mapping, solar and so on. That is interesting. The Scottish Government is looking at parts of this in terms of how they want to implement and adopt a biodiversity net gain approach. That probably has to come after they create a system that the whole sector can engage with and is robust and sustainable.
Q156 Chris Grayling: Where does the data come from? When you talk about “the data”, what data are you talking about?
Oliver Lewis: Underpinning the BNG system, a competent person or an ecologist, depending on the site’s size and nature, needs to have entered in the baseline data for that site. Technology can immediately provide a real benefit in making sure that they can assess what is on the site and enter it into the metric and engage with the metric to find the best net gain possible.
Q157 Chris Grayling: That is why I was pressing. Then it comes down to an individual’s judgment. Do you envisage that being replaced by an upfront technological assessment of a site?
Oliver Lewis: No, because the policy has consistently said—correctly—and other bodies like CIEEM have highlighted the importance of realising that each case is case-specific. Having the assessment of someone who is competent to do so to look and gauge both the accuracy of the data being entered and also the viability of the proposed solutions is, at least for the foreseeable future, essential.
Q158 Chris Grayling: How do we regulate the organisations that deliver that service?
Oliver Lewis: That regulation of such services is important, and I encourage the Committee to look at that. Making sure that the sector can have confidence in the people, technology and so on that help to undertake this assessment can only be good, from my perspective, and goes back to the points—
Chris Grayling: We do not have that yet. That is a next step, effectively.
Oliver Lewis: It would be useful to see that develop.
Q159 Chris Grayling: Okay. In terms of the quality of the core assumptions—at the moment, for example, we measure salt marsh, ordinary agricultural land and so forth—how confident are we that we have a quality set of baselines for all that work to be done?
Oliver Lewis: On the metric, as I said before, the Government have gone through a genuinely robust approach. It is worth saying that BNG has been in development since 2008 and you have had cross-party engagement and input into the system as it has been developed. A by-product has been successive iterations of the metric getting external feed-in as well.
You have a range of broad habitat types now embedded into the metric with different degrees of distinctiveness within that. From my understanding, that process of ongoing engagement has created something robust. The Government can have confidence that what they are putting out will stand up to scrutiny.
That said, of course, they have, rightly, also said that in a few years’ time they will look to build upon this and return. An ongoing iteration, while giving the sector and wider society confidence that what they have will be robust and will stay for the medium term, is essential.
Jonathan Shopley: I am pleased you raised that question because in all of these markets we are becoming much more concerned about the quality of the instruments, which depends on an accurate baseline and then ongoing monitoring. Particularly with nature-based solutions and nature-based projects, satellite imagery, big data management and AI have become hugely powerful and deliver efficiencies that will help counterbalance the increased costs of commitments to transparency and commitments to ongoing monitoring.
For example, in a typical forestry project, you would set a baseline and you would take measurements. At the moment, they could be done by hand. Increasingly, they can be done through satellites and then augmented by site visits.
That information is stored in blockchains, which then means that they can be shared with registries around the world. For example, the World Bank, the Singapore Government and the International Emissions Trading Association has set up the Climate Action Data Trust, which is a consolidation of information around not just the baselines but the projects and whether they have been validated and then how they have been verified.
For projects, it is critical step forward because nature-based solutions, those that deliver climate and biodiversity benefits, take a long time. If it is an afforestation project, you might have to wait seven to 10 years before you get a verification exercise out. In the old days, if it was done by hand, there was an expensive situation. Now you can always do it year by year, which allows the project to monetarize its climate and biodiversity impacts more frequently and therefore reinvest that in the operations.
The transparency piece is huge. In our business, we now have a portal that allows our clients to literally say what their emissions are for scopes one, two and three, which instruments they have purchased, which ones they have retired, and what their science-based targets or other targets might be. That brings enormous transparency.
Some of the corporates have moved from philanthropy as their first engagement in voluntary action. Microsoft would be an example or Salesforce. They see this market as an opportunity for their core services. They have gone from philanthropy to CSR to sustainability to licences to operate to now thinking that they have a role to play in bringing technology to bear.
Q160 Chris Grayling: A last question from me. Going back to specifics, do any of the three of you have experience of looking at DNA-based soil testing as a mechanism for tracking progress or otherwise? If so, what is your assessment of it?
Jonathan Shopley: We have the nature DNA in our sights. We personally, given that you are asking all of us, have not done a lot in the agricultural world, which is where that plays a part. We have done camera traps in our forest to see what biodiversity benefits accrue to those areas, but not with the DNA. We have kept an eye on those sorts of things and some of the outsider biodiversity or direct biodiversity. The sensors that figure out when clean-cook stoves have been used, and how much, are amazing.
The DNA piece is extraordinarily powerful, and it will help the agricultural sector, which we have not played in that greatly.
Ana Haurie: We have done a soil carbon project in the UK, not using DNA but doing soil sampling and then incorporating that into MRV and satellite monitoring and building the system that way.
Not on that specifically but to reinforce what has been said here, the advances in technology, particularly geospatial technology and AR, bring us forward in leaps and bounds in the measuring of carbon.
Oliver Lewis: We do not have direct experience of these technologies in BNG. Such technology is not required at this stage. However, I want to align myself with what has been said. This technology is coming on in leaps and bounds and it will be interesting to see how it can be incorporated.
Q161 Chair: Thank you, Chris. Picking up on that, are you aware of existing satellite capacity? You mentioned the Singapore Government’s scheme. Is that available yet in the UK for companies interested in monitoring the—
Jonathan Shopley: To clarify, I mentioned actually in Singapore a registry of registries.
Chair: Like a library?
Jonathan Shopley: It brings transparency around the transfer of ownership of credits, for example.
A number of private companies around do this satellite imagery work. Then organisations like NASA make some of their satellite imagery available free at the point of access. Then a lot of the tech companies come in and do the big data management, take all those readings, try to figure out whether an area under a project is improving and then provide updated information about those key metrics. You have probably all read about the satellite that is able to spot methane emissions and has captured some large emissions in that area.
Ana Haurie: Some leading private companies that develop a lot of this geospatial work are based here in the UK.
Q162 Claudia Webbe: I want to move on to the concept of greenwashing or, indeed, the destructive practices employed by companies and traders to create an illusion of environmental responsibility while in fact disregarding the true impact of their actions with misleading and false claims or indeed superficial sustainability projects or initiatives.
I wonder if I can turn first to Jonathan. How can an investor or trader be assured that the credits or natural assets that are being conveyed are truly linked to positive environmental outcomes on the ground?
Jonathan Shopley: The carbon markets—and we have also touched on the biodiversity markets—have a range of standards and standard bodies. The biodiversity market is a little younger and so there are lots of approaches to baselining and then measuring improvements.
In the carbon market, those standards are sometimes called interchangeably standards or registries. Basically, a number of methodologies have been peer-reviewed, published and tested. Once a methodology is approved, say, for an afforestation or forest protection project, the project developer then has to validate that they have the wherewithal to meet the requirements of that methodology and then, over time, they will get verified by independent auditors. Once that happens, the credit instrument is created under that methodology and put into the registry. At that point, the project developer can transfer ownership from themselves to a buy or somebody who will retire it.
The short answer is that we depend heavily on the credibility and the quality of those standards that create these instruments. The standards that are commonly recognised in the carbon market are the gold standard, which is European, Verra, which is in the US, the American Carbon Registry and a number of others.
Remember that these standards have grown up in the vacuum that has been left, as it were, from delays in the Kyoto protocol and the Paris protocol. Lots of these standards have developed varied approaches to how they baseline, how they measure additionality, whether this finance makes a critical difference. That has been critiqued.
The greenwashing you mentioned, in my view, falls into two camps. One is the quality of the instruments. Are people purchasing and retiring instruments that have genuine environmental impacts. The other is the integrity with which you use those. Do you use and retire credits and make a claim of neutrality that hides the fact that year after year your underlying emissions increase?
In the market today, the issue is being addressed by two multi-stakeholder initiatives. One is, on the quality side, the ICVCM, which came out of Carney’s taskforce for scaling the voluntary carbon market. They are developing core carbon principles, which all of the standards are asked to comply with, to create minimum acceptable quality standards for the instruments.
The other side of the greenwashing equation is whether companies use these instruments credibly and with high integrity. Another multi-stakeholder initiative, the voluntary carbon markets integrity initiative or VCMI, is paying attention to that and making sure that the claims a company might make to having a commitment to net zero, making progress towards net zero or being carbon neutral have integrity and are unimpeachable. If a company says it is on the path to net zero, a standard and a set of evidence proves that that is indeed the fact.
Q163 Claudia Webbe: That is quite comprehensive. What happens if a claim is found to be inaccurate? What then happens to the original trade or agreement?
Jonathan Shopley: Again, I will separate that into the quality of the instrument. It is quite possible that a project could fail to deliver credits or as happened in the past years, somebody has gone back to that project and found that the verification of the instruments has not been adequate or comprehensive. The standards themselves provide some guarantee, particularly on nature-based solutions.
If a project under-delivers there are buffers: for example, if an afforestation suffers a fire and all that carbon gets lost from that project at some date after a sequestration credit had been issued, the standard itself can make up that difference and make sure that the environmental integrity of that intervention is secured.
You are asking what happens if someone makes an inappropriate claim. Here in the UK the Advertising Standards Authority has got itself involved in claims that it believes to be misleading and has forced organisations to retract those claims. I give that example.
Ana Haurie: It also depends. We know that in the EU we have the empowering Consumer Rights Directive. We have the green claims directive coming through to, essentially, address those issues of making false claims through the use of carbon credits. Litigation against companies that have made these false claims has increased.
I want to come back to the point I made at the beginning. While we must have integrity of claims and how these carbon credits are used, this phenomenon of greenwashing, and the fear of appearing in The Guardian or any other publication, has significantly impacted demand.
All of us panellists say that the real issue we face in the market is demand and lack of demand. We need to address this. Corporates now need air cover to use carbon credits because they are now completely stepping away from this, which impacts nature, impacts biodiversity, impacts climate and impacts communities. We should turn our attention to the demand and corporates having air cover and legitimacy for purchasing these carbon credits at lot more now.
Q164 Claudia Webbe: How sustainable is the methodology you refer to? How often and regularly can that be repeatedly assessed?
Jonathan Shopley: A couple of things happen. First, in nature-based situations, the baseline needs to be reassessed every now and again. For example, on forest protection, the REDD+ projects generally try to address illegal logging in a particular area.
As government policy gets applied, the rate of illegal logging or fires in an area could decrease and so the baselines have to be reassessed at a certain interval. I do not know what they are, but they are normally somewhere like five, seven or 10 years. Similarly, even outside of nature-based projects, the baselines have to be reassessed to make sure that these projects have no hot air. In other words, the baselines reflect improvements in our management of natural assets.
The second part of that is the methodologies might need to be updated for a variety of reasons. Soil carbon is a challenging area, but we are finding that we are getting through technology opportunities to upgrade the methodologies and the frequency with which we measure the sample sizes that we can get without putting people on the ground, for example. The methodologies go through regular cycles of improvement or, in fact, if there is no additionality argument, as we have found with renewable energy as that has become a cost-efficient alternative to fossils, that methodology for creating a carbon credit is retired.
Q165 Claudia Webbe: You refer to when and if errors occur in the system. I am referring to deliberate misrepresentation. For example, if 100 trees are required to be planted in the first year, when are they next counted? Is progress reported back to the investor?
Jonathan Shopley: The verification exercise that has to happen before a credit is registered in the registry means that they will see whether trees have burned down, have been chopped down or are in place and the sequestration has occurred. If there is a gap in that, the buffers, generally, held by the standards will make up that difference. I think that was the question you asked but, Ana, maybe you would pick up on that.
Ana Haurie: Yes, I can pick up on that, too. Yes, every time you issue a new batch of carbon credits—and they are usually issued in annual vintages—you have to go through the whole verification process all over again. You have to have it verified and audited. As we were discussing earlier, now with the increased use of geospatial data technology, you can measure continuously the fact that that carbon is sequestered as it increases the biomass of trees and so on. To that extent, technology has improved.
The other development, which might also be what you were asking, is what happens if there is fraud and if you have deliberately said that this tree is there, and it is not there. This is where the UK has also innovated by developing insurance products to address these issues.
Q166 Barry Gardiner: Sorry. How do you insure against illegality? You cannot.
Ana Haurie: You can take out insurance for fraud or negligence.
Jonathan Shopley: To finish that argument, basically, it will replace the credit that you thought you had but do not because of fraud. The insurance policies are different and are emerging, but they will make you whole. If somebody steals something from your home and your insurance covers you, they either give you the money or the replacement. That type of insurance is being brought to market.
Q167 Claudia Webbe: If greenwashing is suspected, where, if anywhere, can this be reported for independent investigation?
Ana Haurie: I do not know where it can be reported for independent investigation but, for example, increasing cases of litigation are being brought against companies for greenwashing. They face increasing legal risk to the extent that reporting becomes mandatory if they misreport. I am not quite sure how it works in the EU. You have to report your emissions annually; if you are misreporting them, I do not know the consequences of that, but I am sure that there are consequences. Certainly litigation and companies being sued is real.
Jonathan Shopley: For example, in the United States, in the California scheme, if an organisation that is generating carbon credits turns out to be out of compliance on a health, safety or any other regulatory requirement, all the credits from that project get suspended or cancelled. A compliance system has direct controls.
In the voluntary carbon market, I agree that there is no central body. No compliance entity looks after that. Gordon commented earlier about the transparency in the market. We have these registries. We know how many credits are there. You can go and see who has retired what. If you care to—or if investigative journalists care to—you can go to the project and see whether that project is doing what it says it is doing. That sort of transparency opens up the possibility for any affected stakeholder to investigate whether things are as they are said to be.
Q168 Claudia Webbe: I can see that Oliver wants to come in but let me ask a plain question. Should there be an independent regulator here in the UK or anywhere?
Oliver Lewis: I will limit my remarks, if it is okay, to BNG, which is the nascent area I am focused on. A new BNG register is being set up to be run by Natural England to record the units. Also, the Environment Act envisions these sites being connected to local authorities via conservation covenants. They mean that local authorities can monitor and enforce the obligations that are set out within that and can indeed take enforcement action. That leads to a question about whether local authorities have the resources they need and the support they need to discharge those functions, but that is sensible.
One by-product we have of how BNG has come around is that we have an extremely transparent medium in the form of the metric sheet itself, which is an Excel sheet. All of the data is set out there on the baselines, the intended habitats and indeed the calculations used to reach those. Having such a transparent medium being used is good. I would encourage that it is maintained as the basis because it is a single metric sheet. It is highly accessible. It allows you to hold individual sites to account and make sure that they genuinely reflect gains and also allows, going back to my earlier point, ecologists and others to engage with the mathematics behind it and suggest improvements over time.
Q169 Chair: Where is that held? Is that metric sheet held by the local authority?
Oliver Lewis: When you submit your planning application, you have to provide the Excel sheet. Also, you must provide it to the register if you are engaging in offsite units.
Q170 Jerome Mayhew: Great. Thank you very much. You were all sitting here? You all heard the first panel? Good.
I have a quick set of questions to give you an opportunity to build on the evidence that we heard from the first panel. This is about opportunities for UK natural capital. Again, I would appreciate it if all your answers were not focused on carbon but on natural capital. It is tempting to get into that area, but we are focused on natural capital here.
We heard from Schroders that, currently, the size of the market is de minimis. Only 0.2% of investments are in this sector. We heard that the scale of the investment opportunities is tiny, a couple of million quid here, a couple of million quid there. A big sale of forestry products would be £100 million. That would be a large forestry transaction. That is too small for the vast majority of significant investors to get involved in if they are responsible for investing billions of pounds.
Over to you, what is the solution? What should we do to create the investment market that is investible from the retail investors’ perspective? If no one puts their hand up, I will pick at random. I will start at this end.
Jonathan Shopley: My company started off as Future Forests in 1997. We had 90 afforestation projects running in the UK then. You are right. It was a real challenge. Some were run by district councils. Some were run by private landowners. We still have a duty of monitoring over those projects. Scale is an issue.
Biodiversity is local. I also heard someone—I do not know whether it was Schroders or ICE—say that it happens project by project. You can cut it any way you like, but somebody has to get their boots on the ground and do some planting and do some management. Unless you have vast tracts of land and you are prepared to do this on an agribusiness scale, it will be challenging.
Q171 Jerome Mayhew: That is the problem. What is the solution?
Jonathan Shopley: I am not sure there is an immediate solution. Under the carbon regime, we had programmes of activity. You could set baselines and repeat the projects, rolling them out geographically. The problem with biodiversity is that it is so contextual that it is quite difficult to do that.
South Africa’s biodiversity offset market is quite intriguing. It allows quite a fungible market, but it weighs up. If you lose an acre of Fynbos in the Cape, you have to create something out of the Peru desert with vast areas. They have some mechanisms to balance that out.
The transaction costs are quite high when you do lots of small projects. To Chris’s comment earlier, technology helps solve a lot of that particular issue.
Q172 Jerome Mayhew: You mentioned the satellite, which can assess for methane emissions. A top-down look can tell you a certain amount, but it is hard to assess the maintenance of biodiversity net gain without someone being there counting things.
Jonathan Shopley: Although running a small project, if you have to put verifiers into the field every year to check that out—
Jerome Mayhew: And the cost of that.
Jonathan Shopley: Exactly. If you reduce the transaction costs, which are such a high proportion of the operating costs for these projects, that is one way. Maybe I will stop there because I am not sure it is solvable, but I am interested to hear what others think.
Ana Haurie: We have struggled to raise capital for UK projects. Part of what we want to do is to channel private capital and institutional capital into nature-based projects globally—I know you want me to focus on the UK—and in the UK as well. In one respect, it should be relatively easy to raise institutional capital for UK projects, but it comes back to that problem of the scale, the costs, the transaction costs and the incentives. We have looked at peatlands and PIUs and we have invested in one project instead of PIUs, but we are struggling to scale that and struggling to get the landowners on board with agriculture, soil carbon and other aspects of biodiversity. We then have to get the farmers onside and they face costs. Do they want to set aside the land? What incentives can be created there?
Jerome Mayhew: On that point, a document called the “Land use framework” is eagerly anticipated but has not yet been published. The mood music from the Government is that they do not want large blocks being, let’s say, rewilded. We want to have a patchwork approach so that the inefficient field in a farm is set aside rather than great blocks of productive farmland, for example.
I put my hand up. I represent an East Anglian constituency and I am a director of a farming company as well, and so I declare an interest.
Almost by definition, if that is the object, every single scheme will be small in its scale or the vast majority of them will be. They will need to be relatively small.
Jonathan Shopley: We have discussed it but one of our early project partners was the Forest of Marston Vale up in the Bedford area. That had scale, which was hugely helpful, but in fact demand stopped us there. Land is hugely expensive, which was the other issue.
To your point, making it local for a moment, I live about 10 miles away from Knepp Estate, which has been famous for its restoration and rewilding.
Jerome Mayhew: It is famous for its farming, but anyway—
Jonathan Shopley: Anyway, it is interesting that it is not a replicable model, if you are saying that, but it now has the Weald to Waves, which is a group of farmers who can see the value in putting some of their land aside. Those farmers now have a voluntary commitment, as I understand it, to create a corridor for wildlife right down to the coast.
Q173 Jerome Mayhew: I will come on to Oliver in a second. We seem to have identified both a problem with demand and a problem with supply. Yet we seem to express surprise that this market does not flourish. Where do we go from here? Oliver, do you have a solution?
Oliver Lewis: Yes. The solution in many ways is linked now to delivery. Now that the mandatory BNG is here, it should help with the demand. The key point is effective discharge of duties, which comes under the Environment Act. Now we need to make sure that local planning authorities are able to ensure at the validation stage that developers comply with their obligations, and that people coming in to supply biodiversity units can do so and that effective conservation covenants are set up.
From my perspective, the point raised is completely right. As a by-product of this policy, you want to see different types of biodiversity gains emerge to do different things, complying with the Lawton principles. In certain areas, large sites would be appropriate. In other areas, farmers putting aside bits of land make a lot of sense.
But key here across the piece is effective discharge because not only does that make the wheels turn, and make things happen, but it also gives confidence to investors. If you are thinking about investing capital into creating biodiversity sites in the first instance, you want to know that you are investing in a regime that will stay consistent, has a clear set of rules and is a fair market based on the statute. The attention needs to go now towards effective discharge across the piece and making sure that LPAs have the resources and support they need to perform their functions.
It does not just have benefits on biodiversity. If you deliver this effectively and investors start to see that, “Yes, we can have confidence in this mandatory market and we can invest in it as a sensible strategy”, as and when the Government, as they hopefully will, move into other forms of net gain—for example, marine net gain now is nascent—there will be confidence in investing in those areas, too.
Q174 Jerome Mayhew: As you develop competence, you gain confidence. Finally, you mentioned South Africa’s scheme. Should we learn from international comparators? Where do we sit in the scale of things? Are other countries doing it better and should we learn from them?
Ana Haurie: Yes. You were asking for a solution. Part of the solution is to integrate voluntary carbon credits into compliance markets.
Jerome Mayhew: Leave carbon credits. We are talking about natural capital.
Ana Haurie: Natural capital. I am sorry but my main expertise is in carbon and carbon encapsulates natural capital and biodiversity. A lot of forest conservation projects have credits that incorporate SDGs, biodiversity and community benefits. Effectively, they have been bundled into carbon. Otherwise, we can enter into a debate. A tonne of CO2 should be a tonne of CO2 and it is, but all the other aspects get bundled into that tonne of CO2. I talk about carbon, and we focus on it internationally because of all the other impacts that it creates. That is an important component. I apologise if I keep referring to it.
Going back to the question, yes, how do we create demand? How do we solve for the supply-demand issue? Do not have it voluntary. Make it mandatory. You have the mandatory biodiversity net gain. We are trying to address climate change here in one way or another through nature, I believe. Singapore leads by example.
Q175 Jerome Mayhew: In 30 seconds, what does Singapore do that we do not?
Ana Haurie: Singapore allows the use of international voluntary carbon credits into its compliance system. It has levied a carbon tax. You can essentially pay in voluntary carbon credits to up to 5% of your carbon tax. They drive up the price of carbon every year. It is starting at S$25 next year and in 2027-28 it will go up to S$45. They are putting a real price on nature and a real price on carbon and are allowing international carbon credits to go into that. The cap-and-trade system or ETS system tries to discourage negative behaviours, whereas nature-based projects incentivise positive action in reductions and removals.
Jerome Mayhew: A final comment and then we will go back to the Chair.
Jonathan Shopley: What Singapore has done in the carbon market it is beginning to do in the biodiversity market, which is to create a centre of excellence internationally. We have seen it set up this climate action data trust. It gets carbon exchanges set up and gives incentives for all of the players in a more mature carbon-trading ecosystem to come to Singapore.
I noticed on the last trip I did there at the beginning of last year that the universities are now developing competence around biodiversity metrics, for example, in measurement. They are getting some of those private satellite companies to come and be present. They do not have a solution and I do not point to them, but they have a hub.
I know you have a UK focus here. The UK has enormous bits of what could be a hub. We have the City of London and the secondary market, but we have the National Oceanography Centre down in Southampton, which does an amazing amount of work on baselining for marine systems. The woodland carbon code has some tremendously innovative mechanisms to support markets by giving a guaranteed price to the market in a reverse auction system. It says, “If you cannot sell it on the voluntary market, we will be the buyer of last resort”, which gives confidence and removes risk. Then the old woodland carbon code, which set up the market here, is another example where the UK has bits.
I will echo Ana’s position as well and reference California. We have an opportunity to use the emission trading scheme to capture credits from projects that deliver verified biodiversity co-benefits, and it would be a shame not to use that. California has done that. It regulates the high-emitting sectors and says, “Agriculture is tough and difficult to deal with. Methane is difficult to deal with. We will use the offset mechanisms to address those within the ETS. There is a real opportunity here to do the same.
Jerome Mayhew: Thank you very much. Apologies, I have to leave early.
Q176 Barry Gardiner: Insurance against fines imposed by a regulator or official body for criminal or quasi-criminal conduct is not permitted under English law for public policy reasons. My question, first, to you is: when you made that statement, who is doing the insurance? Who is insuring?
Ana Haurie: Private underwriters. Maybe I did not understand.
Barry Gardiner: Sorry. Let me rephrase it: who is taking out the insurance?
Ana Haurie: We have taken out the insurance.
Barry Gardiner: As the provider of the scheme?
Ana Haurie: No, we have taken out insurance for fraud and negligence on the issuance of any carbon credits that arise from the projects that we are backing and financing.
Q177 Barry Gardiner: I do not want to get stuck down a rabbit hole here, but it seems to me that insofar as you are aggregate schemes—if I can put it that way—this is like the sector insuring its businesses against an illegal action.
Ana Haurie: Against negligent or fraudulent action.
Barry Gardiner: On their part?
Ana Haurie: On the part of the project developer or any of its service providers.
Barry Gardiner: I suspect one needs to evaluate the distance between any organisation—such as Respira—that put those different projects out to the market and quite how that would work in English law.
Chair: To cut through this, it might be helpful if Ana could describe the kind of transaction where this applies. You mentioned mangroves earlier. If you invest in a mangrove swamp—which is not available in the UK and so it is external—you will need to check and do due diligence.
Q178 Barry Gardiner: If you are an investor, you are like a homeowner insuring against a burglary, but you are not an aggregator for the project operators? That is what I had understood you to be.
Ana Haurie: Sure. We enter into long-term purchase agreements with developers of nature-based projects. For example, we buy carbon credits from the largest mangrove restoration project in the Indus Delta in Pakistan. We commit to buying current and forward issuances of carbon credits that that project will generate. We buy them, we own them and then we work with corporates, which might then buy those carbon credits from us. We insure against—
Barry Gardiner: Being defrauded?
Ana Haurie: —being defrauded, exactly.
Chair: Due diligence risk.
Q179 Chris Grayling: On that point, when you buy carbon credits in the Indus in India, how do you measure and who does the measuring of the credits?
Ana Haurie: That is all part of the verification and auditing and monitoring process and so initially by the project developer but also using lidar satellite technology. That whole process has to be verified by an external, independent third party.
Q180 Barry Gardiner: Sorry, I wanted to talk about the difference between voluntary and compliance markets and how we might learn from the existing markets and apply that to natural capital markets.
You spoke of America. I was in Washington during the parliamentary recess talking about sustainable agriculture. It is clear to me that what we—certainly in the UK and Europe—regard as regulation is regarded there as unwarranted inference by the federal Government.
The idea that this will be easy to do voluntarily when we do not have the same European understanding of the role of statutory frameworks and statutory regulation—you said earlier that we need the Government to make this compulsory, but the idea that that will happen in certain areas of the world, particularly in the US with its sensibilities and sensitivities to government regulation, I would have thought, is extremely difficult to see.
Where do we take the learnings from the carbon markets and then push them through into the biodiversity and natural capital markets?
Jonathan Shopley: We already see the voluntary carbon market being regulated in many ways: in its transparency, in its requirements on the standards to create instruments that can be traded in commoditised markets like ICE. You could mandate a scheme like I understand they have in parts of America where they are required through the planning process to make up or compensate.
From the Government, we are looking for a clear framework to make decisions. I can tell you a quick story of a conversation I had with Dieter Helm when he was head of the Natural Capital Commission. We were rebranding—
Barry Gardiner: We would still be building gas-fired power stations, according to Dieter.
Jonathan Shopley: I went to see him because we were rebranding as Natural Capital Partners at the time before our merger. His challenge to me was, “Either you are very brave or very stupid because, without a framework set to set the social contract on biodiversity, who the hell are we to decide what is a good project?” There is a critical piece to be done there. Whether the 25-year plan or any of that does it adequately in the UK is questionable.
Once you have done that, look at the way the Biden Administration in the US used the Inflation Reduction Act to say, “We will invest in infrastructure to decarbonise the economy and, in the private sector, you just go at it. We will not tell you how to do it, but we will give you the wherewithal”. Here in the UK, when it comes to renewable energy—and I know this is far away from biodiversity—we do not have that infrastructure.
Q181 Barry Gardiner: Do you believe that we should continue with the £28 billion pledge that we had in the Labour Party until recently or are you unaware of that?
Jonathan Shopley: I do not know whether I am qualified to comment on that.
Barry Gardiner: I am drawing you in.
Jonathan Shopley: All right. I suggest that we need a clear framework. If you want to take something from the carbon markets, take the NDCs or nationally determined contributions. We need national biodiversity programmes and then we need a little bit of infrastructure—
Q182 Barry Gardiner: We had that in the NBSAPs, and it has not worked. It was in the 2013 biodiversity COP. We eventually took that movement, in the same way that Paris had for the UNFCCC. The CBD COP eventually got there with NBSAPs, and they were not worth the paper that they were written on, and they do not provide a standard framework, cross-country, cross-border, to be of use in the same way as the UNFCCC.
Jonathan Shopley: You are describing the current state of NDCs across the world. Give it a bit of time. We have been working at the UNFCCC for three decades and we have barely got a grip on it. Biodiversity is coming up fast. A lot of lessons are to be learned from the carbon markets and you were highlighting those.
I would not be too pessimistic, though. From the last gathering, progress is being made on those national and international linkages.
Q183 Barry Gardiner: What impact did the price drops in natural capital credits, such as the carbon credit market, have? We have seen prices plummeting. I do not want to stop you, but does anybody else want to come in? Please, go ahead.
Jonathan Shopley: Market-based approaches were successfully applied to sulphur dioxide. Basically, the allowances were restricted and the price of an emission of sulphur dioxide went up. That was a successful application of carbon markets internalising the externalities.
In the carbon markets, we should have had that. We should have seen a steep curve as we sucked out all of the cheapest ways of using markets to find the next cheapest way of removing an emission.
We have talked about quality, and we have talked about integrity, but we have not spoken about ambition. Ambition has been missing across the world to tighten it up. If we had done that, if we could have done that through the NDCs or another mechanism, we should have seen a repeat of the sulphur dioxide market and a rise in the price of carbon. As a result of that and as a result of a variety of other interventions, the view that carbon credits are a new form of investment, cryptocurrencies and so on, we have a highly volatile market, and it has not served our purposes.
Ana Haurie: That is partly what Singapore is trying to achieve through the tax rate going up. South Africa is doing the same thing.
Q184 Barry Gardiner: Can the monitoring and reporting duties under the biodiversity net gain framework be read across into voluntary assessment standards?
Oliver Lewis: I will come in on that. On the BNG, an issue we have is that it is fundamentally nascent, and we will have to see the proof of the pudding. It is good that we have seen from BNG an awareness of some of these limitations that you have seen in the other markets that we have referred to. A key point is whether the enforcement powers, which are envisioned to be created under conservation covenants, come into force.
A key trend to monitor is whether you see the adoption of conservation covenants, which are set out in the Environment Act, being adopted and used and then how that is discharge.
There are also points of nuance as well, of course. For example, if an act of God destroys a habitat bank or simple variations exist that mean perfectly legitimate aspirations to create certain gains over a certain amount of time do not amount, how can they be successfully ameliorated and dealt with?
In the same way I take the view that we should learn lessons across the piece and that each sector should learn from others, with BNG a key point is how it works in practice. Hopefully, there will be lessons to learn.
Q185 Barry Gardiner: Ms Haurie, you spoke earlier about using carbon markets as a way of getting into biodiversity credits. You also spoke about how there is not a single price for carbon. To a certain extent that reflects the fact that some have other beneficial public goods thrown in.
What is the danger of carbon coming to dominate? How do we stop it becoming the only metric that we use when we talk more widely about biodiversity credits? Can you leverage the difference when talking about the price of carbon for those different additional benefits? Can you say, “We are giving a carbon price there because it has these additional benefits. Therefore, we already have evaluated the additional benefits. Let us look at how we have done that and create it as a separate element in the market”? Do you see where I am going?
Ana Haurie: Yes. How do we stack it rather than bundle it?
Barry Gardiner: Yes.
Ana Haurie: We will end up going down that route. We are getting this mix-up of carbon with biodiversity and other benefits because we have carbon credits now. They exist now and we have scale in them now, whereas biodiversity credits are relatively nascent, and the scale is not there.
I believe that we use carbon as a proxy because we need to take action on climate now and, yes, we have to look to the future. We need to see this as and-and rather than as a zero-sum game. It is often portrayed as this at the expense of that. It cannot be that. It cannot be nature at the expense of technology. It cannot be reductions at the expense of removals. It cannot be carbon at the expense of biodiversity. We need to act now, and we need to act in the future. We need to see it as part of a whole.
For example, UK corporates are much more focused on TNFD and on biodiversity credits because, in a sense, they are brand new and are not tarnished with any of the complications that come from carbon. We absolutely must keep developing that, but we do it at the expense of something we have now. We are throwing away with the bathwater. We must change our way of seeing it to see it as a win-win and an and-and.
Oliver Lewis: To come in on that point, I completely agree. Also, a key principle set out in the guidance documents to accompany BNG is the rules on additionality about how you use those individual sites. It is important to keep track of those and make sure that they incentivise the right behaviour as well. It is an interesting answer to the point that was raised in the previous session about how long these sites last for and so on. You could see how possibly additionality and the chance to return could create a solution. I completely agree with that point. Additionality will have to be monitored carefully.
Jonathan Shopley: If I could add to that, Oliver, I am glad you brought up the additionality piece because—particularly in the carbon world and in the biodiversity world—if you are going to take credit for something, you need to make sure your money and your investment and your capital made that happen.
Around the world, as our sense of urgency increases, we layer on regulations, grants, subsidies and taxes. It becomes difficult to prove the additionality argument. We have to watch out for that. The EU took a long time to reform its ETS and still suffers a little bit of this overlapping policy work. It makes it difficult.
I feel somewhat like a purist. Allowing an ETS with an offsetting mechanism, whether it is for a biodiversity purpose or climate or both, to do the heavy lifting seems to me to be right. You would rely less on grants, subsidies and things that distort that market.
Chair: Thank you very much. That concludes our panel. It has been informative. I thank Jonathan Shopley, Ana Haurie and Oliver Lewis for joining us today and for your terrific contributions.