West CAP0007
Written evidence submitted by West
Levels of private capital investment are dependent on perceptions of future returns from such investment. So the key challenge is to design institutional structures that support adequate and reliable resources flowing from those benefiting from landscape recovery to those delivering it. It is not the availability of private capital investment that is the constraint. Once the right institutions are in place, there will be no shortage of private capital investment if returns are adequate.
Furthermore resources from those benefiting could often be in the form of capital payments which would reduce the need for private capital investment and community investment could be an important source of funds which also ensure community engagement and a holistic focus on community benefit.
Hence a focus on private capital investment as the challenge is misplaced. The focus needs to be on the challenge of institutional design to underpin the flow of resources from those benefiting from nature recovery.
The extent investment is aligned with environmental benefits will depend on the relevant institutional design underpinning the flow of resources from those benefiting from landscape recovery. These institutions are likely to include standards, codes of conduct, accreditation systems, regulatory requirements, governance of landscape recovery entities etc. These institutions will need to be designed so that maximising returns to investors is aligned with maximising environmental benefits. This is a huge challenge.
Nature recovery has the potential to provide a wide range of environmental benefits including flood risk and pollution reduction, biodiversity recovery and carbon sequestration. Each benefit has different beneficiaries who exist in different regulatory systems so there is a substantial risk that these interests will not be aligned distorting environmental outcomes. For instance, if returns to carbon sequestration are seen to be most promising, this could incentivise planting of monocultures that maximise carbon sequestration with significant levels of pesticide and fertilisers, providing environmental performance similar to large scale monoculture farming, which would hardly count as nature recovery at all. Net biodiversity gain markets also could lead to fragmented ‘bits’ of habitat much of limited biodiversity benefit when viewed from a necessary holistic lens in line with the Lawton principles.
We believe that the focus on creating markets for different ecosystem services is misconceived if the aim is to deliver environmental benefits as this is unlikely to align returns to investors to a holistic delivery of environmental benefits as:
Only some benefits from some land management activities lend themselves to the sort of commodification that markets require (e.g. compare carbon sequestration with flood risk management – note that the Wyre project in Cumbria is not seeking to sell flood risk credits which would make no sense);
Many benefits are highly spatially specific such as nutrient and flood risk reduction, so the creation of well-functioning markets is highly unlikely due to the limited number of potential participants and transactions.
Each market will be driven by different complex economic conditions creating substantial uncertainty in terms of environmental outcome.
Each market will have to have its own regulation and standards creating hugely complex systems of red tape.
Nature recovery needs to be a long-term project based on a holistic and improving understanding of ecosystems and common commitments, which do not seem consistent with the short-term fluctuations of multiple markets.
This approach is likely to create fragmented, complicated and costly institutional systems with some siloed markets, particularly the carbon market, likely to distort and undermine attempts to deliver systemic nature recovery outcomes.
Instead the focus should be on holistic institutional systems that could align funding with systemic nature recovery. The Landscape Recovery Scheme within the Government’s Environmental Land Management programme could deliver this if the right governance arrangements are put in place. They could learn from the Landscape Enterprise Networks approach pioneered by 3Keel consultancy which focuses on building business partnerships for resilient landscapes, and work led by the Ribble River Trust in the Ribble Catchment which is similarly developing a collaborative partnership approach between farmers and ecosystem regeneration funders.
The latter is particularly interesting as it is seeking to formalise agreements between funding and delivery partners using cooperative rather than contract law. This appears to be a more promising legal approach as it:
Allows for single, transparent agreements between all parties rather than the multiple interlocking contracts that the contractual legal approach requires.
Focuses on governance systems to deal with changing science, policy and partner circumstances rather than seeking to cover these in complicated small print in contracts which generally fail to foresee all potential changes (e.g. pandemics).
Facilitates transparent ‘stacking’ or combining of funding from beneficiaries of different ecosystem services which means funding is larger and aligned with holistic nature recovery.
Supports a collaborative culture, reinforces trusting relationships and ensures a collective focus on the common good.
Provides the potential for representation of wider community and stakeholder views.
Markets are inherently difficult to regulate due to information asymmetries between market participants and regulators, particularly if their funding is constrained as many of our regulators have experienced.
Regulating markets is also likely to make them highly complex to engage with, each type of ecosystem market having different rules and standards, so making engagement very expensive and probably excluding most smaller landowners.
Even if markets are well regulated, this will not address the issue of green washing if this is understood as companies using nature credits to cover their lack of action to achieve net zero. Assessing whether companies are only using such credits for aspects of their business where it is impractical to reduce carbon intensity would be incredibly difficult and expensive to assess objectively.
If though the approach is based on collaborative partnerships underpinned by trustworthy governance arrangements that ensure projects focus on systemic landscape recovery, this is likely to significantly reduce the need for regulation. In particular such partnerships would be able to do due diligence on potential funders to reduce the risk of green washing. They could also be effective aggregators of projects which would be crucial to attract investors. So overall this approach should substantially increase investor confidence, while markets are always likely to suffer reputational issues and real fraud.
This approach would support Outcome-Based Cooperative Regulation as developed by Professor Christopher Hodges with the potential to provide a more credible, cost-effective, evidence based regulatory system.
Such an assessment will only support measurement if complemented by systems to support local decision making within institutional systems outlined above.
We aren’t able to comment on this.
As above we are not sure this is practically possible. Regulation is always a blunt instrument and natural capital markets will always be highly complicated with bad actors likely able to exploit them. Greenwashing is particularly difficult to address as it depends on judgements on the reliability of company commitments to net zero which are very difficult to objectively assess without detailed knowledge of the company.
We are not able to comment on this.
September 2023