Forestry Commission                            CAP0008

Written evidence submitted by the Forestry Commission

Environmental Audit Committee Call for evidence on the role of natural capital in the green economy

Dear Environmental Audit Committee Call for Evidence Team,

I am writing on behalf of the Forestry Commission, which is a non-ministerial Government department with a board of Commissioners, and consists of three constituent parts (Forest Services, Forestry England and Forest Research) responsible for protecting, expanding and promoting the sustainable management of woodlands, and for increasing their value to society and the environment.

The Forestry Commission is focussed on delivering the Government’s ambition to increase tree cover to 16.5% of England’s land area by 2050. We provide a range of incentives for woodland creation, restoration, management and tree health, and we regulate afforestation and deforestation in England, as well as the felling of trees. We are working with the forestry sector to help drive investment into woodland creation and management to deliver greater ecosystem service benefits, through schemes such as the Woodland Carbon Code and Biodiversity Net Gain.

Forestry England manages the Nation’s Forests (previously known as the Public Forest Estate) which covers over 260,000 hectares of land in England. Forestry England has been a pioneer in developing natural capital accounts and is the first organisation in the UK to meet the British Standards Institute new standard for natural capital accounting[1].  Forest Research undertake monitoring and assessment of the impacts of new and existing woodlands on ecosystem services, working as a partner on the Natural Capital Ecosystem Assessment (NCEA) project and maintaining the National Forest Inventory (NFI). They have recently published a brief guide on how green finance can help to assist woodland creation and management[2].

Nature recovery is a core part of the Forestry Commission’s remit and we balance this with our duties and responsibilities to support sustainable productive forestry in England. We view nature recovery as action that improves our land, water and seas for wildlife, and for a range of other environmental outcomes.

To assist the EAC in its work, we have set out a detailed response to the relevant questions that the committee has set out in its terms of reference at Annex A. Our key points are:

• There is a financing gap of at least £1.8 billion to meet the Government’s tree planting targets, that needs to be closed between 2022 and 2032. It is crucial to leverage private funding to close this gap.
• We consider that there are limits to the role that the commercial sector can play in developing the regulation of assets, and that there will be a key role for Government and experts to define and design the necessary metrics for measuring and apportioning improvements.
• The Woodland Carbon Code’s (WCC) rules on integrity, additionality and attribution should serve as a model for other ecosystem service markets.
• Work is underway on compliance standards for natural capital markets; there will be a role for auditing and/or regulation of these standards to reassure investors further, that providers/markets are continuing to abide by them.
• For the mainstream adoption of ecosystem service payments there will need to be clear rules established for attributing benefits and measuring additionality, that allow for the ‘stacking or bundling’ of benefits with both other ecosystem investments and public payments and a need for clear regulation of the market to ensure accountability.
• The UK should act as an advocate of natural capital markets and should seek to attract investment from overseas, but community inclusion should be a key integrity principle and land use change should be regulated to achieve multiple outcomes that meet local needs.

Yours sincerely,

Richard Stanford

Forestry Commission CEO

September 2023

Annex A

1. What potential contribution can private capital investment make to measures to secure nature recovery?

FC view nature recovery as action that improves our land, water and seas for wildlife, and for a range of other environmental outcomes. We are interested in the totality of the benefits that can be delivered alongside boosting wildlife, such as preventing soil erosion, reducing flooding, providing timber, supporting the economy and improving mental health and wellbeing.  Research[3] undertaken in 2021 shows that to meet UK targets on woodland creation and management, a financing gap of £1.8 billion[4] needs to be closed between 2022 and 2032. It is crucial to leverage private funding to close this gap as public funding is necessary but will be insufficient to deliver in full.  Forest Research have presented examples where blended finance between partnerships of publicly funded bodies and commercial organisations have already provided nature recovery through woodland creation and management. It is clear however, that there will need to be a step change both in the aspirations of the commercial sector to invest in the green economy and the regulation that will be needed to ensure that the outcomes planned for in the Environmental Improvement Plan and the Environment Act’s Nature Recovery Targets, are delivered.

The Taskforce for Nature Related Disclosure (TNFD)[5] provides a systemic approach to identifying where commercial activity is both affecting and dependent upon the natural capital assets and ecosystem services that nature provides and proposes rules for how it should be accounted for.  We see this as a global opportunity to capture private capital investment, but one that will take time and will be dependent upon sound regulation and certainty in the natural capital assets and the way that they are ‘bundled’ and accounted for, in order for it to be a success.  We consider that there are limits to the role that the commercial sector can play in developing the regulation of assets, and that there will be a key role for Governments and experts to define and design the necessary metrics for measuring and apportioning improvements, for instance as has happened with the Government’s Biodiversity metric[6].

The Woodland Carbon Code (WCC) is the quality assurance standard for woodland creation projects in the UK, and generates high integrity, independently verified carbon units. Backed by the Government, the forest industry and carbon market experts, the code provides woodland carbon units for the UK[7], it is also internationally endorsed by ICROA[8]. While the WCC is voluntary we would like to see the overriding principles applied to all Green Finance investment opportunities, ensuring that there are clear rules for measuring additionality and that improvements can be attributed directly to where investments have been made. The integrity and reputation provided by Government backing of the Woodland Carbon Code, has also been a key theme when stakeholder views have been sought, highlighting the need for a strong regulatory framework for wider natural capital markets.

2. How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?

While it is important to measure the overall level of investment in the green economy, it is the outputs from the investment that are essential. Attributing an action from an investment and being able to audit an improvement will be critical for green finance to be sustainable.  The BSI’s standards for carbon reporting[9], provide a template for how this could be tackled for each natural capital asset where a market is being established (we are working with the BSI to develop an overarching standard for natural capital assets).

We would also welcome an overview of where different natural capital assets have been aligned to either mandatory or compliance market standards, what public funding mechanisms are in place to support these markets and where integrity standards or initiatives are in place to enable consistent reporting.  There are currently a range of voluntary natural capital market tools and standards in development targeted at a number of different ecosystem services, including: Woodland Water Code; Agroforestry Carbon Code; Hedgerow Carbon Code; Nature Impact Tokens and the UK Carbon Code of Conduct. Standardisation of rules and integrity principles is urgently needed to avoid confusion around the overlap of these markets.   Applying robust additionality tests will help to private investment to drive additional action towards nature recovery/ GHG emissions reductions.

From a forestry perspective it is also important to highlight the positive environmental and natural capital outcomes secured from woodland creation projects in the UK, though forestry legislation/regulations and the requirements of the UK Forestry Standard that apply to all woodland creation projects.

3. What measures are necessary to (a) establish and (b) maintain the high-integrity markets in ecosystem services which are expected to attract private investment? What confidence do investors currently have in the UK’s arrangements for these markets?

All existing ecosystem service markets in the UK are currently voluntary and uptake has been low, in comparison to the anticipated potential size of the market.  What has been evident in voluntary markets is that the integrity of the ‘unit’ that describes the natural capital asset is of critical importance. For example, if the additionality of the improvement provided for by investors is contested, or the ownership of the improvement is divided in ways that are not clear, then there is little market confidence and the unit becomes devalued, as has been seen in a wide range of commercially operated carbon offsetting schemes[10].  Respected standards such as the Woodland Carbon Code, that inspire market trust are underpinned by standards and a set of principles including additionality, robust science, permanence, transparency (e.g., registry), independent monitoring, reporting and verification (MRV).

The British Standards Institute work on Nature Market Integrity Principles will assist in establishing the required principles for establishing and maintaining these markets and having a basis for assessing the robustness of investments. There will likely still need to be a role for auditing or regulation of these standards to reassure investors further that those who sign up to the BSI Principles are continuing to abide by them.

The Forestry England natural capital accounts[11] demonstrate that new woodland provides a range of ecosystem services that have economic values significantly higher than the traditional timber values from the crop.  Existing ecosystem service markets do not easily ‘stack’ these benefits; they are either acknowledged as co-benefits, but not valued economically (e.g., Woodland Carbon Code), or can be stacked in a limited way with public payments (e.g., Biodiversity Net Gain[12]). For the mainstream adoption of ecosystem service payments there will need to be clear rules established for attributing benefits and measuring additionality, that allow for the ‘stacking or bundling’ of benefits with both other ecosystem investments and public payments.  Where successful stacking takes place, the true value of an ecosystem (such as a forest) to society can be realised. This will help to create a virtuous circle, providing greater funding for the restoration and maintenance of natural capital assets and a maximum utility of land that is used for nature.

A further barrier to scaled private investment in ecosystem services is the volume of projects either ready to be deployed and invested in, or in pipeline. The majority of institutional investors are looking for investments in, at a minimum, the tens of millions of pounds, whereas woodland creation projects are typically far smaller than this. To address this issue, aggregators are starting to become established to join together smaller projects to create packages which funds can invest in. It is likely that aggregation will be an important element of maintaining the market in ecosystem services as large individual projects will be limited in the UK, in part due to the nature of land ownership. 

Bringing greenhouse gas removals from nature-based solutions into the UK Emissions Trading Scheme (UK ETS) would be likely to both encourage private investment into nature as part of climate mitigation activities but will also require robust reporting. The incentive associated with entry into UK ETS and the use of nature-based solutions to reduce reported carbon emissions will mean significant activity is put towards having robust reporting and regulatory approaches necessary to participate in the scheme. Regulations and reporting approaches from this could then be applied to broader ecosystem service markets to establish and maintain confidence in them. Entry of nature-based greenhouse gas removals such as the Woodland Carbon Code into the UK-ETS would increase market confidence for both investors and landowners and provide higher payments to accelerate uptake.

Adoption of a framework for establishing high integrity nature markets which covers the various elements discussed above has been recommended by the Financing Nature Recovery UK initiative.[13] Their framework consists of three main components: market design, market governance, and market operation. The importance of these are explained and evidenced with insights from local and international nature markets.

Scheme rules may not be sufficient to ensure environmental outcomes, particularly if carbon outcomes are driving the investment. Regulations and standards, beyond those associated with natural capital markets, such as the robust regulatory framework that applies to forestry in the UK, can provide that surety.

4. What contribution will data from the Natural Capital and Ecosystem Assessment (NCEA) programme make to the objective measurement of changes in environmental outcomes? 

The Forestry Commission is working with Defra and the scientific community to model and predict the scale of change needed in land protection and management, to understand what changes are required, and to better monitor progress so that we can adjust delivery to meet Government targets. The Natural Capital Ecosystems Assessment (NCEA) Project, which utilises woodland cover and function data from the National Forest Inventory, will allow us to provide sample data on biodiversity change in woodlands to complement our use of indicators to assess progress.  Forest Research are a partner in the NCEA project and are helping to establish a baseline which can be used to measure change and direct investment.

The Forestry Commission has carried out woodland surveys and compiled forest inventories at 10–15-year intervals since 1924. The rolling programme of the National Forest Inventory[14] (NFI) assesses the size, distribution, composition, and condition of our woodlands through time. In 2017, the National Forest Inventory was extended to report on canopy cover outside woodland[15], which will be updated, for England, from a 2016 reference date to 2022 in Forestry Statistics on 28 September.

Forest Research has been working with statutory agencies across GB to develop a statistical assessment of 15 indicators of woodland ecological condition and a further classification of woodland habitat into its condition status of favourable, intermediate and unfavourable compared to a benchmark of a stand of ancient semi-natural woodland (ASNW) in good condition. This has enabled native, near native and non-native woodland stands (outside of protected sites) to be classified as favourable, intermediate, or unfavourable in terms of their ecological condition for the first time. The Forestry Commission has extended this work to provide a tool for woodland managers to use – this same woodland condition tool is now also used in Biodiversity Net Gain. 

The NCEA will provide a broad benchmark for some ecosystem services and for forestry it will help to supplement long standing datasets.  It should be acknowledged however that the benchmark data provided by NCEA will not be suitable for all investment purposes, either because:

• it does not cover all ecosystem service outputs,
• it does not present data at a small enough scale to be able to demonstrate local improvements, or
• the frequency of updating the data will not be enough to allow for the expected level of financial reporting.

On the final point, it should be noted that the ONS reports on the state of different aspects of natural capital, e.g., woodlands[16], but that only part of this data is updated annually.  The frequency of reporting for financial markets and assessments of, for instance GDP, are much higher, with quarterly or monthly assessments.  For green finance to operate on an equal footing to other financial markets reporting frequency and data collation will need to happen more regularly and to a more detailed level. There could be challenges with this requirement in that changes in nature recovery are seasonal and, in some cases, may show limited progress within financial quarters or years.

5. How can the proposed UK Green Taxonomy support high-quality investments which deliver genuine benefits to nature? What financial disclosures should the taxonomy require?

The proposed UK Green Taxonomy will provide clarity for investors on ‘green measures’ that benefits nature in a UK context, that reflects UK-domestic legislation, regulations, standards, policy, national pattern of land use/ownership and national need. The taxonomy may differ from other taxonomies that apply either regionally or globally. This is likely to be attractive as the UK context will resonate with UK-based investors and their own audiences.

Financial disclosures associated with the UK Green Taxonomy should demonstrate financial additionality and that the action would not have gone ahead in the absence of the nature market finance.

6. How can the operation of natural capital markets ensure genuine net gains for nature? How do such markets address the risk of ‘greenwashing’ of investments and the offsetting of natural recovery in the UK against environmental degradation elsewhere?

As set out in our response to Q1, we consider it essential that natural capital markets are well regulated and designed with the input of the relevant sector, and industry experts.  For Biodiversity Net Gain a compliance standard has been established through the development of a ‘biodiversity metric’, which will be owned by Government, but has been produced and refined by a wide group if industry stakeholders (including the Forestry Commission). Furthermore, the implementation of the compliance standard has been mandated by legislation that requires a 10% uplift from development activity, but the delivery and price of units is for the market to establish. We would welcome the adoption of this approach for other natural capital assets, particularly where a statutory target has been established through the Environment Act.

The completion of the British Standards Institute’s nature investment standards principles[17] should provide the baseline requirements that all natural capital markets should meet to ensure genuine net gains for nature in regard to additionality and other standards. These are UK-specific standards though, so the risk of overseas impacts is not mitigated by these standards, however if these or similar principles become adopted internationally, this could reduce the risk of ‘greenwash’ globally. A form of regulation or audit associated with the application of these principles will be equally as important to ensure that adherence is genuine.

7. What role can the UK’s financial markets play in developing the flow of international capital into the development of the UK’s natural capital

The UK is a major player in the financial services field – being a major exporter of financial services and having extensive experience of developing and helping to implement international environmental treaties and approaches. The financial sector’s experience in developing and regulating markets and creating packages/funds/assets that are attractive to both domestic and overseas investors should be utilised to develop natural capital markets that will provide investment for the UK, and to encourage sustainable investments globally. For developing natural capital markets there will be a need to learn from other UK financial markets on how regulation can best be applied and what instruments and arrangements are needed for good governance.

Effective regulation of voluntary carbon and other nature markets is needed before bad practice generates reputational damage. The Voluntary Carbon Markets Integrity Initiative (VCMI)[18]  is tackling some of these issues in carbon markets globally, but there will be important roles for the existing regulatory institutions in the UK such as the Financial Conducts Authority (FCA) and Advertising Standards Authority), etc.

There are risks associated with overseas investments and the sustainable utilisation of land and we consider that community inclusion should be one of the expected key integrity principles.

It is also important to note that the Woodland Carbon Code is strictly a UK-based instrument and only UK-based businesses can report Woodland Carbon Units (WCUs) against their net greenhouse gas emissions. Foreign investors would not be able to report/retire WCUs against overseas emissions and there is clarity that carbon finance linked to the Woodland Carbon Code and the generation of WCUs contributes to the UK meeting it’s GHG emissions reduction commitments. Such an approach helps to address concerns over ‘greenwashing’.

8. What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and financial centres?

The UK is an early mover in the market for natural capital investments, which enables us to have a role in setting international standards. It is important that domestic approaches are developed and advocated to both external investors in UK markets and that UK overseas investment apply a natural capital approach.  The Treasury’s economic appraisal guidance, the ‘Green Book’ was updated in 2018 and 2022, to give clearer guidance on how impacts on natural capital should be assessed and treated when implementing projects[19]. This should be applied to all Government investment decisions (both domestically and internationally) and used as an example to other nations of the positive environmental effects that can be achieved through a natural capital approach.

Experience gained in aligning the WCC across the UK’s four devolved administrations, each with their own legal and financial arrangements, has demonstrated that national boundaries do not have to be a barrier to ecosystem markets. International co-operation on schemes that enable natural capital markets should be pursued for different natural capital assets where interests align. The UK also has a strong regulatory underpinning for land-use change which bolsters market confidence; for example, the Forestry Act has important provisions preventing deforestation, ensuring permanence and avoiding environmental harm.