UBS                            CAP0012

UBS AG Group’s submission to the Environmental Audit Committee’s Call for Evidence on the role of natural capital in the green economy.

UBS is a premier global financial firm offering wealth management, asset management and investment banking services from its headquarters in Switzerland and its operations in over 50 countries worldwide to individual, corporate and institutional investors. The bank publishes public-facing thought leadership on a range of sustainability topics, including natural capital.

Leveraging recent UBS publications, this response answers questions from the inquiry which are relevant to the firm due to their international or financial services focus:

• What potential contribution can private capital investment make to measures to secure nature recovery?
• What contribution will data from the Natural Capital and Ecosystem Assessment (NCEA) make to the objective measurement of changes in environmental outcomes?
• What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and centres?

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

1. Securing nature recovery requires a diverse set of approaches and ideas that recognise its complexity as a system of systems with highly localised components[1]. While this Call for Evidence focuses on private capital investment, this is just one part of the puzzle; finance, government, science, and corporations play important and differentiated roles as well, as set out in a recent UBS white paper[2].
2. Multiple estimates point towards the significant investment required to protect natural capital[3]. For instance, the United Nations Environment Programme estimates that annual investment in nature needs to reach up to USD 536bn by 2050 to halt climate change, tripling by 2030 and quadrupling by 2050. Private capital will play a key role in scaling natural capital investment, which today is dominated by public investment (86% of total investment in nature-based solutions)[4]. Nature investments present private capital with tangible economic and financial benefits, such as helping to reduce nature-related risks for existing businesses[5] (particularly those most exposed to nature) and creating new investment opportunities (investing in natural resources could provide USD 2-5trillion in sustainable business opportunities by 2050[6]).
3. Nature’s services (such as flood regulation, pollination and carbon storage) tend to be free, and therefore they go unpriced in markets. Ideally a price would be put on these services, but a global ‘nature price’ would be difficult to levy due to nature being a system-of-systems characteristics and the highly localised character of natural capital stocks[7]. This helps to explain why humanity’s ecological footprint is estimated to be 56% larger than earth’s current biocapacity[8].
4. Private capital can support measures to secure nature recovery in several ways such as informing market creation, connecting local natural capital projects to the needs of international private capital and through engagement (as set out in a recent UBS white paper[9]).
5. First, private capital investment can inform the creation of specialist natural capital markets (which are currently niche, existing mostly within the carbon offset market[10]). Functioning market infrastructure is important to creating bankable projects and overcoming market failures. Partly this involves articulating the needs for specialist market infrastructure to trade ‘keystone eco-assets’; a key example is the Murray-Darling water trading in Australia.[11] We also note the UK’s recent efforts to develop new nature markets[12]. As per previous UBS publications[13], the key actions to ensure functioning natural capital markets include:
• Opportunities: Investable projects need clear boundaries, scope, role and responsibilities, performance metrics and an of the opportunities[14];
• Risk Management: Ensuring regulatory measures balance the needs of stakeholders (e.g., protected areas can lead to displacement).
• Robust third-party verification: Investors need to feel comfortable about the additionality and permanence impact of nature protection measures, much alike the same issues in the carbon offset market. Ideally, ecologists and biologists will conduct a thorough reviews, avoiding a generic “check-off-the-list” process.
• Development of geospatial approaches: Natural capital markets can leverage existing technologies such as sensors, satellites, and artificial intelligences, plus the “big data” facilitated by such approaches.
• Natural capital indices: As systematic disclosures and data become available, indices are likely to be developed to facilitate the measurement of progress, similar to the work of Climate Action 100+ (or the developing work of its nature equivalent, Nature Action 100).
6. Second, private capital can connect local natural capital projects with rapidly developing international practices on nature-related investment. For instance, a standardised disclosure regime for investors is emerging through the Taskforce for Nature-related Financial Disclosures (TNFD), which provides both the ‘what’ and ‘how’ on nature-related disclosures[15]. From a global investment perspective, it is key for localized projects to generate data in line with globally consistent frameworks.
7. This has two benefits. Firstly, it enables private capital (through its cross-value-chain position) to compare the impact of projects across different types of ecosystems and borders, prioritising projects which provide with the highest ecological benefit to investment ratio. Secondly, the global purview of private capital can connect local natural capital projects to broader natural capital trends. For instance, projections suggest there could be an 8% crop production shortfall relative to demand in 2050[16], highlighting the importance of protecting natural capital through more sustainable agricultural practices. This also highlights the importance of considering natural capital and climate as part of the same issue: better stewardship of the planet[17].
8. Third, private capital can engage companies to promote better integration of the environment into financial decision making. There are multiple approaches; In a recent UBS white paper, we set out the ‘why-what-how’ framework, which directs investors toward sectors with a high dependence on biodiversity, high potential to effect change, or those lying downstream in the value chain.[18] Sophisticated engagement frameworks are emerging, such as the World Benchmarking Alliance’s Nature Benchmark Methodology, which assess companies on 25 nature indicators and 18 social indicators. This trend is similar to the path followed by climate (e.g., through the investor initiative CA100+), although natural capital’s path may diverge given (as a topic) it does not have the same concentration of corporate actors. By leveraging these frameworks, private capital can push natural capital risks (such as the UK’s mature body of environmental law versus other countries[19]) and opportunities up investee’s agendas.

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

9. National datasets of natural capital are important stepping stones towards measuring a nation’s true wealth, in keeping with the Dasgupta Review’s concept of ‘Inclusive Wealth’ that looks beyond Gross Domestic Product (GDP) to include natural capital (among other things) as a broader yardstick of prosperity. Around 55% of the world’s GDP is moderately or highly exposed nature[20], creating a strong economic case for providing investors, finance and corporates with data to analyse their impact and dependence on natural capital. NCEA data can facilitate this move—which is part of a broader shift from an output to an impact economy—through enabling the construction of national natural capital accounts aligned to the UN’s System of Environmental-Economic Accounting Ecosystem Accounting (SEEA EA) framework[21].
10. Natural capital accounting has developed slowly since its emergence from academia in the 1970s. This is largely due to slow ‘top-down’ efforts by governments. Additional ‘bottom-up’ initiatives from a wider range of stakeholders, including investors, corporates, intermediaries, and NGOs [22] are required to accelerate the development. Ideally, governments would have reliable and regularly updated national natural capital accounts, that would enable private stakeholders to innovate with their own natural capital accounting. However, private stakeholders are not positioned or incentivised to create such datasets, making initiatives like the NCEA irreplaceable. The data is unlikely to emerge through means other than the NCEA, despite its significant benefits.
11. These benefits are public, enabling policymakers to track the state of the environment over time, but they also accrue to investors, finance, and corporates. By compiling government-backed and spatially linked statistics on the quality of the environment over time, the NCEA’s data would benefit the private sector through[23]:
• Anticipate demands of coming regulation: National reference points for environmental data will help organizations prepare for the coming wave of biodiversity reporting. For instance, governments are starting to implement Target 15 of the Global Biodiversity Framework, requiring large organizations to assess and disclose their risks, impacts and dependencies on biodiversity by 2030. National datasets enable firms to report against these requirements, such as by taking the raw data or as inputs to proxies. This is part of a longer trend—for instance, the number of biodiversity-relevant taxes doubled between 1990 and 2022—and significant regulations are already emerging today, such as France’s requirement for biodiversity foot printing.
• Inform business strategy: National data would enable companies to undertake natural capital accounting exercises, providing visibility on their business impact and dependence on the UK’s natural capital across opaque value chains. For instance, the framework enables businesses to identify and manage nature-related risks—such as their impact on water supplies in areas of high competition—and can help them quantify their dependence on those supplies via monetized figures. For nature-inclined investors, the data can facilitate investee peer comparison and benchmarking.
12. Data is only as useful as the tools that turn it into actionable insight. As mentioned in a recent UBS white paper, one of private capital’s key roles is to provide innovative methodologies and use cases for the increasing availability of natural capital data (driven by initiatives like the TNFD). For instance, new methods could be developed for assessing natural capital risks up supply chains[24] (leveraging work from initiatives like the Network for Greening the Financial System).

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

13. There is a strong body of international work emerging on natural capital standards, some of which cover investment.[25] The UK can support these ongoing efforts and promote their alignment in three ways: promoting publicly accessible data; building standards on top of these data commons; and ensuring the compatibility of any standards with international agreements and goals.

14. First, reliable and regularly updated national environmental data is a prerequisite for any international standards on natural capital investment. These environmental “data commons”—publicly accessible and credible data—are the foundations on which international standards are built. Global investors require these data points to benchmark investments against national and regional trends, allowing them to compare investments through a ‘natural capital lens’—such as comparing the impact of companies on landscape-scale water tables in different regions. Creating SEEA-EA aligned accounts could facilitate cross-country natural capital analyses, such as exposures to natural capital across opaque value chains. Currently ‘data intermediaries’ plug these gaps by providing impact valuation services, including on natural capital[26]. Future standards could leverage existing data efforts, including global biodiversity hotspot maps[27], public databases on species[28] and foot printing[29].
15. Scale is a particular problem for investors to gauge natural capital risks and opportunities across diverse portfolios. For instance, geographically assessing corporate assets is the first element of the TNFD’s LEAP framework, to assess their ecosystem context ‘on the ground.’ This requires data on all investee operational assets, which requires investee disclosure before financial institutions can perform analyses on their own natural capital exposure[30].
16. The creation of reliable environmental datasets also facilitates the next generation of target setting. We do not believe that the current trajectory established for climate should be followed i.e., setting targets in relation to single metric and a single trajectory). Over-simplified implementation will lead to further market failure, either in the form of non-delivery of the desired goals or the failure of financial instruments intended to support their delivery. With these lessons in mind, we believe three building blocks will echo climate’s trajectory and are likely to be applied to nature[31]:

• Science-based targets set in relation to specific natural capital indicators (such indicators still to be selected or devised).
• Scenarios, still to be designed.
• Eco-asset-specific stress tests, noting that, compared to climate stress tests, these will take some time to develop and presently their exact use and development path is unclear (for instance, current examples may not capture second-order effects well, and they face well-known conceptual and data limitations[32]).

17. Second, for natural capital investments to ‘speak the same language’, they need to use comparable standards. Government support for a common standard would ensure that corporate disclosures (and therefore the investors that use them) are aligned. A good parallel is the recent wave of government support for reporting against the Taskforce for Climate-related Disclosures (TCFD) recommendations, which aligned corporate disclosures on climate.
18. A similar thing for natural capital would help mainstream natural capital investing, at a time when less than half of companies reporting to the Carbon Disclosure Project consider biodiversity in their strategies[33]. There are standards in the market already for nature-related reporting, such as on environmental data (the TNFD) as well as natural capital accounting (such as the Value Balancing Alliance’s EU-funded ‘Transparent Project). Similarly, some concepts are ready-made for use in any future standards, such as the idea of keystone ecosystem assets, and the categorization of ecosystem services into supporting, regulating, provisioning and cultural under the Millenium Ecosystem Assessment[34]. A sensible starting point could be advocating this for sectors that are the most dependent on natural capital, which includes many of the companies listed on the materials- and energy-focused FTSE100[35]. There is a long way to go before standardisation will emerge; for instance, a recent report found there are over 50 different approaches to valuing nature (from a review of 13,000 studies)[36].
19. Third, the driving force behind natural capital investment standards is to enable the sustainable management of natural resources. This means any future standards should support the end goals of existing international environmental agreements. For example, natural capital investment standards could support the Kunming-Montreal Global Biodiversity Framework’s goal to halt and reverse biodiversity loss by 2030 (under the Convention on Biological Diversity) by helping a wide range of stakeholders gauge their impact and dependence on nature[37]. An important action is further government co-ordination on natural capital, aligned with science and taking into account societal stakeholders, preferably in the form of a government-level agreement on the need for urgent and accelerated action to maintain current levels of natural capital.[38] Importantly, the local nature of natural capital means that any future standards for investment should include provisions for community-level engagement, possibly aligned with existing expectations under the CBD.

Contacts

William Nicolle

Associate Director, ESG Analyst

Sustainability and Impact Institute, UBS

Judson Berkey

Managing Director, Group Head of Engagement and Regulatory Strategy

Chief Sustainability Office, UBS

September 2023