Natural England                            CAP0032

Natural England: Written evidence submission to the Environment Audit Select Committee Inquiry on the current and potential future role of natural capital in the green economy, and the Government’s proposals to increase private investment in measures to support nature recovery.

Natural England is the Government’s statutory adviser on the natural environment established under the Natural Environment and Rural Communities Act 2006 (the NERC Act). Natural England’s purpose is to ensure that the natural environment is conserved, enhanced, and managed for the benefit of present and future generations thereby contributing to sustainable development.

We are pleased to have an opportunity to submit evidence to the Committee’s important and timely inquiry.

Overview

Natural England recognises the fundamental role that Nature can plays in underpinning our future economic wellbeing and green growth:

• Funding nature recovery is both economically rational and economically essential.
• Nature recovery will require significant investment.
• Natural England is central to the delivery of nature’s recovery and the private sector’s contribution to it.
• Experience shows that capital flows into the environment do not always deliver environmental gain.
• Environmental markets pose new and additional challenges.
• Governments have a role in creating, developing and directing environmental markets as well as ensuring their integrity and supporting their development.

Please find further detailed comments below in relation to the specific questions set out in the inquiry call for evidence. We would be delighted to expand upon these at a subsequent oral evidence session would the committee find that useful.

1          Natural England’s perspective on green finance

1.1          Funding nature recovery is both economically rational and economically essential

The Economics of Biodiversity: The Dasgupta Review, was an independent, global, review of economics of biodiversity, commissioned by HM Treasury and published in February 2021[1].  The review considered the relationship between biodiversity, economics and finance, and came to the following central conclusions[2]:

• Nature is an asset, just as produced capital and human capital.  This means that it is something that we rely on, which produces essential benefits.
• Biodiversity is an essential characteristic of Nature, which determines its productivity, resilience and adaptivity.
• Humanity’s demands on nature are significantly outstripping supply, which creates significant risks for economies and financial systems.
• Widespread and deep-rooted institutional failure underpins the mismanagement of our portfolio of assets.
• The global financial system and education system have particularly critical roles in enabling persistent change

Nature provides benefits on which we all depend, both as individuals and as wider society and economy.  In fact, the economy is bounded by nature as many of the benefits are reliant on ecological processes that cannot be substituted with technology[3].  Most of these benefits are not traded in markets, which means that markets - left to themselves - will under invest in them compared to their true value. It is therefore economically rational and essential for government to seek to increase this investment[4].

1.2          Nature recovery will require significant investment.

An estimate put the resources required to meet the UK’s nature-related outcomes over 10 years at £56 billion[5]. This report was published two years ago and the funding gap has not reduced since. We recognise that funding needs to come not only from the public purse, but also private and philanthropic sources.  We welcome the governments nature markets framework[6] and are excited by the Government’s Green Finance Strategy and Defra’s target for private finance into nature’s recovery in England to reach over £1 billion per year by 2030[7]. However, we note that even meeting this target would still be significantly short of the assessed funding gap.

1.3          Natural England is central to the delivery of nature recovery and the private sector’s contribution to it.

Natural England is already a key shaper in the development of Nature Markets and Disclosure initiatives.

Natural England helped develop the Biodiversity Net Gain (BNG) approach as specified in the Environment Act. Eftec (2021) have estimated the size of the BNG, driven by private funds, will be £135m-£274m per year[8].4 Natural England have the following roles with regard to BNG: 

• Recommending future updates to the statutory biodiversity metric after publication.
• Establishing and maintaining the BNG net gain register to record allocations of offsite biodiversity gains to developers.
• Selling statutory credits on behalf of the Secretary of State and work with Defra to design and develop the scheme.
• Monitoring and evaluating the success or otherwise of mandatory BNG and making recommendations to Defra.

Natural England also contributed to the development of the peatland code in the UK[9].

As the statutory consultee in planning and environmental assessment process, Natural England is responsible for Nutrient Neutrality guidance.  Also, Natural England have been directed by Government to design and implement a nutrient credit scheme. As part of this Natural England are providing advice and investing in evidence to enable others to invest in nutrient mitigation and stand up their own credit schemes.

More generally Natural England has a key role in planning for nature recovery, and engaging with spatial planning systems to support the most effective use of land for this purpose.

1.4          Experience shows that capital flows into the environment do not always deliver environmental gain

Environmental market creation should not be an end goal, but rather a means to an environmental end. Markets can increase efficiency of expenditures, but in circumstances where non-market mechanisms (e.g. voluntary payments) are as effective these can be simpler and cheaper to administrate. 

Attempts have been made at establishing markets for nature over an extensive period in many countries. The USA, Australia and others have implemented carbon, water and biodiversity markets. The successes and failures of these schemes are an important evidence base for the UK to consider. Global experience has shown that it should not be assumed that the existence of private capital flows into land-based projects delivers on gains for the environment[10],[11],[12],[13]. This risk can be mitigated by ensuring schemes are designed with specific reference to improvements in the quantity and quality of ecosystems that underpin environmental gains and nature recovery.

1.5          Environmental markets pose new and additional challenges

In many environmental markets what is being traded is an artificial unit or compliance certificate. This raises additional standards and accreditation challenges. Specifically, consideration needs to be given to:

• Permanence: how long are the environmental changes agreed to last?
• Equivalence: are changes in one site equivalent to changes in another in terms of the benefits sought?
• Additionality: will additional investment require additional changes in land management? Will it lead to additional benefits?
• Leakage: will improvements to environmental quality in England put pressure on other countries’ environments through additional demand for imports?
• Distributional concerns: many markets have distributional/equality impacts, but new environmental markets raise new challenges, particularly where they affect quality of life and risks-faced by different communities.

1.6          Governments have a role in creating, developing and directing environmental markets as well as ensuring their integrity

Government has a role in creating markets where those markets are underpinned by regulation, (see section (2.1.2 below).  These markets can be supported by long-term regulatory standards and market infrastructure.  Setting price points and feed-in tariffs are potential tools available to government in this space.

Government has a role in directing private finance to maximise benefits for nature and climate recovery.  This includes ensuring that markets or initiatives are doing what they claim to be doing and checking the impact on nature recovery.

When markets are in a developmental stage there is a role for government and the third sector in supporting market development – for example through the Natural Environment Investment Readiness Fund and the Big Nature Impact Fund.  It is important to continue to review the need for this sort of support to build market confidence.

2          Answers to questions posed

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

At this stage it is not possible to accurately estimate the potential contribution of private capital investment to nature’s recovery. This is for two reasons. Firstly, green finance is not one thing, but rather an umbrella term, which covers a wide variety of different financial arrangements and incentives. Secondly, with in each type of green finance, the contribution depends upon a range of different decisions and circumstances. In this section we will set out the different types of green finance and what will most impact their potential contribution.

2.1.1        Type 1: Simple markets in benefits from nature

These are ‘simple’ markets which arise through mutual self-interest without the need for support by governments, charities or third-party institutions.  Simple markets in benefits from nature are rare however, because most of the benefits from nature are public goods (things which benefit everybody whether they pay or not).

There are examples of this sort of simple market. For example, the Landscape Enterprise Networks approach has brokered a trade of £1 million in the East of England[14]. Improved evidence and evaluation, along with digital platforms can support the development of this area, but it’s potential will be limited by public goods and aggregation problems.

2.1.2        Type 2: Markets driven by regulation

Some regulations are supported by markets which allow companies to trade with each other to meet the regulatory target as efficiently as possible[15]. For example, UK emissions trading scheme. There are currently three environmental markets driven by regulation. These are the UK Emissions Trading Scheme, Biodiversity Net Gain and Nutrient Neutrality. These regulation-backed markets have the potential to drive environmental improvement at the least possible economic cost, as well as driving innovation and economic activity. The potential for this market depends on the government appetite for the regulation to underpin them and its desire to use markets to achieve flexible and cost-efficient regulation.

To be successful they require clear rules, transparency and consistency. They may also require initial investment to ensure markets are sufficiently liquid to meet demand. They also require evaluation of their environmental impact to ensure that changes compliance units which appear desirable are having the desired impact on the ground.

2.1.3        Type 3: Markets driven by Environment Society and Governance (ESG)

Environment Society and Governance (ESG) captures business desire to make a positive contribution to environment and society.  ESG goals can be achieved by direct donation.  However, sometimes businesses would like to be able to measure their contribution in a comparable way, and in these cases voluntary markets can play an important role. There has been a particular growth in voluntary carbon markets, and in land management codes designed to ensure investments in carbon also lead to wider environmental benefits.  For example, the peatland code[16] and woodland code[17]. These markets need clear rules, clear attribution, accreditation and assurance and evaluation to ensure that the environmental changes on the ground are desirable is essential. The potential for these markets depends on the business appetite to measure the impact of their ESG expenditure.

2.1.4        Type 4: Environmental outcomes driven by investor preferences

Investors are increasingly asking for the environmental (and social) impact of the investment to be considered.  Sometimes they are willing to consider a lower or slower financial return on their investment.  This known as Green Finance.  The need for a financial return means that most of this investment will not be directly in benefits from nature, but in renewable energy, energy efficiency or other green technological transformation. There is significant potential here in terms of investment which support technological changes to greener land management and fishing practices.

Green Finance change potential has been limited by a lack of clarity about what counts as a green investment. In this context we welcome HM Government’s 2023 Green Finance Strategy, Mobilising Green Investment[18].  In particular, we welcome the UK Green Taxonomy, which will provide clarity on what investments should be labelled as green.  The exploration of mandating disclosures against it after ‘at least two reporting years’ has the potential to helpfully drive green investment through transparency.  We also welcome the UK government’s support for the Taskforce for Nature-related Financial Disclosures (TNFD).  We note that UK Government sees the TNFD as the main method for operationalising Target 15 of the Global Biodiversity Framework and will explore how it should be incorporated into the UK policy and legislative architecture.

2.1.5        Investments required to support all Green Infrastructure types

All the types of market listed above require a framework of clarity, transparency and quality assurance to ensure trust in the market by both demand and supply side Some of this can be achieved through private sector and third sector actors, but an institution without conflicts of interest is required to ensure investor confidence.

The boundaries between these invest types are sometimes not clear.  For example, there has been significant voluntary uptake of Biodiversity Net Gain even before it is legally required.  Additionally, there are some investments where it is not clear what mixture of bottom-line return and ESG is driving the investment.

In every case it is essential that the actual impact on ground is assessed and compares to the desired change in units - be they compliance units or credits in carbon.  This will require accurate data about the state of the environment, and is an important role for the evidence being collected by the Natural Capital Ecosystem Assessment.

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

Regulation and/or quality assurance should ensure that every investment moves land holdings in a positive direction in terms of ecosystem health and biodiversity, as well as delivering the purchased specific environmental benefits.

The benefits from nature (ecosystem services) depend on the spatial configuration of natural assets.  So effective investment in nature requires strategic and spatial planning.  Local Nature Strategies will provide this in local areas across England and will help investors to know that they are contributing in a way which adds value strategically.

We need a scientifically rigorous approach to assessing the impact of investment.  This will not be able to rely on a single indicator; like human health, ecosystem health is complex and must be measured multi-dimensionally.  We know that biodiversity is a critical enabler of resilient, adaptive ecosystems that provide multiple services[19].

We need to use the appropriate evidence and not be driven by convenient or cheaper indicators that don’t give the information we need. Natural England’s work on Natural Capital Indicators are an important source in this regard[20].

2.3          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? 

To provide confidence to investors you need:

a)      To know the interventions lead to the outcomes desired (at a good level of confidence)

b)      To be able to understand and measure change.  This requires monitoring data and quality assurance.

c)       Standards in the areas above and the functioning of the market

d)      a geographically specific register of payments, and what that payment is for is required.  This should be transparent.

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

We need systematically regularly collected data on the quantity, quality and distribution of our assets as well as the ecosystem services they provide. The NCEA is collecting baseline data in relation to this need. We will need this work to be repeated over time so it can be used to measure change, and it will also need to be supplemented with additional data to ensure we get the resolution required by some decision makers.

2.5          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 UK economy should remain as internationally comparable as possible, to support international financial flows and internationally comparisons.  It should be based on places and process and should be measurable.  It should be based on science and evidence.

More specifically, it’s important that the UK Green Taxonomy support moves towards farming models which enhance the natural environment, particularly soil quality.  It should also support environmentally friendly land use change where appropriate.

2.6          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? 

Transparent and effective quality assurance is required, addressing all the issues raised above. This is most effectively tackled through standards for natural capital markets.

Regarding the danger of offshoring environmental degradation, this fits with Defra’s wider policy role to balance the different things the UK requires from its land.  The Land Use Framework may help in this regard.

2.7          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’s financial markets are strongly connected internationally.  The flow of capital therefore depends on the issues set out in response to question 1.

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

The UK has taken a leading role in thinking around natural capital, including natural capital evidence, accounting, trials and markets.  Furthermore, both the city of London and British Standards are internationally influential.  There is therefore a possibility of leading international standards if the UK can successfully tackle some of the challenges which the US and Australian environmental markets have faced. Successful, ambitious implementation of the UK green taxonomy into robust, transparent risk and transition (ESG) plans would place the UK well to align with consumers and regulatory changes.

BS 863:2021 - Designing and implementing Biodiversity Net Gain was developed with Natural England input and published in 2021 and is now being adapted for international use as an International Standard (ISO)

September 2023