abrdn CAP0037
Written evidence submitted by abrdn plc
Environmental Audit Committee Inquiry: The Role of Natural Capital in the Green Economy
About us:
1. abrdn is a global investment company that helps customers and clients plan, save and invest for their future. We are a global business, with customers and clients in 80 countries. We manage and administer £495bn of assets on their behalf (as at 30 June 2023).
2. We structure our business into three areas:
Introduction:
3. abrdn has experience in providing private finance for nature recovery projects. On behalf of the abrdn Property Income Trust we have initiated a project (Far Ralia) where private finance has contributed to the funding of 750 ha of native woodland in the Cairngorms National park and we expect to fund peatland restoration over another 50 ha. The project is expected to generate Woodland Carbon Code and Peatland Code credits, sequestering over 300,000tCO2e over 100 years. We currently plan to retire these credits to offset the hard-to-abate emissions for a Trust. We hope to initiate more such projects in future.
What potential contribution can private capital investment make to measures to secure nature recovery?
4. The financing costs for nature recovery and carbon sequestration are significant (in the £billions), but very small relative to the scale of the global capital markets. With the right incentives and safeguards, private finance could provide the bulk of the financing for nature recovery projects in the UK.
5. Nature recovery is primarily a public good – e.g. the inherent value of biodiversity or the collective value of ecosystem services (e.g. carbon sequestration). Typically, with public goods, private finance can only be deployed at scale with government support. This can take several forms – subsidy (e.g. ELMs, forest planting grants), taxes, tradeable credits and command-and-control (e.g. biodiversity net gain regulations).
6. There has been a bias in the past in the UK to favour subsidy (public money for public goods) but public subsidy is not the only mechanism. Where government regulation internalises externalities, private capital can be deployed to finance the necessary activities without public financial support. The recent Biodiversity Net Gain regulation provides a good example where a command-and-control regulation drives the private financing of nature recovery interventions.
7. Another mechanism that allows partial private finance of nature recovery, is the voluntary carbon markets. The voluntary purchase of carbon credits by companies seeking to offset emissions, helps to finance peat restoration and native forest planting (alongside government grants). However, this mechanism is quite challenging for investors partly because of uncertainty of the long-term credibility of voluntary schemes and about long-term VCM carbon prices; partly because there is a long delay of 5-15 years between investment (e.g. planting) and the first revenue from sale of verified credits; and partly because of the ‘illiquidity’ or difficulty of exiting projects once invested.
8. While it is appropriate for private finance to bear these risks and challenges, the more risk and illiquidity, the higher the risk premium required by investors. A pension fund may reasonably require 10-12% return from a high risk, illiquid private markets project. This makes private financing of such projects very expensive and raises concerns, whether justified or not, about ‘profiteering’.
9. Finding ways to reduce risk and improve liquidity is important to reducing financing costs and improving public acceptability. The integration of high-quality voluntary carbon market schemes into carbon compliance mechanisms could provide a route to lower risk premia and cheaper financing for projects, perhaps reducing the requirement for public subsidy for planting and peat restoration. Carbon floor prices for VCM schemes may also play a similar role in risk reduction – if at greater expense to the tax payer.
10. It is notable that BNG projects look like they will have much quicker paybacks and the fact that they are driven by regulatory compliance makes them more reliable. (Although even regulatory compliance mechanisms are not without risk).
How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?
11. While there are exceptions, it is a reasonable assumption that private investors are more interested in profit maximisation than nature restoration. This means that it is vital that there are effective safeguards and policing to ensure high standards are maintained, and that regulation is independent and effective. The early experience of private finance in the UK water industry is a case in point. It seems likely that current mechanisms for safeguarding private projects are not sufficiently well funded, or perhaps not optimally designed.
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?
12. Most markets for ecosystems services in the UK are still in their early stages. The two carbon codes have reasonably strong design features, though our experience using them suggests that there are many questions to resolve about how to deliver and maintain their integrity.
How can the proposed UK Green Taxonomy support high-quality investments which deliver genuine benefits to nature? What financial disclosures should the taxonomy require?
13. A well-thought-out UK Green Taxonomy could help provide investor confidence in the ability of funds to deliver genuine benefits to nature. If the taxonomy aligns to existing frameworks, it would reduce the reporting burden but also enable easier comparison for investors into the necessary solutions to move towards a more nature positive net zero economic model. Aligning solutions to the recently published metrics provided in the TNFD recommendations would be highly recommended. This would allow investors to have comparable metrics in areas where previously there have been none and would help create a common language.
14. Investors struggle to highlight benefits when there is a lack of clarity on the metrics to be applied. We don’t believe that a single metric is a realistic aim for such a complex subject, but rather a dashboard of metrics that align to the drivers of nature loss as identified by IPBES. This enables us to evidence that the holdings in a fund can deliver genuine benefits to nature.
Opportunity | Amount of capital expenditure, financing or investment deployed towards nature-related opportunities, by type of opportunity, with reference to a government or regulator green investment taxonomy or third-party industry or NGO taxonomy, where relevant. |
Increase and proportion of revenue from products and services producing demonstrable positive impacts on nature with a description of impacts. |
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?
15. This is a complex question to which there is no easy answer. We believe that it is unwise to assume or claim perfect equivalence of any offset. One tonne of carbon sequestered by a forest is not identical to one tonne of carbon emitted through the combustion of fossil fuels. Carbon sequestered in a forest may not last the thousand years that the fossil fuel carbon remains in the atmosphere. The language of carbon sequestration ‘contribution’ may be preferable to language that implies equivalence (i.e. net zero, offsets).
Contact details:
16. For further information contact:
Kate Ballantyne
Public Affairs Manager
September 2023