Kana Earth CAP0041
Kana Earth is developing a non-for-profit Hub for all Landowners, Farmers, Forestry/Peatland Developers, Verification bodies and Codes/Methodologies providing the market infrastructure to scale. In parallel, Kana is developing a platform for asset managers to launch funds that target UK nature with the ambition to create Natural Capital as an asset class for UK investors.
1. What potential contribution can private capital investment make to measures to secure nature recovery?
Private investment can make a significant contribution to nature recovery and will grow areas that the public purse cannot support.
At the current time we are failing to achieve government targets across the UK, as evidenced by woodland creation and peatland restoration statistics. The limited public purse is unlikely to expand to provide further incentive to undertake the permanent and semi-permanent land use change required.
Private investment can and will make a significant contribution but it needs the following:
● A profitable return on the capital invested. Private investment is not a tax or a charitable contribution so it needs to have a realistic opportunity of achieving a return in order to be released.
● Tangible units and products to be procured from suppliers as an output or in return for invested capital.
● A stable and secure market structure to operate around.
● Integrated data and data processors to provide confident decision making.
● Clarity on taxation.
● Standardised legal frameworks where obligations and responsibilities associated with delivery are clearly defined.
● A regulatory framework and environment to provide assurance.
Currently a number of these points are not in place or are stalled in their development.
Government similarly needs to make way for private investment through clarity on where the public purse will be utilised.
One area completely ignored to date is the compliance cost associated with creating high integrity nature markets. As an example, any woodland creation below 10ha is currently rendered as uneconomic and nonviable. If the public purse was utilised to fund this it would incentivise smaller scale projects adding certainty to nature project producers, thereby stimulating integration and transparency of data.
2. How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?
UK based Carbon and Biodiversity Codes should play a significant role in incentivising the achievement of Government nature recovery ambitions through the creation of projects and units by landowners into which corporations can invest.
As mentioned in the previous disclosure, private investment requires a realistic opportunity to achieve a profitable return.
Private landowners are the deliverers of the nations’ environmental targets but changes in behaviour and the delivery of nature projects need to be properly incentivised.
Environmental projects by private landowners need to either:
● Produce a significant reduction in cost or increase in output within traditional land/farming markets.
● Produce a standalone environmental product such as a carbon credit or biodiversity token that has a realisable value over a traditional land/agricultural use.
Similarly, corporate investors need to be incentivised to make an environmental product investment part of their operational business requirement. Government has the ability to stimulate these behaviours through the creation or extension of compliance markets or quasi compliance markets, or through signalling of desired and acceptable behaviours that can be satisfied through voluntary markets.
Currently there is an emergent market for carbon units which can be produced through additional nature-based projects by landowners and sold to corporations.
Whilst there is a small compliance market associated with Biodiversity in England there is no standardised Biodiversity product or collection of products across the UK. There is also no requirement or incentive for corporations to invest in a Biodiversity product at present.
As a result, the development of a Biodiversity market to support Government targets seems remote.
Similarly whilst there is an emerging Carbon market, the rules surrounding additionality and eligibility are not consistent with incentivising the achievement of Government targets as evidenced by the Woodland Carbon Code failing to support productive woodland creation.
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?
It is clear that the asset owners, such as the pension and life funds, still see the Natural Capital asset class as a high-risk and niche investment sector. Investments that have happened to date have been one-off and taken significant effort and time to complete.
For Natural Capital to be considered as a mainstream asset sector that could be compared to equity, bonds or property, there area number of key things that need to be addressed:
● High integrity. The BSI work that is identifying the criteria and certification process for any methodology to operate in the UK needs to be pushed across all the devolved governments. For the price point to be attractive to landowners, the UK has to be seen as a high-quality low-risk source of Natural Capital worth paying for.
● Trusted and open Investment data. The data for any Natural Capital project needs to be able to underpin investment. There are a number of challenges that are stalling growth in the market. For example, the Government contract for the UK Carbon Registry used by the Woodland Carbon Code and Peatland Code is run by S&P. This is not currently openly accessible with any organisations wanting to use this data facing legal action from S&P with their belief that they ‘own’ the data. This behaviour is not open or investment friendly and is stalling growth. In addition it prohibits integration, inhibits growth, and risks double counting and misrepresentation as it fails to allow real time data updates.
● Price Floors. Currently there is only one scheme in the UK (the Forestry Commission Woodland Carbon Guarantee process) that underpins prices in the market. To ensure the success of other methodologies, such as Blue Carbon, Soil Carbon, and Hedgerows, similar price guarantee schemes would be instrumental in changing the business case.
● Supply. In the Committee for Climate Change 'Land use: Policies for a Net Zero UK’ 2020 it was estimated that the UK’s capacity for a nature carbon sink was nearly 60m verified tonnes per annum. In 2022 the UK achieved less than 0.5m. There needs to be landowner-friendly policies that join up all the initiatives to ensure that landowners have clear options they can select and receive support on.
● Innovation. Currently there is a vibrant community of organisations that have been supported by the Scottish and English governments to develop the science to underpin Natural Capital projects. There is no support provided for the market infrastructure. At present, Kana Earth is the only UK-based organisation creating the technology solution to bring parties together to make them investible while also supporting the asset managers. There are many technology verification platforms, feasibility studies, satellite/LiDAR and other types of organisations but they are receiving little or no support from the innovation grants. We would recommend that UKIB or Innovate UK target market infrastructure as part of their investment strategies.
● Insurance. The investment rule that if it is insurable, it is normally investible is very true in the Natural Capital sector. Specific support should be provided to the insurance sector to be the world leader in Carbon Shortfall and other Natural Capital assets
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 NCEA programme will inevitably create an enhanced data set but it is unclear how, if at all, this data and the programme will interact with private investment.
● How will it enhance the decision making of landowners wanting to know how best to utilise and manage their land?
● How will it give confidence to the investment community that the contribution they are making is having a positive impact?
● How will it be used to stimulate behaviour, adjust targets or enforce compliance all of which are likely to have an impact on environmental markets and products?
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?
It must not be overlooked that the impact of taxation on the supply side of environmental projects is absolutely critical to the motivation to create more projects.
The tax policy must ensure that the creation of these projects remain incentivised for the long term, and the tax handling of different types of environmental projects remains consistent.
The creation of environmental projects must not expose landowners to Inheritance Tax on the underlying land and Natural Capital assets and should also have income and capital gains tax benefits if we are to ensure incentives to create projects that are in the right place.
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?
Claims of net gains for nature are currently hard to prove, but also hard to disprove that is currently leading to the significant challenges in the press on the integrity of the global Natural Capital marketplace. We believe the following market strategies should be adopted:
● Trusted Project data from the inception of the project underpinned by a legal framework ensuring parties stand by this data.
● Frequent baseline information (at least annually) with the data captured within the legal framework.
● A clear avoidable and unavoidable loss process that determines whether any loss event is the fault of one of the parties creating or managing the project, or an act of nature.
At Kana Earth we are building the not for profit Hub supporting the development of the market infrastructure supporting the above strategies. We are encouraging other organisations to integrate their own frameworks to extend the coverage and data sharing so that the UK can become the first ‘Data First’ Natural Capital Market in the world. In this market claims are backed up by trusted data significantly eliminating the risk of greenwashing.
We believe that the creation of the market framework and infrastructure should be left to the private sector that will drive the efficiency required to scale. However, the baselining and verification of nature projects should be supported by government policy and funding which will ensure all projects particularly those of smaller scale can be independently audited, retain a high integrity status and assurance, ultimately remaining viable.
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 has the opportunity to be a world leading international marketplace for Natural Capital. In doing so we could enable investment into our UK environmental market from international sources and we could ensure that if UK sourced funds go to offshore markets that these are as robust as possible.
However, at the current time carbon units created under the established UK Codes such as the Woodland Carbon Code and Peatland Code are only allowed to be sold to UK-based businesses and therefore there is no direct way for international capital to flow into the UK environmental market.
8. What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and financial centres?
The UK has the opportunity to play a leading role in the development of international standards and to set up the premier high integrity Natural Capital Market in the world with the associated influence on standards that this position would bring.
At the current time however the UK Government has taken a back seat approach in terms of policy. Codes are being created independently and in silos, market structures are evolving in a piecemeal way and the Government is reluctant to engage with private companies. Financial institutions are largely disconnected from the creation and management of projects on the ground and overall there is little joined up thinking or direction, which means that there is also limited ability to create market certainty and confidence. Ultimately, there is currently no UK Government Leadership in this sector and market participants, such as Kana Earth, are trying to create consensus and market enabling solutions with little support.
The window for the UK to be a leading player is time limited and closing rapidly.
Once institutional funds start to deploy capital they will find the UK has not got enough scale and will go offshore. The increasing risk is that UK investment capital leaves the UK for other countries and jurisdictions.
September 2023