Aviva Investors                            CAP0046

Written evidence submitted by Aviva Investors

Written evidence to the Environmental Audit Committee’s call for evidence on the role of natural capital in the green economy.

September 2023

Introduction to Aviva Investors

This submission is from Aviva Investors, the asset management arm of Aviva, a UK headquartered financial services company. Aviva and Aviva Investors have been involved with the UN’s sustainable development and finance activity for decades including as part of the UN Environment Programme Finance Initiative; as a founding signatory of the PRI; as conveners of the Corporate Sustainability Reporting Coalition for Rio+20 which shaped SDG target 12.6; as co-founders of the Corporate Human Rights Benchmark – the first benchmark of corporate performance against the UN Guiding Principles on Human Rights – and as co-founders the Sustainable Stock Exchange Initiative.

Representatives from Aviva Investors and Aviva have been attending the UNFCCC COP for over a decade and have been very active in recent COPs, including through secondment into the High-Level Climate Champions’ team (COP26), co-chairing workstreams within GFANZ and at the UK Transition Plan Taskforce, and most recently with a divisional CEO participating in COP27’s finance day and our Group CEO chairing the finance day activity at CBD COP15.

Why we are submitting evidence

Losing nature's resilience exacerbates other impacts like climate change, systemic risk, threat to financial stability and price stability therefore engaging the inflation and growth priorities of the government.

Our food system relies on bees pollinating crops. Our medicine supply is inspired by biodiversity. The oxygen we breathe relies on healthy forests and oceans. To resolve the climate crisis, reduce inequality, maintain the wealth of nations and feed a growing global population, we must protect, conserve and restore nature.

This wide range of services means that USD44 trillion – equivalent to more than half of the world’s GDP – is moderately or highly dependent upon nature.2 Despite this, human activity is destroying nature worldwide, the population sizes of mammals, birds, fish, amphibians and reptiles have seen an alarming average drop of 68% since 1970.3 Biodiversity loss is a recognised driver of financial risks,4 and yet the financial sector continues to contribute to biodiversity loss through its investment and underwriting activities. This needs to change.

Both the Intergovernmental Panel on Climate Change (IPCC) and the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) recommend tackling climate change and biodiversity loss together; they are closely linked and success in one fundamentally depends on success in the other. We agree, and our action to tackle biodiversity loss goes hand in hand with our Aviva Sustainability Ambition, including our 2040 net-zero plan.

As well as being the right thing to do, it also makes economic and financial sense. The cost of inaction is too high.

While we offer suggestions for each of the Committee’s questions, the bigger prize is to re-evaluate how existing private financial flows stop causing harm to nature and the link to economic incentives/regulatory measures at the sectoral level that transition finance away from financing harmful activities.

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

Spread of contribution

An initiative that we are an active member of, the Finance for Biodiversity Pledge, has 140 financial institution members responsible for nearly €20trn in assets. The pledge commits financial institutions to engage with companies on their biodiversity impacts, to assess positive and negative impacts, to set targets for improvement and to make public disclosures. The pledge also places an emphasis on asking global leaders to take action to reverse nature loss.[1]

Estimates suggest an additional $800 billion will be required every year to tackle the biodiversity crisis (target 19 of the GBF). To close the gap, we need to look beyond engagement, philanthropy and overseas aid to focus on the financial flows through the whole international financial architecture.

GBF and financial flows

The post-2020 Global Biodiversity Framework (GBF) – adopted during the December 2022 COP15 (15th Conference of the Parties to the United Nations Convention on Biological Diversity) – aims to galvanise urgent and transformative action to halt and reverse biodiversity loss by 2030. Implementing the GBF will address the direct drivers of biodiversity loss, significantly mitigating the nature-related physical and systemic risks faced by business, society and the global economy.

As part of support for an ambitious outcome, Aviva and Aviva Investors sent a delegation to Montreal – led by our CEO, Amanda Blanc – to advocate for the GBD framework to include a provision to align private and public financial flows with the protection and restoration of nature, broadly equivalent to Article 2.1.c of the Paris Agreement 36. We also advocated for large companies and financial institutions to monitor, assess and disclose their risks, dependencies and impacts on biodiversity, including in their operations, supply and value chains.

We first advocated for these positions in our response to a 2019 consultation from Business for Nature, a coalition of businesses and conservation organisations. Subsequently, we advocated for an ambitious COP15 outcome, including collaboration with Business for Nature, Finance for Biodiversity and WWF. As part of our commitment to the Finance for Biodiversity Pledge, we were one of three asset managers co-chairing the Public Policy Advocacy Group representing finance at the negotiations.

Pleasingly Goal D and Target 14 of the GBF do require the alignment of public and private financial flows with both the 2030 targets and the 2050 vision and targets for phase out of harmful subsidies, which secures a focus on implementation in the short, medium and long term.

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

The committee is right to focus on environmental benefits and how to achieve the Government’s environmental targets flowing from the CBD. Should policymakers wish to achieve these targets with private sector investment, it will also be necessary to consider how pursuit of these targets can be aligned with financially material risk factors for companies and offer an acceptable expected financial return for institutional investors.

Capital pathways

In 2022, we saw the first ever Sustainable Development Bond issued by the World Bank, in partnership with Citi, with the purpose to raise awareness to biodiversity and natural ecosystem services[2]

We have also seen the recent launch of nature swaps, rhino bonds and blue bonds although the issuance is miniscule compared to green bonds, which are themselves are less than 5% relative to the whole of bond market financial flows[3] and to the scale of the financial flows needed.

The process from conceptualising a potential investment opportunity to deploying the money is long. The structuring of deals can be complex and time delay often contributes to deals collapsing. Whilst private capital investment can help due to speed of deployment, many companies still struggle owing to a lack of frameworks to deploy said capital.

Size of natural capital projects

Many natural capital projects are too small in scale to attract significant levels of institutional investment. The average UK forestry transaction in 2022 was £3.4mn and total commercial forestry transactions in the same year were estimated to have been approximately £195mn.[4] For investment managers and asset owners responsible for investing portfolios worth billions of pounds, such sums are generally regarded as too small since they will need to allocate considerable resources to analyse each project plus transaction costs. Even where an investor does feel able to include such assets in their portfolio, the sums available in which to invest are still way short of the total it is estimated that would be required to close the biodiversity financing gap. Also, projects of this size make little to no difference to overall performance as they are immaterial to the overall amounts being run and therefore don’t merit the analytical resources that would be necessary

The government could use UKIB to provide pooling and a platform for accessing these projects through pensions and for asset managers and seed a fund that seeks private sector investment.

Risk appetite

Not all natural capital investments are high risk, but many current opportunities are in developing countries. There are inherent risks associated with any investment in developing countries and many opportunities are not at the investor grade (investor grade meaning investment opportunities that hold a relatively low risk of default). There is low trust in data from these geographies, and there are additional concerns around issues like corruption perception, transparency and a free and well functioning civil society.

Despite the risks, nature and biodiversity financing is a huge opportunity for developing countries. Many are ‘megadiverse’ and harbour the majority of the earth’s species and a high number of endemic species. The opportunity to foster sustainable development investment for nature positive outcomes is huge.

Although there are elevated risks in some jurisdictions, those are not necessarily reflective of the risks of the natural capital projects themselves but the national environment and especially its debt history. So to attract private capital at scale MDBs, IFIs and local development banks all need to use all tools to mitigate actual and received risks - this means some concessional capital and first loss tranches, but also smart use of guarantees, blended finance , pooling to bring scale, and also technical assistance and capacity building to support countries in bringing these projects to the markets in a form that private capital will be interested in.

Biodiversity / carbon trade-off

The lack of transparency and certainty of what voluntary market biodiversity units, beyond biodiversity net gain (BNG) will look like in the future and what their value will be in the coming decades is limiting private investment. As a result, when designing natural capital projects, especially afforestation, we often are forced to factor in large areas of commercial forestry to balance the uncertainty/lack of definition of how voluntary market biodiversity units will be structured and what their value will be.

Standardised of data

Investment managers identify the lack of standardised data as a potential barrier to investment in natural capital as it prevents the aggregation of investment data needed to measure impact. To overcome the lack of standardised data and report accurately to clients, investment managers would be required to invest significant resource. To better align investment with the Government’s environmental targets, it will be necessary to improve the supply of reliable and comparable data.

Grant funding and nature subsidies

Currently to generate even the moderate returns required to catalyse private funding into nature restoration programmes, there is a heavy reliance on grant funding (for planting and restoration activities). The private sector can take on a bulk of the financing requirements however there will still need to be some form of subsidy and support from the government. A shift from subsidising fossil would easily cover this but there needs to be certainty that these grant funding regimes, especially in Scotland, will remain and ideally be expanded.

The bigger prize is to re-evaluate how existing private financial flows stop causing harm to nature and the link to economic incentives/regulatory measures at the sectoral level that transition finance away from financing harmful activities.

The Dasgupta review

The Dasgupta review notes that the global financial system is critical to supporting the transition towards a nature-positive global economy and needs reform to remove subsidies and private financial flows that harm nature.

The review also shows that markets cannot catalyse the transition to a nature-positive global economy by themselves. While the business case for sustainability is strengthening all the time (driven by a growing awareness of environmental issues, policy changes and rising demand for sustainable goods and services), the current system still tends to penalise sustainable long-term decision-making. For example, fossil fuel subsidies undermine markets for green energy and distort efficient pricing of energy. In addition, weak policies around protection of biodiversity mean that companies taking voluntary measures to protect or invest in nature face higher costs than competitors that do not.

Environmentally harmful subsidies were often created with good intent, for example to improve food security or access to energy and clean water, but without consideration of any negative environmental consequences.  The recent agreement of the Kunming-Montreal Global Biodiversity Framework (GBF) in December 2022, under which countries agreed under Target 18 to “identify by 2025, and eliminate, phase out or reform incentives, including subsidies, harmful for biodiversity in a proportionate, just, fair, effective and equitable way.”

Scope of nature subsidies

Globally we spend more than $1.8 trillion a year, equivalent to 2% of global GDP, on subsidies that are driving the destruction of ecosystems and species extinction.[5] This compares with $150 billion a year in funding to protect nature[6]. Put another way, a recent OECD report found that finance flows for biodiversity, estimated at £38 billion a year, are just 10% of the subsidies paid to fossil fuel companies and agribusiness, the main drivers for the climate breakdown and ecosystem collapse. Identify, assess and reform subsidies harmful to biodiversity at the national level and replace them with incentives to protect biodiversity

Outside the UK, the Corporate sustainability due diligence directive (CSDDD) passed in the European Parliament on 1 June. This clears the way for formal discussions between the Parliament, European Council, and European Commission on the directive’s final shape. The CSDDD would compel firms to identify and either prevent, end, or mitigate the negative impacts of their activities on human rights and the environment — including pollution, environmental degradation, and biodiversity loss.

The Dimbleby review

The Dimbleby review puts UK ‘government subsides spent globally on supporting practices – such as intensive agriculture, fisheries, fossil fuel mining and fertiliser manufacture – that destroy nature’ at $500 billion-worth.

Target 18 of the GBF seeks to repurpose the massive level of subsidies in economies which do harm to nature and Target 19 seeks, amongst other things, to mobilise private sector financing to bridge the significant gap in the financing required to address the biodiversity crisis.

There has been some movement in the right direction. The UK Government has developed a new agricultural subsidy scheme which aims to reverse some of the negative environmental outcomes and promote positive ones. The aim is to phase out £1.6bn in farmers subsidies by 2028, redirecting funds to wildlife restoration and cutting pesticide use. This strategy aligns with calls by The Dimbleby Review which recommended the government ‘guarantees the budget for agricultural payments until at least 2029 to help farmers transition to more sustainable land use.’ (Chapter 8).

In other areas though, the Government have missed key opportunities for smart policymaking, for example, when designing the overarching UK post-Brexit subsidy regime[7].

Subsidies in practice are often complex and have multiple impacts on price, supply, innovation, investment, jobs and communities. Reform needs careful management, as we are seeing with farm incomes and agricultural subsidy reform in the UK, or potential higher energy bills under fossil fuel subsidy reform. But reform that is good for the taxpayer, for the economy and for the environment is eminently possible[8].  It is also unavoidable if we are to meet the challenges of nature and climate.

Subsidies create perverse incentives that focus on quantity at the expensive of climate and nature, and therefore the repurposing of subsidies aligns with government, multilateral, and private sector commitments and efforts to transition to reach net zero and protect and restore nature by 2050, and is essential for investors with a long-term investment horizon.

Recommendations:

1)     A UK Commission on Subsidies to develop full disclosure of subsidies, and an assessment of their intended and unintended impacts. The commission would highlight subsidies which harm the climate and nature and require the relevant department to respond within 6 months detailing how the subsidy will be changed to avoid that negative impact. After publication the Commission should be established as a governance body to hold Government to account on progress in subsidy reform. The Commission should be independent, and deliver its findings and recommendations jointly to the Treasury and the Environmental Audit Select Committee, and publicly. Commission members should include experts on fiscal issues, as well as on business, energy, agriculture, and biodiversity.

a)     Promote the rapid development and implementation of innovative financial solutions such as green financing, large public funds and blended finance schemes to finance nature including small and large-scale nature-based solutions.

b)     Review, disclose and shift away from direct and indirect subsidies and tax policies that incentivise the degradation and over-exploitation of nature and redirect them towards sustainable use, resilience, restoration and circularity.

c)      Adopt mechanisms and quantifiable indicators to value ecosystem services delivery and reward sustainable natural resources management.

d)     Integrate nature-based solutions into public procurement policies and infrastructure development guidelines and promote net gain requirements with adherence to the mitigation hierarchy for all major development sectors.

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?

The Government must set up ambitious nature restoration targets and clear delivery policies to create nature restoration markets. We welcome the ethos of the Dasgupta Review, the enactment of the 2021 Environment Act, the publication in early 2023 of the first set of statutory nature restoration targets under the Act (covering air quality, water quality, biodiversity net gain and waste reduction) and the first statutory Environmental Improvement Plan.

However, there is scope for the Environment Act's long-term targets and the interim targets and delivery policies under the Environmental Improvement Plan to be broadened in scope to cover issues such as soil restoration, peatland restoration, woodland restoration / creation, resource efficiency etc. As seen in real economy sectors like offshore wind and electric vehicles, it is the combination of targets, regulations and market mechanisms that can attract investment in new projects and cut costs.

With some adjustments to ambition, filling in of gaps, and close alignment with wider policy frameworks, the UK Government could secure a truly world-leading legal framework of environmental objectives to include ambitious, comprehensive and coherent targets to provide them with much needed clarity on long-term policy direction and a stable investment environment. Aligned to this, we also need refunding of the Environment Agency as It has been made toothless by a lack of resources for monitoring.

Building on the Dasgupta Review recommendations and together with the Environmental Improvement Plan, clear targets will establish a framework for government policies, incentives and regulations which will allow businesses to invest in more resource efficient and environmentally restorative business models and receive predictable revenues from doing so.

Recommendations to fill the gaps of missing targets:

Whilst broad ranging, the current suite of targets remains incomplete. We believe the following key targets should be introduced to fill in existing gaps:

a)     An apex water quality target set at the national level - The current Water Framework Directive target – which sets ambition in terms of water quality at the national level - expires in 2027, which is creating investment uncertainty about the Government’s long-term vision for water in the UK. This presents a risk that the overall quality of the UK’s water does not improve. We would encourage the Government to set an outcomes-focused water quality target at the national level. Such a target could be expressed along the following lines: “all or an ambitious percentage of water bodies need to reach good environmental status by a certain date.” This target should then be supported by an outcomes focused catchment level target for the water sector and targets on other relevant sectors that have significant impacts on water quality, such as agriculture.

Ultimately, a national level target should be part of a broader effort to develop a much-needed strategic and long-term plan for the future of water in the UK.

b)     The species abundance target baseline should be moved from 2030 to the present day. We believe that by setting the baseline for measuring progress on species abundance in 2022 or ideally earlier given the enormous decline we’ve seen in nature over the last three decades, this will allow greater transparency in monitoring the progress being made in the near term to tackle species abundance decline and recovery. A baseline set in the present may also help focus minds and accelerate efforts to halt the current decline in species abundance ahead of the current 2030 target. A present baseline would also be more consistent with other targets and therefore clearer for the business community.

c)      A target to improve the condition of Sites of Special Scientific Interest (SSSI). The Nature Recovery Green Paper made the important observation that protected sites in the UK are often in poor condition. The 25 year environmental plan featured an important commitment on the condition of protected sites to reach 75% good condition by 2042. The current consultation misses the opportunity to put this commitment on statutory footing. Improving SSSI conditions will be critical for the recovery of nature as these sites act as the repositories of our most threatened species and a network of protected spaces in good condition is fundamental to helping wildlife thrive. We therefore call for the inclusion of a target to improve the condition of SSSI sites, similar in nature to what the Government is proposing for marine protected sites.

The link with the GBF

Part of creating viable and high integrity natural capital markets that investors can invest will be to implement the GBF in the UK as well as introduce clear nature restoration targets in the UK for each key natural asset and market mechanisms to meet these targets.

Dasgupta was very clear on the necessity of Government action to enable finance to become a driver of positive nature recovery.

“While financial actors have a key role to play …  – through greater channelling of financial flows towards natural assets and their sustainable use – it should be stressed that their role is ultimately bound by broader government and regulatory policies to correct for institutional failures.”[9]

Even if Government were solely considering how to achieve their climate targets, all the above recommendations would make sense. Nature can play a critical role in contributing to net zero targets for 2050, given nature based solutions could provide a third of cost-effective emission mitigation required to achieve pathways in line with Paris Agreement goals.[10]

Recommendations for the UK to Actively and effectively implement the GBF:

The UK should aim to be the go-to jurisdiction for nature positive finance, so make it an international competitiveness and growth race to the top. Government should systematically embed nature into the existing and emerging regulatory, policy and legislative architecture around financial markets. Ultimately the only way to align the UK finance sector to a nature positive future, and so meet the conclusions of the Government’s Dasgupta Review, is to implement comprehensive policy reform via an ambitious, rigorous, costed UK economy-wide Transition Plan, backed up by pushing for similar ambition in the global financial system.

This could be achieved by:

a)     National Biodiversity Strategies and Action Plans and Target 14 of the GBF - Countries are required to submit their National Biodiversity Strategies and Action Plans (NBSAPs) ahead of COP16, which will take place in 2024.

In updating National Biodiversity Strategies and Action Plans (NBSAPs), ensure that biodiversity is mainstreamed across policy making and strategic decisions within HMT, in coordination with DEFRA and FERA, ensuring the effective integration of biodiversity. The ambition of the NBSAPs should align with all of the goals and targets of the GBF.

b)     National Biodiversity Finance Plans (NBFPs) - Take specific action towards implementing Targets 15 (on disclosures), 18 (on subsidies and incentives) and 19 (on resources mobilisation) of the GBF via NBFPs which includes the following elements:

c)      Embed regulatory requirements for disclosures on nature-related risks, dependencies and impacts, within the scope of mandatory disclosures for large and transnational companies and financial institutions. TH UK can lead in this space by these disclosures being made by the Bank of England and FCA (as they have started to do with climate)

d)     Reduce, ultimately eliminate, and repurpose, public incentives that are harmful to biodiversity, including regulatory, fiscal and trade incentives, in a socially just and equitable way, directing incentives towards activities that contribute to the shared vision, goals and targets of the Global Biodiversity Framework, making incentives positive or neutral for biodiversity by 2030.

e)     Use financial and policy levers to mobilise biodiversity finance, including through appropriate fiscal policies, green financial products, investment in green infrastructure and other nature-based solutions, payment for ecosystem services, and high integrity carbon markets to incentivize private financial flows

Overarching delivery

f)       Building on the National Biodiversity Strategies and Action Plans and National Biodiversity Finance Plans workstreams to develop a ‘nature positive’ roadmap for the UK economy, to set an overarching delivery framework to deliver on nature goals in alignment with the Global Biodiversity Framework

Climate synergies

g)     Integrate the consideration of nature within policy and regulatory response to the climate crisis, including the synergies of climate and nature action. In doing so,

h)     implement the recommendations of the Coalition of Finance Ministers for Climate Action, in particular its guidance on “Climate and Nature-related Financial Risks”, within decision-making processes and policy orientations. To compliment this, require the Bank of England to do the same with the Network for Greening the Financial System (NGFS).

Ensure nature is gradually integrated into Sustainable Disclosure Requirements (SDR) and the UK Green Taxonomy.

i)       The Government should clarify and provide supportive guidance on the full scope, next steps and timelines for the implementation of the evolving SDR framework. This should include clarifying how different aspects of the framework will interact with one another, including: SECR and TCFD requirements, the UK Green Taxonomy, the disclosure of net zero transition plans, and the applicability of ISSB standards in the UK.

j)       The finalisation of the SDR, Green Taxonomy and transition plan requirements should be based on science, be as practical and interoperable as possible with other international reporting and disclosure requirements such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the EU taxonomy.

k)     The UK’s evolving green finance framework – including net zero transition plans - should increasingly capture information related to climate adaptation and nature restoration.

ODA

l)       Ensure that official development assistance flows do not harm biodiversity, and make use of all relevant opportunities to generate positive outcomes for nature, climate, and socio-economic development

Risk

m)   Require all principal financial regulators (FCA, PRC, MPC, PRA) to explicitly incorporate nature-related financial risks and opportunities into their activities. 

Disclosure

n)     Setting Disclosure Regulations, requiring that all financial institutions assess the impacts and dependencies on nature, using global standards such as the Taskforce Nature Related Disclosures (TNFD) and actions to ISSB Sustainability standards, to incorporate biodiversity disclosures on a national level and support greater global consistency. The aim is that disclosure should inform actions for private finance sector investments and activities in order to align the private financial flows, reducing harmful and increasing positive financial flows.

1. incorporated into public procurement - require biodiversity action plans or at least policies by all those seeking public contracts (as they did with climate[11] and align with export credit and trade deals. [12]

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

We anticipate a big backlog in coming years for carbon credit verification. Currently the funding Woodland Carbon Code employees and the supporting forestry bodies is low. The funding structures of these organisations need to be reviewed with a potential solution being charging more for the submission of projects to the registry.

Woodland cover is integral for the UK to achieve their net zero by 2050 goals and having access to verification regimes and shorter planning cycles is integral to get projects off the ground quickly.

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 2023 Green Finance Strategy confirmed the Government’s intention to consult on the introduction of a UK Green Taxonomy this autumn.

The Green Finance Strategy stated that the UK will continue to provide international leadership in its support for the ISSB and the UK is establishing a formal mechanism for assessing and endorsing the global corporate reporting baseline of ISSB standards. Once adopted, these standards will be known as UK Sustainability Disclosure Standards (UK SDS).

The Green Finance Strategy said that UK SDS “will provide the basis for future obligations within company law and FCA requirements for listed companies, ensuring a single set of standards is applied across the UK regulatory framework.” It is currently unclear how UK SDS and UK Green Taxonomy will co-exist, but it will be important to ensure they do not add complexity for companies reporting in the UK through needless duplication or contradictory approaches.

The ISSB also intends to incorporate water, biodiversity, and ecosystems in its future standards, building on the work of the Taskforce on Nature-related Financial Disclosures (TNFD). As such, it appears likely that financial disclosure standards relating to natural capital will be incorporated in UK SDS, consequently encouraging investment which delivers benefits to nature.

Companies operate across borders, and sustainability challenges and investments are not confined to national boundaries. In seeking to ensure a robust investment information ecosystem, the UK must also ensure that it remains aligned with overseas markets. The UK should continue to support efforts to ensure global coherence of standards through initiatives like the ISSB which can provide a baseline global sustainability reporting standard whilst use its influence to get other markets to do the same

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?

Education and reputational risk

There is a big education piece that needs to go on with the public that highlights how unnatural the current landscape is. Franchise and reputational risk associated with large natural capital projects funded by corporates is high. Even with Glen Dye Moor, a project where we have done significant consultation with the local community, are improving public access, retaining community and heritage sites of importance, and hiring a local PR expert to communicate our intentions, we are still accused of greenwashing.

The most pertinent impacts

Any approach that seeks to stimulate private sector investment in natural capital might benefit from focusing on threats such as these which are most financially material to business and where a real-world impact can also be achieved.

According to the WEF Global Risk Report 2023 (which ranks global risks in terms of severity over short and long period), Biodiversity loss and ecosystem collapse is viewed as one of the fasted deteriorating global risks over the next decade, and all six environmental risks feature in the top 10 risks over the next 10 years.

The WEF has also identified 15 non-climate threats to biodiversity which it argues are the most important for business to engage with on the basis that they are significant threats, business has some role in causing these threats (and the potential to address the problem), and because the threats might subsequently be disruptive to businesses. WEF analysis suggests these threats endanger around 80% of the species identified as threatened or near-threatened by the IUCN Red List of Threatened Species. The WEF has characterised these threats and action to address them as 15 “systemic transitions” with the potential to generate business opportunities worth $10trn each year and create 395mn jobs by 2030. The business sectors most at risk from these threats cover over a third of the global economy and provide up to two-thirds of all jobs.[13]

Policy framework

While there is a clear and growing consensus among policymakers, business, and other interested parties on the importance of biodiversity, it is arguable that there is less clarity on the overall objective. This is not to say that there are not international treaties, domestic laws, or industry-led initiatives. The recent Kunming-Montreal Global Biodiversity Framework – adopted by 196 countries – established an overarching objective (to halt and reverse biodiversity loss by 2030) and 23 “action-oriented” global targets in support of the objective.

The Secretary of State for Environment, Food & Rural Affairs has also created legally binding environment targets which were given effect through the Environment Act 2021. These UK targets were announced during negotiations of the Global Biodiversity Framework, meaning that while there are (intentionally) many common elements, the domestic approach is not wholly derived from the international agreement. For investors and companies operating globally, this may be a cause of confusion or become burdensome as different domestic targets are developed. The UK Government has described its environmental targets as “world-leading”.[14]

The implication may be that the UK now must work hard to ensure other nations follow its approach.

Recommendations

Through the UK’s membership of the G7, G20 and as active participants in COP28 and COP16 the UK could call for:

1. Disclosure of sovereign implementation plans for “30 by 30” – effective conservation management of at least 30% of the world’s land, water and marine areas by 2030. This relates to Target 2 of the GBF “Ensure that by 2030 at least 30 per cent of areas of degraded terrestrial, inland water, and marine and coastal ecosystems are under effective restoration, in order to enhance biodiversity and ecosystem functions and services, ecological integrity and connectivity”.

2. All financial regulators and central banks to support the delivery of the Kunming-Montreal targets. 
3. Central banks to show leadership by assessing and disclosing the degree to which financial systems are exposed to biodiversity loss, including by considering assessments of impact and dependency, scenario analysis and stress-tests. Central Banks could also show leadership through early adoption of TNFD and assessment of own risks in bond portfolios.
4. Central banks to play an active role in the Network for Greening the Financial System which provides a forum for sharing best practices.
5. The UK should use its membership of the G7 and the G20 to convene a summit to collectively harness the international financial architecture to promote delivery of the GBF, inviting institutions within the architecture and the G77 member states  to develop roadmaps and proposals for reform.

These roadmaps should:

-          Place the supervision of the GBF delivery at the centre of its purpose and work programmes-  Review its mandate and constitution and request relevant stakeholders suggest any changes necessary to support the reorienting of the institution towards putting biodiversity  at its heart.

-          Report annually on the progress of the institution and those it supervises, regulates, coordinates and oversees, towards delivery of the GBF ambition.

-          Collaborate with the other elements of the architecture to create and collectively steward a global biodiversity transition plan for finance, reporting annually on global progress and making recommendations to governments for the policy action needed to deliver the enabling environment for the successful transition of the global finance system

6. G7 - Similarly, the G7 has launched an ‘Alliance for Nature Positive Economies’, although its initial focus is modestly on advancing disclosures of nature-related risks.50 Such progress, though welcome, remains ad hoc and incomplete. It is important to make use of ongoing international climate and nature negotiations: the UNFCCC COP28 in the United Arab Emirates in 2023, and the CBD COP16 in 2024, through to Brazil’s UNFCCC COP30 Presidency in 2025. Another option would be to broaden the G7’s Alliance of Nature Positive Economies.

7. G20 However, advancing progress through the G20 in 2024 under the Brazilian Presidency may be preferable in building a more inclusive approach that includes significant leadership from nature rich countries in the Global South preventing, and therefore itself being disrupted by, growing tensions and conflict. What is needed is a more systematic and ultimately, systemic design undertaken collaboratively at the highest levels, encouraging ambition, leadership, trust, and increased coherence. Such an approach is best advanced where possible through existing international cooperation channels. This should include the G20, starting with Brazil’s Presidency in 2024, given the country’s pre-eminence as a major nature economy and its public commitment to equity and addressing the climate and the nature emergency

8. Alongside this, the agenda can and should also be progressed in related and parallel fora including the G7, climate and nature COPs, the IMF Annual Meetings, the WTO/UNCTAD and the BRICS+ summit.

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 £10trn in total that UK investment managers look after makes the UK the second largest investment management centre in the world, following only the US in scale, and bigger than the next three centres in Europe (France, Germany and Switzerland) combined. The UK has provided funding and important political support to the TNFD, which is preparing to publish its risk management and disclosure framework. The UK has also been a prominent supporter of the ISSB, which plans to incorporate nature into its standards. By continuing to support these initiatives through the platforms available to it, the UK can help to establish coherent international standards for natural capital investment.

The UK is a pioneer in the development of nature credit markets, a key driver for mobilising private finance. Government’s Biodiversity Net Gain (BNG) policy is one of the world’s first mandatory markets for biodiversity credits requiring developers to avoid habitat loss in their operations[15]. The recently published Nature Markets Framework outlines priorities for the development of high-integrity markets. These build on the UK’s reputation as an early leader in developing voluntary carbon markets to support woodland creation and peatland restoration. Nature-based credits can enable investment by creating units to be bought and sold. The credits are delivered by nature restoration projects and can ensure those who benefit from nature pay a fair price for the service it provides. Nature credit markets can incentivise farmers and landowners to protect and restore nature and reward efficient monitoring, reporting and verification[16].

Government should also support R&D that creates the technologies and services needed to scale investment in nature, alongside supporting the green jobs markets to ensure the UK workforce has the quality and quantity of expertise needed to deliver these technologies and services.

With that in mind, a UK-based natural capital market which provides scale, high standards, and decision-useful data should be well-placed to benefit from its proximity to a leading global financial centre.

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

The UK will likely base its standards on the example set by the ISSB and the upcoming Taskforce on Nature-related Financial Disclosures (TFND). The release of the TNFD recommendations (during the evidence collecting period of this inquiry) has been  a landmark moment in driving financing for nature & biodiversity. They will be a critical tool in allowing firms to understand nature related risks and opportunities. After the release, the government should provide clarity on how the recommendations should be incorporated into policy and legislation.

The government should also endorse the ISSB standards and introduce regulatory requirements as part of sustainability disclosure requirements (SDR) as soon as possible. In the interim, government should put in place mandatory measures to ensure businesses align their reporting with the TNFD Framework, while the ISSB continues to develop its nature-specific standard.

September 2023