UK Infrastructure Bank                            CAP0051

Written evidence submitted by the UK Infrastructure Bank

Consultation response - UK Infrastructure Bank

How will the UK attract investors to support its nature positive future?

https://committees.parliament.uk/committee/62/environmental-audit-committee/news/196804/how-will-the-uk-attract-investors-to-support-its-nature-positive-future/

Terms of reference

The Committee plans to examine the following principal questions in the course of its inquiry:

1. What potential contribution can private capital investment make to measures to secure nature recovery?
2. How can investment best be aligned with environmental benefits, so as to achieve or surpass the Government’s targets for nature recovery?
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?
4. What contribution will data from the Natural Capital and Ecosystem Assessment (NCEA) programme make to the objective measurement of changes in environmental outcomes?
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?
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?
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?
8. What role does the UK have in establishing international standards for natural capital investments, alongside other jurisdictions and financial centres?

UK Infrastructure Bank

The UK Infrastructure Bank is a government-owned policy bank, focused on increasing infrastructure investment across the United Kingdom. Our mission is to partner with the private sector and local government to increase infrastructure investment in pursuit of our two strategic objectives:

1. To help tackle climate change, particularly meeting the government’s net zero emissions target by 2050
2. To support regional and local economic growth through better connectedness, opportunities for new jobs and higher levels of productivity

We have an initial £22 billion of financial capacity. We will aim to deploy up to £8bn in private sector debt and equity, £12bn in guarantees and £4bn through our local authority lending function.

We invest across 5 sectors – Clean energy, Transport, Digital, Waste and Water. We published a discussion paper in November 2022 on the role the bank can play in Natural Capital and Environmental Markets. This was in response to HMT’s strategic Steer in April 2022 on the bank’s priorities and remit.

Natural capital markets and our mandate

We recognise that nature markets are nascent and will take some time to develop and scale responsibly. We have initially decided to target specific areas of the market, although this will evolve over time as new markets develop. We are currently prioritising voluntary carbon markets (using woodland carbon code or peatland code) and Biodiversity Net Gain (BNG), as these are the most developed and can attract revenues.  

We will look to:

1. Deploy capital into promising high-integrity natural capital projects
2. Facilitate investment in natural capital at the landscape-scale as markets mature
3. Work collaboratively with stakeholders across the market

We have made one investment in natural capital to date. This was in Highlands Rewilding Ltd where we provided a £12m bridging loan for the acquisition of the Tayvallich Estate. The Estate will act as an open laboratory to develop data and research in improving biodiversity, whilst also directly removing carbon via sequestration and preventing emissions via peatland restorations. UKIB invested on the basis of the project’s support in developing the natural capital knowledge pool, leading to scalable solutions that could be used by land managers across the UK. Furthermore, the investment is expected to deliver local benefits related to economic growth including ecotourism and oyster harvesting. Press notice is linked here

In reflection of our remit to invest in UK projects to grow natural capital markets, we have provided comments from an investor perspective. These are based on our discussions to date with project sponsors and other investors. Below we set out our thoughts on Questions 1, 3, 6 & 7 of the consultation.

Compliance (BNG) market

Enabling new entrants to market

The introduction of biodiversity net gain (BNG) (coming into effect in 2024) is expected to lead to a step change in the scale of nature markets. To facilitate this, our engagement with market players has identified some of the issues that if resolved could support new entrants to enter the market.

Landowners and farmers would benefit from easier access to advice on how they can engage with the various land management options. For example:

1. Financial risk & tax relief: Farmers already benefit from tax relief (Inheritance Tax relief or “IHT”) and subsidy grants under Agri-environment schemes/Environmental Land Management schemes (ELM). Farmers will need to know whether any land owned and used for BNG counts as a “farm” for the purpose of IHT. Farmers and landowners would also benefit from expert advice on navigating the options of investing in the BNG market, relying on ELMs, or a combination of both. 
2. Legal: Guidelines or standardised legal documents for leasing land, engaging parties to develop BNG and market transactions to sell/buy Biodiversity Units (BUs) would benefit landowners by streamlining this process and helping supply side players to understand from the outset what this will look like. The complex process of producing these documents is a potential barrier to smaller landholders entering the market.
3. Management of cashflows: We recognise that landowners need to fund project delivery costs before selling BU’s, albeit this can be recovered relatively quickly. Accessing finance for upfront delivery can be risky for smaller landowners.

Market Operations

Whilst significant work has already been done to clarify UK policy in environmental markets, there remain some areas where clarity would improve investor confidence and bring forward private capital flows into these markets. For example:

1. Statutory Biodiversity Credits: It would be helpful for an orderly demand/supply market to define when the statutory biodiversity credit rules are applied and to set out a process for establishing and reviewing the price of BUs provided in this manner, (prices were published by Defra in July 2023). 
   It is worth noting that, there is a potentially large demand for BNG that could come from Nationally Significant Infrastructure Projects (NSIP’s). From a commercial perspective, local BNG suppliers could choose to demand very high prices, simply due to requisite volumes and land scarcity issues in circumstances where an NSIP is to be built nearby.
2. Data transparency and price signalling:  Given the nascent stage of the market, there is currently a lack of data transparency covering (i) areas and types of habitat lost per Local Planning Authority (LPA), (ii) price of trading BU’s per LPA by habitat type and (iii) responsibility for oversight and decision making in local government in areas with BU scarcity. Landowners/land-managers/financiers of BNG are less likely to invest without visibility of prices paid/contracted for BNG as it adds to risk. Some of this data could potentially be collected through the local spatial planning or Town and Country Planning process. The BNG market might also benefit from the kind of architecture deployed in other trading systems to provide clear price signalling to the market.
3. Biodiversity Metric: Enabling landowners to assess the BNG value of their land independently of impact will assist in decision making and long-term planning.  The metric might benefit from being divided into its constituent parts for each of: (i) Developers (demand side), (ii) Landowners (supply side) and (iii) market transactions for BU (bringing in proximity of buyer and seller). 

Voluntary Markets – Carbon

We currently observe a tension in the afforestation market between (i) forestry for timber or (ii) forestry for carbon credits. Separately, there is a distinct market for “woodland for nature”.

Greater investment in forestry in the UK could allow it to be a leader in sustainable construction using wood products – the UK currently imports more than 80% of its timber. In general, softwood timber products come from conifers and hardwood products come from deciduous trees such as the UK’s native Oak and Beech. Hardwoods can be used in structural features of sustainable buildings, whereas softwoods cannot.

The current narrative around woodland creation focuses largely on carbon credits to contribute towards net zero outcomes and also biodiversity benefits. Carbon credits are more rapidly generated with a high degree of coniferous planting (many of which are exotic species). Although biodiversity will undoubtedly increase with any new woodland, this may not be replacing UK native woodland which has previously been lost.

This has resulted in many investors looking at either timber or carbon credit outcomes specifically and disincentivises focussing on the bigger picture. More alignment of afforestation with wider environmental outcomes (e.g. native biodiversity as well as air quality, water quality) could provide reassurance to investors and stimulate investment in projects that deliver both hardwood and softwood timber products and carbon credits. This would be on the basis of carbon credits being earned alongside timber revenue streams (see below), without needing to forego wider environmental benefits such as biodiversity, water quality etc. This would benefit the market as the current price of carbon in the voluntary market is low, and most natural capital projects benefit from having additional revenue streams. 

The economics of voluntary carbon projects in the UK can be challenging and enabling wider sources of income for nature-based projects could help to address this. We highlight below two specific aspects of the voluntary codes which are challenging for project economics:

1. Additionality test: The Woodland Carbon Code (WCC) additionality test is more difficult to pass when combined with commercial forestry. Equally, if wider ecosystems services are stacked with carbon in the future this will further raise the bar of the additionality test because income from the wider stack of ecosystem benefits will need to be taken into account.

2. Our commercial view, similar to our comments on BNG, is that investors would benefit from a publicly available database of voluntary carbon credit prices, albeit with anonymised buyers and sellers. In the short term it would benefit potential buyers (who may for example be seeking specific vintages) and also those considering developing a project if the existing data that is hosted on the UK Land Carbon Registry (here) could be downloaded and manipulated.

Nature Credit Market

The voluntary nature credit market is in its infancy. There are some instances where companies have invested in nature so that they can report against environmental and biodiversity improvements (alongside voluntary carbon credits), but these are philanthropic or Corporate Social Responsibility (CSR) related projects rather than investments purely on commercial terms in the market and it is difficult to gauge the potential size of this market.

We recognize the importance of the recently launched Taskforce for Nature –related Financial Disclosure (“TNFD”). If widely implemented, this could be instrumental in developing a market for voluntary nature credits.

Domestically, Environmental Net Gain (ENG) will measure asset level metrics directly associated with Nationally Significant Infrastructure (NSIP) developments. These might include water, air and soil quality. In contrast, TNFD’s application is broader and can apply to corporate entities. Many NSIPs will have shareholders that own the company developing the asset and the market expectation is that TNFD will capture those types of shareholders in a similar manner to TCFD. This would require ENG reporting at asset level to be aggregated up to TNFD at corporate level, along with global metrics (including the supply chain impacts) of similar receptors. It would be beneficial to the market if the metrics were aligned to make reporting on both of these initiatives easier.

Metrics are a key part of any voluntary investments in nature markets. We would welcome the early adoption of a suite of UK based nature metrics for the voluntary market, which could then be standardised to ensure integrity, yet with flexibility to evolve as science progresses.

Developing new markets and maximising grant outcomes

We welcome the Natural Environment Investment Readiness fund (NEIRF) and the Facility for Investment Ready Nature in Scotland (FIRNS). These programmes provide important funding for the development of new markets and business models. One observation is that these funds, which provide grant money up to £100k, facilitate very early development work but don’t fund follow on work or early capital investment, which would typically cost more and in some cases could be key to unlocking the ambitious scale of investment needed in the UK.

September 2023