UK Sustainable Investment and Finance Association (UKSIF)              CAP0056

Written evidence submitted by the UK Sustainable Investment and Finance Association (UKSIF)

The role of natural capital in the green economy

About UKSIF

The UK Sustainable Investment and Finance Association (UKSIF) is a membership organisation for those in financial services committed to the growth of the sustainable and responsible finance sector in the UK. Our 300+ members, representing over £19 trillion in global assets under management, include investment managers, pension funds, banks, ESG data and research providers, financial advisers and NGOs.

Context

Natural capital describes elements of nature that provide important benefits called ‘ecosystem services.’

These include CO2 storage or removal, protection from soil erosion and flood risk, habitats for wildlife, pollination and spaces for recreation and wellbeing.

At UKSIF we are seeing our members increasingly consider investment opportunities in natural capital assets – including water preservation and treatment, air pollution control, flood defence schemes and waste management. These nature based solutions could help address climate change and nature loss in tandem.

Some UKSIF members are already pursuing investment opportunities in the natural capital market and we can expect this to continue grow in the coming years. For example:

• HSBC Global Asset Management’s series of natural capital funds in partnership with Pollination aims to invest billions into the long-term preservation and protection of nature, seeking to mainstream natural capital as an asset class
• Invesco’s Water Resources ETF (exchange traded fund) invests in companies creating products designed to conserve and purify water for homes and businesses.

Various organisations have also published tools and guides to help investors appreciate the importance of and measure natural capital. These include:

• First Sentier Investors’ ‘Investors Can Access Nature Now’ (ICANN) guide, published in September 2023. ICANN focusses on assessing water and deforestation issues in investment portfolios. In it, First Sentier acknowledge that “access to nature-related data can be challenging. It can be inaccurate, complex and not standardised.”
• Scottish Widows’ ‘Nature and Biodiversity: The Pensions Imperative’, published in February 2023. This report has a chapter on measuring nature related risk. It recommends that a similar approach as was taken via the Taskforce for Climate Related Financial Disclosures should be adopted to develop tool for nature-related risks.
• RSPB’s “Economic costs and benefits of nature-based solutions to mitigate climate change”, published in October 2020. This study analysed the costs and benefits of restoring three UK habitats – peatlands, salt marshes and woodlands. It found that for every £1 invested in peatland restoration, the average expected quantified returns are estimated to be £4.62 in terms of economic and social benefits.
• The data provider MSCI has published ‘An Investor’s Guide to Nature and Biodiversity Risks and Impacts’, as well as the MSCI Nature and Biodiversity Metrics Framework.

What more can be done to encourage investment in natural capital

We see further opportunities for growth in this market that can help channel capital towards sustainable investments and projects, though a number of barriers remain for investors.

These include concerns over a lack of a reliable stream of revenue from natural capital projects, and more broadly understanding among some investors on investment in nature-based solutions, given the nascency of this asset class. Funds will also need to have an appropriate risk-return profile and robust investment criteria and objectives in place.

The Green Finance Institute is doing work to increase understanding of natural capital assets and the role of the private sector in paying for and investing in nature restoration,

nature-based solutions and nature-positive outcomes. This project is called GFI Hive, which we continue to be supportive of.

There also needs to be much better quality data on natural capital to overcome barriers in assessing progress and development. We think this can be addressed in large part through the creation of a new nature specific disclosure standard from the International Sustainability Standards Board (ISSB). This should make use of the Taskforce on Nature Related Financial Disclosures’ (TNFD) finalised framework, and consider international disclosure standards, such as those published by the EU and Global Reporting Initiative. Further details on this can be found here.

With investors more and more actively evaluating and integrating biodiversity risks and opportunities into their investment decision-making, the demand for good-quality information in this area is considerable (and growing), and not only from the investment community, but wider stakeholders too. The absence of well-established, existing reporting frameworks and guidance in this area (especially when compared with climate change) has led to a material disclosure gap among companies that needs to be addressed, and there is a good opportunity for the ISSB to now advance a common, global baseline on this issue.

Better data and disclosures is absolutely key - businesses’ impacts on nature aren’t captured in much financial reporting/data currently, and we need to see new

kinds of nature-related data in place, as much of this isn’t designed for use by investors and needs to be made more usable for industry and day-to-day investment decisions over time, which TNFD will assist with.  

The government may also need to consider raising awareness of the opportunities for investors in natural capital in the UK, perhaps as part of their work on a UK green taxonomy.

Finally, we believe the UK Infrastructure Bank (UKIB) could play a more prominent role in supporting investments into nature-based solutions and private markets for ecosystem services, such as water quality, biodiversity and air quality.

While the Chancellor has confirmed that UKIB will seek early opportunities for investments in nature-based solutions and ensure nature is incorporated in decision making, we would welcome further consideration to how a new investment objective focusing specifically on biodiversity and nature could be formally incorporated, alongside the Bank’s existing net-zero and levelling-up mandates. This would recognise the significant potential of the Bank to leverage private capital towards nature-based solutions, such as flood defences and water infrastructure, and ensure biodiversity is explicitly targeted with not all projects having a positive climate impact necessarily benefitting biodiversity in all instances.

March 2024