World Wide Fund for Nature (WWF)                            RNC0008

Written evidence submitted by the World Wide Fund for Nature (WWF)

EAC: Inquiry on the role of natural capital in the green economy

The World Wide Fund for Nature (WWF) is a leading, independent environmental organisation with representation in nearly 100 countries globally. Our work spans a number of key environmental areas, such as climate, food, forests, oceans, water and wildlife. This response has been prepared through the collaboration of the WWF-UK Economics Unit, Finance Policy team, Conservation Programme, and Public Affairs team. Combined, these teams have expertise on nature markets, financial regulation and policy, net zero transitions, economic growth, and green financial mechanisms. 

As a civil society organisation working on nature positive transitions, financial policy and regulation, and nature conservation we welcome the Inquiry on the role of natural capital in the green economy, recognising the urgent need to increase private financial flows into nature. In this response we highlight specific policy interventions and tools that will enable businesses and financial institutions to align their investments with national and international environmental targets.

Inquiry: The Environmental Audit Committee is undertaking an inquiry into the current and potential future role of natural capital in the green economy, and the Government’s proposals to increase private investment in measures to support nature recovery.

Consultation: As part of this new inquiry, the Committee:

• seeks to understand whether the Government’s policies to promote natural capital and investment in biodiversity protection is adequate.
• It will look at the role private investment can make, and how the UK might develop world-leading markets in natural capital assets while avoiding the ‘greenwashing’ of investments.

The Committee invites written submissions addressing any or all of the issues raised in the following terms of reference, by 17:00 on Friday 20th December 2024.

Summary of key points:

1. Private capital can and should make a substantial contribution to nature recovery, by shifting away from investments in nature damaging activity and investing in the nature positive transition across the whole economy.
2. This nature positive transition can be created by replicating the architecture of the net zero transition, and integrating the two. For example, by implementing TNFD alongside TCFD, and by requiring nature to be incorporated into climate transition plans.
3. In the same way as we have net zero sectoral pathways for the private sector to align with (e.g. published by the CCC), we need nature positive sectoral pathways, to give greater clarity as to how different sectors need to change in order to support and align with the delivery of the CBD and Environment Act goals.
4. If financial institutions are required to publish transition plans that also explain how they will support the nature positive transition, they should then be incentivised to invest in the business models, and the innovation needed across the economy to deliver that nature positive transition – which should go well beyond investment in NBS.
5. WWF has developed nature positive pathways for the agriculture and renewable energy sectors, to illustrate how they can be constructed, and how they can support transition by the private sector, which will be published in October 2023.

1. What potential contribution can private capital investment make to measures to secure nature recovery?

To achieve the targets of the Global Biodiversity Framework (GBF),[1] the UK needs to halt and reverse biodiversity loss, a concept referred to as nature positive. The targets of the GBF should be guiding the UK government’s nature recovery ambition and efforts. The current apex target of the Environment Act to halt the loss of nature by 2030 does not meet the level of ambition in the GBF. Private capital investment is necessary for two reasons:

• To increase investment flows into nature: Public financing and nature markets alone are insufficient to deliver the required nature positive transitions.
• To finance nature positive transitions across the entire supply chain of economic sectors.

To increase investment flows into nature: Becoming nature positive and achieving global nature goals as agreed at the Convention on Biological Diversity (CBD), Conference of Parties 15 (COP15) will require financing. Public finance is critical, but alone is insufficient for the scale of the task. Private finance has the resource and potential to support these nature goals – by both shifting finance away from harmful activities and directing it towards nature positive ones – especially if they are considered alongside, rather than separate to, climate goals. It should be possible to create the incentives to unlock private financing for nature: as has been pointed out by multiple experts “natural capital underpins all economic activities and human well-being.”[2],[3] Additionally, the transition to nature-positive business models is estimated to generate opportunities worth US $10.1 trillion in annual business value and could create 395 million jobs by 2030.[4]

To enable the private finance sector to support these global goals, a set of policy frameworks and tools at an international and national level are needed, which set clear direction for a nature positive and net zero economic transition, create the right incentives, and make it possible for the private sector to measure and report on nature impacts. Such foundational “building blocks” strengthen national level action and play a critical role in allowing the financial sector to develop appropriate investment strategies, find profitable opportunities, and overcome risks – with respect to climate and nature financing.

Nature and biodiversity credit markets, such as Biodiversity Net Gain in the UK, are an important lever for increasing finance for nature recovery and local communities at the forefront of the transition, such as farmers. However, nature and credit markets can only address a small proportion of the impacts that businesses have on nature. The remaining vast majority of impacts occurs elsewhere in the supply chain, either downstream or upstream, beyond a business’ direct sphere of influence.[5][i]To mitigate these impacts, economic sectors need to transition to a nature positive business model.

To finance nature positive (nature recovery) transitions: The current economic system relies on the depletion of natural capital and on impacting nature negatively by releasing pollutants, using land and sea, and contributing to climate change. To reduce the impacts that UK economic sectors have on nature, to the extent needed to achieve the GBF targets, a whole-economy transformation is needed. This transformation requires development and deployment of new technologies, re-design of existing value chains, creation of new metrics for measuring economic success, and disruption of the dominant business models as well as of production and consumption patterns.4 Private capital investment is needed to finance the transition of the UK economy into a nature positive future. The UK government needs to provide an enabling environment, which will drive private capital investment towards this transformation.

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

Currently there is a lack of clarity on how businesses and financial institutions can align their activities and investment with environmental targets set by the government. For instance, the Government has set targets for reducing pollution and increasing nature restoration in its Environment Improvement Plan (EIP), but it is unknown how each sector of the economy can and should contribute towards these targets. The EIP, which is currently being revised by the UK government and is expected to be published in Q2 2025, provides an important opportunity to align the UK economy with environmental targets. There the government can explain how the role of the private sector in meeting national environmental targets and present the policy levers that will implemented to drive action.

The UK government has made meaningful progress on tackling climate change and implementing the Net Zero agenda, which should be replicated in the policy framework for nature. Governments have a range of domestic policy instruments at their disposal – particularly regulatory reform and fiscal policy reform – to align private finance with net zero and nature positive goals. Here we explore the three main tools which can align private investment with environmental benefits:

• Nature Positive Sectoral Pathways
• Transition Plans
• UK Financial Regulation

Nature Positive Pathways: We recommend the UK government supports and participates in the development of nature-positive pathways (NPPs) for key sectors of the economy, integrated with existing net zero sectoral pathways as set out by the CCC. WWF-UK and the Green Finance Institute have put forward an approach for developing nature-positive pathways for key systems: agri-food, built environment, and water supply, treatment, and sewerage. The revised Environmental Improvement Plan (EIP) should explain how the private sector is expected to align with environmental targets and endorse the development of nature-positive pathways to guide private action.

In 2020, the Climate Change Committee (CCC) published the UK’s Path to Net Zero along the Sixth Carbon Budget, which outlines the transitions that different sectors of the economy need to undergo to meet the Net Zero target by 2050. These pathways have been fundamental to guiding and accelerating action on climate change by government, business, and society, but no such pathways exist to halt and reverse the loss of nature.

NPPs will lay out the specific changes needed within a sector - and at what pace - to align with the UK’s nature-related targets. They present how different sectors are expected to contribute to the delivery of the targets of the EIP.

NPPs are a recommendation of the Assessing UK Nature Risk Materiality Report released in April 2024, led by the Green Finance Institute (GFI), with input from Defra, HMT and the FCA.[6] In October 2024, WWF-UK published a report, co-authored with Aviva, detailing why NPPs are urgently needed and how they can be developed.[7] The Taskforce on Nature-related Financial Disclosure’s (TNFD) discussion paper on corporate nature transition plans calls for the development of NPPs as a necessary complement to its own guidance.[8]

NPPs will give the private sector clarity on the national direction of travel on key issues, a critical condition for enabling business and industry to support the delivery of these two interlinked environmental goals. By presenting the transitions that economic sectors need to undergo to meet targets of the EIP, nature positive pathways should also identify the areas where the current policy framework falls short of the ambition of the GBF and offer policy recommendations. Effective nature positive sectoral pathways should be guided by the following set of principles:

1. Aligned with the ambition and timeframe of the EIP targets, and where necessary they should challenge the existing UK policy framework.
2. Integrated into the existing Net Zero pathways, which have been developed by the CCC, and identify synergies between nature and climate goals, as identified in this report.
3. Provide a vision on how the value chains and business models of economic sectors in the UK need to transition, which extends beyond the offsetting of nature impacts.
4. Driven by the latest scientific research on the climate and nature crises and the economic transitions that are required to avert them,
5. Equitable and inclusive of the perspectives of local stakeholders and small businesses, who require support and guidance to embark on the net zero, nature positive transition.

NPPs, which are integrated into the existing Net Zero pathways, will align private investment with environmental targets by:

• Providing long-term government commitment and clarity on the direction of travel of the transition, which enables financial institutions to plan and manage investments.
• Aligning global nature positive targets with national policy on nature and climate.
• Breaking down the global targets of the GBF into measurable national targets that businesses can operationalise and report on.
• Addressing the trade-offs and capitalising on the synergies that emerge between different sectors as they each work to achieve nature positive and net zero targets.

Nature in transition plans: The role of nature in transition plans is increasingly recognised. Transition plans are elements of business strategy, typically focused on the climate transition, where businesses and financial institutions demonstrate how they will manage climate risks and take action to reach their climate targets. They are not only relevant for internal business decisions, but also can inform capital allocation decisions by investors (in particular preventing greenwashing), as well as support policymakers and regulators in understanding planned private sector action and implications for government policy.

The Transition Plan Taskforce’s (TPT) Disclosure Framework[9], intended to represent best practice for transition plan disclosures, recognises the important role of nature-based opportunities and safeguards in climate transition planning. This reflects the critical contribution of natural ecosystems to climate change mitigation and adaptation, and the potential for activities driven by climate priorities to negatively impact natural ecosystems without appropriate safeguards. The Glasgow Financial Alliance for Net Zero (GFANZ) has published further guidance on the integration of nature in climate transition plans, currently out for consultation[10]. There is also potential for further transition planning to go beyond strategies to achieve climate objectives and consider a wider range of nature-related issues. This was articulated by the TPT Nature Working Group[11] which considered further policy steps required to integrate nature into transition planning. Draft guidance for such an approach has been developed by the Taskforce for Nature-related Financial Disclosures[12]. The Environmental Audit Committee has previously recommended that the Government take steps to incorporate nature loss into the TPT Disclosure Framework[13].

The UK Government, in its 2024 manifesto, committed to mandating 1.5C aligned transition plans for UK-regulated financial institutions and FTSE100 companies[14], and will be consulting on requirements in 2025. We recommend the TPT framework is used as a basis for transition plan requirements, and that the Government take further steps to integrate nature loss and relevant objectives into transition planning requirements over time.

UK financial regulation: The Chancellor of the Exchequer has taken an important and valuable step by referring to the government’s economic strategy as including a transition to a nature positive economy in the most recent remit letters to the Bank of England, including specifically that the Financial Policy Committee should consider the materiality of nature-related financial risks for financial stability[15].

In addition to disclosure requirements (such as transition plans), the UK financial regulatory framework must create incentives to shift towards sustainable finance, including investment in nature, and transitioning finance away from the most damaging economic activities for nature. These incentives will be created by the full integration of climate and nature systemic risk and opportunity across the activities of the financial regulators (Bank of England, FCA, PRA, Pensions Regulator).

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?

A clear roadmap for the measures necessary to establish and maintain high-integrity markets was set out in the Financing Nature Recovery UK report in 2022. These measures mostly coalesced around the need for improved data, accreditation, and standards to increase confidence in nature markets. We strongly support the work being undertaken by the BSI to achieve this.

However, there is still a perception that investment in nature-based solutions and related markets is high-risk. Financing Nature Recovery UK noted that "the lack of an institutional architecture and robust market governance including approved standards for measuring and accrediting nature-based projects, means that investors do not have sufficient certainty to price and manage risk over the long term”.

WWF is involved in several projects that are looking to improve the underpinning evidence of emerging nature markets including the creation of a saltmarsh carbon code and piloting Nature-based Solutions for the improvement of water resources in Norfolk. Expansion and continued investment in the Natural Environment Investment Readiness Fund by government will continue to provide the resources and impetus needed to grow confidence in nature markets as well as the mechanisms needed to properly apply them.

In August, the governments attempted reform of nutrient neutrality rules contributed to a decline in investor confidence in nature markets. There was already a large body of work underway towards the creation of a nutrient credit market in effected geographies which would have enabled the flow of capital from the private sector into nature recovery, this is now under threat if the amendments are adopted by government. We need to see consistency in the regulation underpinning emerging markets if we are to continue to grow investor confidence and realise the scale of delivery necessary to bend the curve on nature loss.

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

The UK was a key player in decision-making processes at the UN biodiversity conference, CBD COP15, in December 2022, playing an important leadership role internationally to help deliver a promising Global Biodiversity Framework (GBF). Several of the targets of the Framework relate to mobilising private finance and influencing financial flows to prevent the further loss of biodiversity around the world, as well as ensuring the private sector discloses risks and impacts on biodiversity, in order to progressively move to sustainable patterns of production.

The UK should advocate for the adoption of mandatory transition planning globally (in parallel to implementing it in the UK), particularly by key financial markets, and aligned with the TPT’s guidance.  

The global harmonisation of reporting standards should also continue to be a priority. The inclusion of transition plans in IFRS S1 and the IFRS foundation taking over responsibility for the disclosure resources developed by the TPT together offers a route to an aligned global standard. The UK should help to establish a truly global standard, including emerging markets, as finance needs to flow from the global north to south. The ISSB standards should 1) integrate nature into its current climate framework, 2) adopt nature disclosures in line with the TNFD, and 3) ensure that nature is integrated in any future standards regarding transition planning. The UK government can champion and encourage this.  

The role of the financial regulators is key to growing sustainable finance and managing climate and nature-related financial risks. However, as financial markets are global, the UK’s regulators would benefit from stronger global regulatory standards. This could involve the G20 giving the Financial Stability Board the mandate to go further than its current stocktake on supervisory and regulatory approaches to nature risk[16], to quantify systemic nature risk as well as facilitating relevant regulatory responses.