By Emma Howard Boyd CBE, Chair of the Green Finance Institute
The Global Biodiversity Framework agreed in Montreal in December saw 196 governments commit to increase total finance mobilisation for biodiversity to at least US $200 billion annually by 2030. In the UK, we know that we need an additional £5.6bn a year to reach nature-related targets.
As the focus now turns from targets and commitments to action, collectively we need to understand: What will enable that flow of capital? What are the building blocks required to underpin the development of domestic and global nature-based markets? What lessons can be learned from countries that have already embraced revenue models such as carbon credits, nutrient or reef credits or biodiversity net gain?
The Green Finance Institute (GFI) has identified what we refer to as ‘mission critical factors’ when it comes to mobilising private finance into nature restoration and protection. That is, to reach this goal, it will be essential on both a national and global scale to:
The topic of building blocks to unlock private finance at scale was the subject of one of the roundtables convened by the Secretary of State for Environment, Food and Rural Affairs, Thérèse Coffey on Friday 17th February in London, followed by a reception at Buckingham Palace hosted by His Majesty the King – an event that brought together ministers, financial institutions, private sector companies, indigenous leaders, and eNGOs from around the globe to focus on implementation of the Global Biodiversity Framework and forge a path of action.
There was a tangible commitment and enthusiasm by those that attended to share best practices and ideas in order to reach our nature goals more effectively and efficiently. With this commitment in mind, this article shares some of GFI’s own reflections at the event – highlighting lessons emerging through our own work to tackle these ‘mission critical factors’ and develop the building blocks to unlock private finance for nature at scale.
Developing a supply
An investable nature project must be at the scale and have the risk/return profile to meet an investor’s requirements. We need nature restoration projects or nature-based solutions to be designed with these requirements in mind – demonstrating income generation to pay back investors, and the potential for models to be scaled and replicated. This may be entirely new ground for the many land managers or eNGOs which are the natural project developers, and which are used to the traditional model of grant funding.
For a pipeline of investable projects to be developed, it is therefore important for governments or philanthropic foundations to offer support to help these project developers step into this new territory and develop and trial models for investment. They can do this by providing investment readiness funding that is complemented by technical advisory and a facility for shared learning,
In the UK, the Natural Environment Readiness Fund, for example, provides £10 million to over 80 nature-based projects in England to help them develop a business case and investable model. This work is complemented by a Community of Practice that hosts peer-to-peer learning, and also by the development of an online interactive Investment Readiness Toolkit that offers detailed guidance to projects, sharing lessons learned through case studies, webinars and other media. The GFI is proud to have advised on and acted as an assessor for the NEIRF, in addition to supporting the Community of Practice and designing, curating and hosting the Investment Readiness Toolkit, with funding from the Esmée Fairbairn Foundation.
This approach is now being adopted by The Scottish Government which announced the Fund for Investment Readiness in Nature Scotland (FIRNS) on the 16th of February, in partnership with NatureScot and the National Lottery Heritage Fund and with support from GFI.
This trialing of investment ready projects has resulted in scores of innovative projects testing out revenue streams derived from carbon sequestration or avoidance, biodiversity net gain, nutrient reduction and flood risk reduction. Many are testing aggregation models that bring together subscale projects to meet the size needed by investors and the landscape-scale needed for positive environmental impact. Projects are also demonstrating the art of the possible in blending multiple revenue streams to create an attractive return profile that can be replicated nationally.
Creating Demand Drivers
While we are seeing greater funding support to develop the supply of nature-based projects into markets, it is crucial to simultaneously ensure that demand from investors, financial institutions and buyers of credits is being primed. We often hear there is an enormous appetite from the financial community for nature-related investments, but this is not entirely accurate. While there are several institutions globally that have been vocal about nature-related investments, many still do not see nature as ‘investable’.
It is important that we demonstrate nature can be a returns’ delivering opportunity. On the GFI Hive, for example, we showcase over 30 projects or investment funds that are offering financial returns to private investors in addition to restoring or uplifting biodiversity. Tracking this nature investment is critical to give investors the confidence, knowledge and impetus to continue to mobilise finance towards nature and biodiversity.
There are also tools governments can use to create demand, such as the development of compliance markets. In England, biodiversity net gain (BNG) legislation, for example, has created the potential for investment in habitat uplift. Multiple habitat banks are under development in England, receiving investment from housing development projects that will be required to achieve at least a 10% biodiversity net gain increase from the pre-development biodiversity value under BNG legislation.
Another lever to encourage investment from the private sector is provided through mandatory FSB Task Force on Climate-related Financial Disclosures (TCFD) reporting, and upcoming voluntary TNFD reporting. As companies are increasingly required to disclose their Scope 3 emissions, they will be looking to help their supply chains transition – we are seeing this in the agricultural sector, for example, where supermarkets and food and beverage companies are providing financial support to help farmers reduce their inputs or transition to low carbon and nature-friendly farming. Crucial to building this demand from the private sector will be presenting a clear economic case for investing in nature.
Strong signalling around the need for UK corporates to reduce their nature-related risk from regulators and governments alike, as well as government support for the Taskforce on Nature-related Financial Disclosures (TNFD) framework when it launches later this year, should encourage companies to reduce their negative impacts on nature, but also to put money to work to restore and protect the ecosystems upon which they depend. As convenor of the UK National Consultation Group for the TNFD in addition to hosting the Secretariat, we are committed to preparing the private sector for adoption of the framework when it launches in the autumn. We will also be working with partners to identify the economic risks of nature-related impacts and dependencies.
There is also growing recognition of the need for environmental and financial regulators to work more closely together so that the TNFD, and the future reporting requirements under the International Sustainability Standards Board (ISSB) and Science-based Targets for nature can be met.
Finally, de-risking is essential in the early stages of nature market development to give investors the confidence to invest. Anecdotally we hear of international deals that would unlock $1 billion in private sector finance with $20 million of concessionary capital. Nearly every case study on GFI Hive includes some guarantee, insurance, credit enhancement, concessionary capital or grant funding. In the UK, Department for Environment, Food and Rural Affairs has, for example, committed to invest seed capital into the Big Nature Impact Fund, putting £30 million to work with the aim of crowding in multiples of that in private sector finance.
Supportive Market Infrastructure and Environment
Underpinning demand and supply, there must be a supportive market infrastructure. Another benefit to trialling projects through investment readiness funds using a Community of Practice is that important gaps in market infrastructure can be swiftly identified. Here in the UK, for example, the need for clarity around how different routes to market can be stacked together has emerged, as too has a need to review tax treatment of agricultural land. Defra recently announced it has appointed the British Standards Institution to develop a framework for the operation of UK wide standards for investment in nature markets and road map for the development and delivery of standards which address key gaps.
Similarly, priming the demand side can highlight data gaps that need to be filled, or if direction from governments is needed so that nature-based investment can gain the confidence of investors and buyers. Identifying and unlocking these barriers at pace is essential given the urgency of the biodiversity crisis.
This direction from governments, across parties, around a long-term vision, with clear outcomes and targets underpins the ambitions of the Global Biodiversity Framework. While the UK can be proud of moving at pace, a delay in clarity around post-Brexit agricultural subsidies and in a framework to support the sale of ecosystem services or environmental outcomes has caused the farming transition to move more slowly than needed. Through the GFI’s work with partners across the agricultural supply chain, for example, we have identified a need for a priority set of environmental outcomes metrics to be agreed to provide farmers with the confidence to start baselining and for supermarkets and banks to develop the financial support to deliver upon those outcomes.
More widely, any clarity and long-term vision for delivering on nature and biodiversity targets cannot be constrained, but must be embedded across government policy. While the Green Finance Strategy in the UK is a critical forthcoming document which will guide the public and private sectors forward, nature and biodiversity must be incorporated into wider legislation, such as the Financial Services and Markets Bill.
Finally – we must keep pushing for everyone to understand that climate and nature are inextricably linked. Too many companies are still saying that they first must deal with climate, and will then turn their attention to nature, largely due to signalling from governments around the world that climate is the priority. The Skidmore Review in the UK started to merge these narratives by highlighting the role of nature-based solutions in meeting net zero. As adaptation creeps up the agenda, green infrastructure and NbS will naturally take more prominent role, but it is on us to speed this up. We will never meet net zero without being nature-positive – and in restoring and protecting nature we have so much to gain.
The momentum from COP15 is still strong, and I have been encouraged by the appetite across sectors to come together to discuss implementation. We have further opportunities to share our collective messages on a global stage this year with COP28, and the G7 and G20 meetings.
Collaboration and a commitment to share ideas and work together, as witnessed at His Majesty the King’s event, will be essential if we hope to move at pace and fill the finance gap so that we meet our 30×30 target. At the GFI, we are looking forward to continuing our work in the UK, in addition to learning from those in other countries in order to deliver the Global Biodiversity Framework.
Photo credit: PA Media
Header image: Ed Duvico